India’s online grocery delivery market is expected to see a 76% year-on-year increase in sales in 2020, reaching $3bn in value. As COVID-19 lockdown and quarantine measures force Indian consumers to change their buying habits, platforms like Big Basket, Amazon, JioMart and Grofers have benefited from this situation. While these companies have dabbled with food and grocery delivery earlier, they have lately seen unprecedented growth in grocery deliveries thanks to the pandemic.

Indian buyers have traditionally shopped from neighborhood family-run kirana stores, which aren’t supermarkets but never let their customers feel the absence of one. These stores offer a variety of fresh produce and provisions, free delivery to customers’ homes, informal credit and an understanding of customer needs at a personal level.

Such stores make up about 90% of India’s grocery retail sales. Customers are now increasingly expecting a similar experience with a mobile app without stepping out of their homes.

By 2023, the online grocery retail market is expected to touch over $10 bn in sales, translating to 1.2% of all retail sales, up from 0.2% from 2019 as per consulting firm Redseer. As the demand for online grocery delivery rises, competition has picked up. It is now a war on time – those offering faster delivery and better prices are expected to retain more users.

Market Share of Online Grocery Stores in 2019

The Demand for an Online Grocery Market

What sets grocery deliveries apart as an e-commerce subdivision is that Indian consumers took years to relinquish control over purchasing the vegetables and fruits they bought. As factors like increased internet penetration, improved digital literacy and reduced product cost began influencing buyers, online delivery services began to settle in as the new normal. The COVID-19 pandemic nudged buyers towards choosing online avenues for staples and groceries as well.

Within this fairly new yet competitive landscape of grocery e-deliveries, we see a bifurcation based on from where the products are sourced.

  1. The first type is an inventory-based model where orders are processed and dispatched from their respective warehouses after a customer places an order.
  2. The second variant is the hyperlocal model, comprising last-mile delivery from local stores, akin to services offered by Swiggy Stores and Dunzo. This model is dependant solely on existing retail outlets, so processing and dispatching is far more simplified.
  3. Some digital platforms offer a mixed model, combining aspects of the inventory and hyperlocal formats.

It is the hyperlocal delivery format, however, that buyers are increasingly warming up to since they can choose specific shops to order their groceries from.  

To capitalise on this rapidly changing behaviour, companies like JioMart, which started operations earlier this year, expanded their reach to over 200 cities carrying out up to 70,000 orders every day. Flipkart is set to launch Flipkart Quick while Swiggy has announced the launch of InstaMart, both mimicking a hyperlocal delivery model. Perhaps the distinguishing factor between these two entrants would be the time taken to carry out the service. Flipkart Quick has promised 90-minute deliveries, much like its existing peers Amazon and Dunzo. However, InstaMart has promised to half that time to 45 minutes, which could set it apart in its door-step delivery service.

As each player carves a piece of the pie for themselves, only those who offer a smooth delivery experience in minimal time will thrive.

Hyperlocal-ing the Way to Success

Several benefits underlie the surging enthusiasm for hyperlocal deliveries.

Firstly, since time is of the essence, buyers tend to choose the service that takes the least time from when the order is placed to when it is delivered. By reducing the processing hassle, the hyperlocal delivery model saves time.

Secondly, companies can scale up hyper local delivery operations by partnering with ‘dark stores’, which are existing retail shops that keep products for local distribution. Since these stores are not newly established for the purpose of online delivery, warehousing and inventory expenses are minimal. Flipkart, for instance, intends to up its game by working with local stores to fulfill orders using its existing fleet of delivery personnel. In December 2019, they invested $60m in ShadowFax, a last-mile logistics startup, to support this strategy.

Lastly, hyper local deliveries play to the sentiment of customer loyalty. There may be a plethora of grocery delivery apps available, but when buyers can purchase groceries from the shop they have visited for years, they are likely to flock to that.

The Rise of the Online Grocery Market in India
What sets grocery deliveries apart as an e-commerce subdivision is that Indian consumers took years to relinquish control over purchasing the vegetables and fruits they bought. As factors like increased internet penetration, improved digital literacy and reduced product cost began influencing buyers, online delivery services began to settle in as the new normal.

Second Time’s the Charm

While we’re seeing a rise in demand for grocery delivery services in the recent months, this is certainly not the first time this model is gaining traction. In 2015, several companies like Paytm, PepperTap and Flipkart entered the hyper local delivery space, only to shut shop in a matter of months. Private Equity (PE) and Venture capital (VC) firms did not see attractive returns and the unit economics were not promising either. Furthermore, VCs were skeptical about the scalability of such a model given that a few years ago local shops were unwilling to hop onto the digital bandwagon.

In the last two year, however, investments have been pouring into this industry. In 2018, hyper local start-ups received the most funding, $1.6bn, from VCs and PEs compared to any other sector. In 2019, Dunzo raised $45m to further expand its hyper local delivery operations.

So, what has changed?

The unit economics have improved due to the order density and frequency, according to a report by EY and the Indian Private Equity & Venture Capital Association (IVCA). When buyers place repeat orders, over time the unit economics turn positive. In the short-term, however, breaking even can seem an uphill task if the model is not executed efficiently.

Hyperlocal deliveries also offer opportunities for horizontal diversification, for instance from grocery deliveries to medicine deliveries.

Opportunities and Obstacles Ahead

The pandemic has brought about consumer buying driven by safety and adherence to lockdown measures. But as the situation quells, it remains to be seen how many of the delivery services which are on high demand now, stay relevant. Timing is key in this industry as the success or failure of the hyperlocal model is dependent on how many buyers and local businesses can be profitably brought on-board and retained.

Perhaps the biggest concern is whether local mom-and-pop stores would want to continue to partner with various delivery companies when the ongoing pandemic normalizes. For now, services like Dunzo and Swiggy are providing much-needed business to the smaller shops. However, when it is business as usual and buyers can physically visit these stores as they used to, there may be an inevitable churn in users of grocery delivery apps.

Despite potential setbacks, grocery delivery services offer a convenience that is in keeping with the fast-paced, technology-driven life of millennials. In April 2020, JioMart began offering its customers an easier way to use its service by placing orders via WhatsApp. Such synergies are yet to be explored by other giants and help mobilise more customer touchpoints.

It is a natural progression of the e-commerce landscape to widen consumer experiences by making it accessible without barriers of time and place. At present, grocery delivery services are popular in Tier-1 and some Tier-2 cities. When such services continue to expand, they may eventually reach Tier-3 cities where the need for essentials at deeply discounted prices is more dire.