E-grocery back in focus; Have investors changed mind?

17 Jul, 2012

E-commerce businesses focused on groceries, fruits and vegetables are back in focus with at least three companies already tying up funding and several others in advanced stages of talks for investments. Although investors sounded a bit wary about online grocery stores when we last spoke to them, the mood has changed now for the better.

Bangalore-based online hypermarket ZopNow is finalising its first round of funding from Accel, Qualcomm and media group Bennett Coleman & Co. Mumbai-based online supermarket Ekstop has raised funding from top angel investors, while Bangalore-based online hypermarket BigBasket.com raised a "large" round of $10 million from private equity firm Ascent Capital.


Changing investor sentiment

K Ganesh, Tutorvista founder and angel investor, is a believer in online grocery. He says the business is capital intensive, but it's not a low margin trade as it's widely believed. "In online model, especially in this business, there is huge saving on real estate costs, but then there are also huge delivery costs. In spite of that, the margins are nearly 10-15 per cent in the online model since we save on inventory and wastage. The stock is mostly bought on a daily basis; so the wastage is less," he explains. Ganesh is an angel investor in BigBasket.com, which raised $10 million from a large PE fund.

Ask him why the startups in this space have not attracted VC funding like other e-commerce businesses have, he shares some interesting insights. "First of all, this is not the typical technological VC play. It is semi-e-commerce, more of a last-mile logistics business, and that's why VCs are not too keen. Moreover, even the initial capital required is huge and VCs don't really have the ticket size because in a seed-stage or Series A round, none of the VCs will put in that kind of money. In fact, it is more like PE play as far as funding is concerned," he clarifies.


We had spoken to Mukul Singhal of SAIF Partners earlier, and he had sounded negative on online grocery. We checked with him again: has anything changed in terms of investor appetite in this sector? Singhal, however, still remains negative.

"The paradigm has not changed. For us, the concept of grocery e-tailing is still not validated. Execution is the biggest challenge at play and so is the tough competition from local shops. These are interesting problems to solve but we are yet to see innovative execution of the same," he points out.

Competition from local stores is actually a key challenge since one can bargain and check things out before buying and get it home-delivered for free in a couple of hours. Moreover, rapport with local vendors often leads to better quality products and deep discounts.


Singhal is not the only non-believer. "Why would I buy those things online when I can buy them from the vendor close to my place," asks Gaurav Saraf of Epiphany Ventures. "It is a very challenging segment. I wouldn't say that the concept is not validated (since ordering utilities on phone and getting home delivery have been around for ages). Still doing it nationally, in one rollout, is yet to be seen," he adds.

But entrepreneurs are coming up with answers for some of these questions. For instance, innovation is at play in the supply mechanism in the case of ZopNow, which allows its customers to order more than one product in the same category. "Sometimes, when a customer is not sure which of the two products he wants to buy, we encourage him to order both. At the time of delivery, he can pick one and return the other. With our own supply chain in operation, such things can be easily handled, leading to a high level of customer satisfaction and repeat purchase," says  ZopNow co-founder Mukesh Singh, adding, "there is huge opportunity for this business as it is a time-saving activity and the concept will soon catch up in tier I cities."

Another VC criticism is that it's difficult to scale the business. There is a ZopNow for Bangalore and a Shopveg.in that only covers some areas in Mumbai, which shows that e-grocery is probably a local or regional opportunity at present. How to scale it up nationally is a challenge mainly because this is not traditional e-commerce business where any courier service can deliver the goods.


Any startup in this space will require a proper supply chain and customised warehousing. So the operational costs will go up if one has to scale up geographically. To counter the capital intensive scale up problem, Delhi-based Aaramshop launched an online platform that simply connects local kirana stores with buyers instead of dealing with physical inventories and storage space. This model has a  greater chance to grow pan-India. Aaramshop is already present in around 25 cities. But it's not clear if the company has managed to gain traction using this model.

Challenges still remain

Selling groceries, vegetable and utilities online is not an easy task, as most of these items perish quickly. Storing them and delivering before they rot is, therefore, a big challenge. For instance, Shopveg.in, an e-tailer dealing in fruits and vegetables, and delivering to selected parts of Mumbai, is trying to cope by trimming its inventory and cutting down on storage costs.


According to Sourabh Dhapodkar, co-founder of Shopveg, "Delivery system, supply chain and logistics are the key challenges as we are dealing with fruits and vegetables. We have our own warehouses but we are now implementing a model so that we will only store as much as we can sell in a day or two."

However, there are companies who store items for a week or so, says Dhapodkar.

But isn't storing quite tough as fruits and vegetables require temperature control to keep them fresh? He agrees. "We need special warehouses and facilities and that requires capital. That's why this business is extremely capital intensive," he adds.


Earlier, we had asked Dhapodkar about funding challenges and he felt that investors were wary probably because they had not come across many examples of the business. "It took some time but I feel that the investors are now convinced of the scalability of the concept and are willing to take the risk," he said.

Ekstop.com co-founder Sumat Chopra seconds Dhapodkar. According to him, the business is quite attractive in spite of competition from brick-and-mortar stores and other e-commerce firms as margins are high, the market size is big and repeat customers are possible.
Another player who has gained traction is Delhi-based MyGrahak.com (operated as a separate business by the offline retail chain REI Six Ten Retail Ltd) who is offering express delivery (within 24 hours) on an extra payment Rs 50 and thus hopes to expand its customer base.

For now, there are some investors who are ready to take the risk and invest in the online grocery model. Those VCs who are still doubtful are waiting for the model to be validated.