Tech start-ups move in on India’s grocery shops

Posted on October 9, 2016

Manish Supermarket appears typical of the kirana neighbourhood stores that have been at the heart of Indian communities for decades, its every available space crammed with goods from soap to biscuits.

Yet amid the household essentials are two distinctly modern, smartphone-wielding young interlopers sent by Grofers, a technology start-up seeking a slice of an Indian ecommerce market that Morgan Stanley analysts predict will be worth $119bn by 2020.

A dizzying number of tech companies have emerged to offer Indian online shopping ventures in recent years. The number of web users increased by roughly 50 per cent to pass 300m between 2014 and 2015, according to the Internet and Mobile Association of India, and is expected to reach 462m this year. In a country where western-style hypermarket chains never took off, this has fuelled predictions that consumers will leapfrog directly from local family-run stores to ecommerce.

But Grofers has taken a more nuanced approach, developing an ecommerce service that piggybacks on the age-old kirana network, enabling customers to order from their local store with a few taps on a smartphone.

At the company’s crowded head office in Gurgaon, a business district south-west of Delhi, chief executive Albinder Dhindsa recounts the evolution of a business model that has been in flux since the service was launched in January 2014.

At first, Grofers was a retailer-facing service, enabling a shopkeeper to summon a courier each time a customer called to order a product for home delivery — long a popular service offered by Indian neighbourhood stores. This was aimed at overhauling the traditional system whereby the store owner sent a junior employee to deliver the goods.

By October 2014, however, its founders had decided that the future lay in dealing directly with consumers. “Getting merchants to be loyal to your platform was very difficult. If someone comes up with the same business, what’s stopping them from switching loyalties?” says Mr Dhindsa, sporting a black polo shirt emblazoned with the company’s orange logo. “But consumers have some amount of brand loyalty.”

To entice consumers to the platform, Grofers decided to “give them a look into the inventory” of their local stores through a smartphone app, which customers would use to order products instead of calling the shop.

It launched the service in January last year and now operates in 18 Indian cities. That expansion highlighted stark inefficiencies in India’s retail system, Mr Dhindsa says.

“The first time we got 3,000 orders in south Delhi, none of the organised retailers had tomatoes or onions left on their shelves,” he says. “There was not a single store that could handle more than 50 or 60 orders a day.”

Grofers has had to pursue growth amid a time of tumult for the nascent “hyperlocal” industry, with dozens of similar companies riding a wave of funding into Indian start-ups. Unlisted Indian tech companies raised $7.7bn last year, up from $1.4bn in 2013, with grocery-related businesses accounting for $282m, according to research provider Tracxn.

“Last year we were in a gunfight with everybody wanting to do some version of this model,” says Mr Dhindsa.

The flood of investor cash drove an unsustainable trend of discounting in the sector, which market leader Grofers says it was forced to follow, while wages for couriers rose as much as 50 per cent. The standard monthly wage for a courier increased from Rs10,000 ($150) to Rs15,000 at one point last year, Mr Dhindsa says.

But investor exuberance faded from September 2015, as concerns mounted that valuations were overheating. The $2bn raised by unlisted Indian technology companies in the first half of this year was 35 per cent down on the same period the year before. That proved to be the death knell for some of Grofers’ competitors, notably PepperTap, one of the largest, whose chief executive announced its closure in April.

Grofers raised $120m — by far its biggest round to date — from leading foreign investors including Tiger Global Management and SoftBank in November last year, even as the broader downturn in sentiment was under way, Mr Dhindsa notes.

But while competition has thinned out, it has had an effect on Grofers, too. In June, the company laid off 150 staff — about a tenth of its workforce — and retracted 67 job offers, having concluded it would have to wait longer than expected for its next funding round.

There is an intimidating new competitor on the scene in the form of Amazon’s Indian subsidiary, which this year began testing its own grocery delivery service, which also relies on kirana stores and other local retailers.

Still, some investors are sceptical about the notion of trying to integrate kirana stores, with long-established ways of operating, into ecommerce.

“If you take too much [commission] from the kirana shop, they’re going to say: why the hell am I bothering with you? You’re just giving him the customer that’s already coming to him,” says Sandeep Murthy, a partner at the Mumbai venture capital firm Lightbox Ventures.

Another team of tech entrepreneurs has spied opportunity in precisely that dynamic. 10i Commerce Services launched its ShopX platform last year in two south Indian cities (see box, left).

The service enables customers to place orders for goods not stocked locally, via a smart device belonging to their local shopkeeper.

The model caught the attention of Nandan Nilekani, an Infosys co-founder turned venture investor. He invested Rs350m this year and says such companies will play a key role in transforming India’s economy.

“Once more data on a retailer’s business starts flowing through a digital platform, it creates a digital footprint that can enable him to get credit,” says Mr Nilekani. “Lots of businesses in India are outside the formal system but the next 10 years will be the period when these people come in from the cold.”

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