I know that some of you think I hate grocery startups. Let me clarify that is not the case. I just feel it’s a market before its time and Indians have bigger problems.
But, it’s good to question your own beliefs every so often. So we took a look at the order values within the grocery space in ~6-month snapshots and broke them down into different buckets to see how things are evolving, and if they are at all. (They are).
When I look at this data, I imagine that grocery delivery companies want to shift us away from our local “kirana” / corner shop and on to their platform. Just like UBER and OLA want to replace the vehicles we drive with their own cabs. Presumably, higher ticket sizes on grocery apps have better unit economics and also signal a growing reliance on such platforms for grocery shopping (People planning and purchasing in bulk, vs. using these apps for last minute purchases). Just like short distance commutes are preferred by UBER & OLA and signify a growing reliance of their customers on them! (Them = UBER/OLA).
It’s also worth noting that initially, many startups wanted to provide instant gratification, i.e. same day delivery. In retrospect, that very USP may have worked against them. Since users knew they could order anytime, they tended to do ‘last minute’ shopping via these apps vs. planned household expenditure. Resulting in higher costs per delivery and a badly optimized delivery fleet. As these companies have moved away from ‘on demand’ to next day or day after — the order patterns have also changed.
From what I understand of this market, a 13% margin on sales in the grocery business is pretty fantastic (not including private label).
Let’s assume that the cost per delivery is somewhere around Rs. 80. So presumably these startups begin to break even on the cost of delivery @ Rs. 620 per order(average).
My guess is that the contribution margin is ~Rs.50. This is the broad logic I followed:
Remember that this doesn’t include CAC. With a 20% churn, we could assume that CAC per household will go to around Rs. 960/-. Logic below:
At this rate, each company will have to sell groceries worth at least Rs. 1000 to one household more than 18 times just to recover their CAC!
Overheads like management cost, warehousing, wastage and electricity are all abover and over this.
Currently, the order frequency for the entire sector is 1.7 per month split across all major online players.
This is how the Average Order Values are evolving:
This is how the Order Frequency (for Active Users) is evolving:
Safe to say, that the kind of customers grocery startups are targeting are essentially the Indian Middle class. Given these order values, one thing is abundantly clear — people are not buying their entire ration online. Many, in my opinion, would be deal hunters or last minute, shoppers.
In a way this is actually good news for the sector, since for every subsequent time period the share of orders above Rs. 1000 has increased. Perhaps the top 1% of India’s internet population is finally warming up to the idea of shopping for groceries online but I suspect it will be some time before this economics turns positive. While that happens, many startups will die/ get ‘acquired’; few will raise further rounds of funding.
Thanks for your time, have a great weekend!
Ashish
- Team KG
P.S. We obviously have the granular break down of order values. Feel free to get in touch if you found this interesting.
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You can reach me on ashish@kalagato.com
