Food & Grocery: Modern Retail v/s Traditional Retail

By Ajay Aggarwal , Head, Retail, Nihilent

Food & Grocery is the largest segment in the Indian retail sector with an annual spend of $570 billion, accounting for around two-thirds of the overall retail spend in our country. This is growing at over 10% every year. Various attempts in the last decade to grow online traction in this sector didn’t get very far, except a couple of pure online brands like Big Basket, Grofers (not Blinkit), and a few regional and local brands, including my own attempt in 2010 with limited success. Probably this is the reason that more than 80% of the market share is still controlled by the neighborhood Kirana and other merchants. I have always been fascinated by this sector in many ways.

It is a tough category for online to be profitable. Unlike other categories, the weight and value ratio are not in favor of absorbing the cost of delivery. The cost of delivering a Rs 20 packet of 1 kg salt is much more than the gross margin. Being the convenience category, customer experience is driven by two key factors: (1) availability across the width of the category and (2) the right price of the brand and pack size of choice. Being a deep category, managing fill rates to ensure availability has always been a challenge. Brands have faced the challenge of using discounts and offers to push sales.

Change in consumer buying behavior during the pandemic has once again drawn attention to the possible growth of this category online. National brands like Big Basket are not just rushing to scale up but also trying to deal with the emerging competition from majors like Amazon, Flipkart, and others. On the other hand, traditional biggies in the brick-n-mortar space have quickly enabled their online deliveries to protect their long-term consumer base.

The key convenience value offered by the neighborhood merchants has been the fill rate to service their catchment needs and their quick delivery time. As these merchants started becoming digital during the pandemic, established online brands shifted their focus on delivery time since they are all trying to wrest available market share from Kiranas. This is triggering innovation in delivery models, with the mix of technology, dark stores, and mode of delivery.

My view is that pure-play online brands will always struggle to make this a profitable business and will continue to burn their capital through discounting and pressure of fast delivery to keep the customers engaged. How long can they do that? Instead, there is a real opportunity for the likes of Spencer’s, Star Bazaar, Big Bazaar, More, V-Mart, and the others to get their act together and focus on building value for their existing customer base through cross channel engagement and leveraging their existing resources.

During the last few weeks, I have identified certain trends through my own experience of shopping with these brands, both online as well as in their stores, and here are some of my observations.

• Each of the stores can be leveraged as local warehouses for e-commerce delivery to the catchment covered by it. A larger number of stores in the chain gives you more market coverage at almost no extra investments towards warehousing and logistics. This is where brands like Reliance Retail have been early winners.
• These brands are making large investments to set up data warehouses to get a single view of their customers. It is important that they also give a single view and range of their inventory to their customers as well. This will create a seamless experience for their customers across the channels. Instead, the range offered online is less than what is available in the store associated with that catchment.
• The prices offered online are often more than in the store. To build confidence and trust in the brand, uniform pricing will lead to better engagement and overall value.
• This seamless integration of the channels will also create real-time inventory visibility across channels, leading to an enhanced customer experience.
• Most of these brands have access to rich data across their business, which could be used to plan assortment across channels. New sets of AI/ML-based technologies are useful to predict assortment at SKU/Store level along with demand forecast to plan required inventory to ensure 95% and above fill rate across channels. These engines are capable of understanding and predicting local demographic preferences in each catchment. This will also help to optimize the overall inventory load across the supply chain.
• These forecasting engines can also be configured to predict personalized baskets for each customer to streamline marketing campaigns. Instead of sending bulk messaging to all your customer base, hyper-personalized campaigns have a better chance of conversions leading to improved customer value.

These observations are based on my visit to the brand outlets and interacting with a range of customers there. They are equally applicable to global brands.

Though the jury is still out on whether modern retail brands will be able to grab a larger market share from their local Kirana competitor, I feel local merchants have a huge competitive advantage since they are serving a much smaller catchment compared to the modern retail brand.