Analyzed : Who Will Win The Grocery Retail Space? Inventory-Less Model?

Grocery retail is the single largest component of retail in India, constituting ~48% of India’s total retail consumption of `41 tn.

Kotak Institutional Equities has shared its analysis on hyperlocal grocery delivery companies’ revenue models. The companies  altogether have raised $290 mn in funding in CY2015.

Though the company bets on Big Basket’s model for less cash burn, it says, “With scale, inventory-less models such as that of Grofers could become more profitable, though achieving that scale will be the real challenge due to stiff competition, high churn rates and customer behavior.”

India’s grocery market size at `Rs 19.9 tn, contributes 48% to India’s total retail consumption. Globally, China is the largest online grocery market at $41 bn followed by UK at $15 bn.

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The hyperlocal grocery companies mainly adopt two models inventory-led model (BigBasket and inventory-less or aggregator models which tie-up with existing shops and supply to the end-consumer (Grofers). Off the two, Kotak says that if scale rises 10x, the inventory-less model could yield better margins as delivery costs could reduce dramatically.

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“Urban grocery consumption is ~40% of overall consumption and is expected to increase further as urban population rises, and purchasing power increases. Despite urbanization trends and higher consumption seen for a few years now, organized grocery retail is a mere 2% of the total,” Kotak stated.

The company has analyzed that with less number of deliveries, inventory led model will be profitable but the trend is likely to change after the scale increases which will increase the delivery cost.

“While both models have the potential to turn profitable, it is the inventory-less model which can potentially achieve operating profits of ~2.6% (of transaction value) versus 1.0% for the inventory-led model.”

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The analysis says that scaling up can be the only inevitable in the long term run which will require sustained investments but it will be a real challenge. The reason for this speculation is that consumer still remains value conscious and prefers tangibility for products such as fruits and vegetables. Adding to this, the companies need to compete with the local kirana stores, who anyway offer services like home delivery, and sometimes have long-term relationships with their consumers, even offering them credit.

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