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June 16, 2012

Can E-Grocers take on the Kirana Stores?

Business today has an article on the challenges facing BigBasket and its smaller competitors.
One reason why no e-grocery startup other than BigBasket has managed to raise money is that margins are wafer-thin. "At a gross margin of 12 to 15 per cent, profitability cannot be more than two per cent," says Gaurav Saraf, Director of Epiphany Ventures, a venture capital firm. The gross margin on fast-moving consumer goods is as low as 14 per cent. On fruit and vegetables, it is around 16 per cent but shelf life is shorter. This is why many sites, including MyGrahak and FamilyKart, stay away from fresh produce. BigBasket, however, says it has no problem. "Fruit and vegetables are procured only on order, except for those with a longer shelf life, such as potatoes and onions," says Menon. "This reduces loss of stock by three to four per cent."

One of the biggest rivals of e-grocers is the local kirana store, which offers home delivery in many cities, often within an hour. But Ascent Capital's Mittal says kirana shops lack the cost advantages to offer customers the best price, and cannot stock a wide range of products. BigBasket tries to consolidate orders in a locality and reach the customer in eight to 24 hours. But is that enough? Manohar Mason, Managing Director of Pentagon Communications, a marketing and consulting firm, doesn't think so. He says: "People can wait for books, but not groceries."

...Saraf of Epiphany Ventures cites the success of British retailer Tesco, which operates offline and online. "It suggests that a hybrid model works best for grocery," he says. "A startup can't compete on procurement with a Reliance Retail, which has the entire supply chain mapped out." Sourcing efficiencies allow big retailers to offer discounts. BigBasket's Menon is undaunted.

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