Why Grofers is not a sustainable business

When I meet acquaintances for “gencus” nowadays, one of the things we somehow end up talking about is the startup world and inflated valuations of some Indian tech-enabled startups. The favourite whipping boys in any such discussions are food delivery companies such as Swiggy or TinyOwl and grocery delivery startups such as Grofers.

All three aforementioned companies have raised insane amounts of money and are making use of these insane amounts of money to poach employees at inflated valuations. They are also launching significant “above-the-line” advertising campaigns making use of the funds they are flush with. Yet, there is one fundamental concept that indicates that these companies are not likely to go far.

The whole idea of e-commerce is that you trade inventory costs for transportation costs. In “traditional” offline retail, transportation costs are low, since everything is transported in bulk, up until the retail store. In exchange for this, there are significant inventory costs, since inventory needs to be stored in a disaggregated fashion (at each retail outlet) pushing up uncertainty, and thus costs.

E-commerce works on the premise inventory is held in an aggregated fashion thus pushing costs down significantly (especially for “long tail” goods). In exchange, the entire transportation supply chain happens in an expensive “retail” manner. Thus, you save on inventory costs but incur transportation costs.

The problem with businesses such as Grofers is that they incur both costs. First of all, since they rely on picking up goods from retail stores, the high inventory cost is incurred (the hope is that retailers will give Grofers bulk discounts, but that is capped at a fraction of the margin that retailers make). And then, since Grofers transports the item to the customer’s location, retail transportation cost is incurred (whether it is directly paid for by the customer or by Grofers is moot here, since it has the same effect on prices and volumes). Thus, Grofers incurs costs of inefficiencies of both online and offline retail, and is thus a fundamentally unsustainable business.

It can be argued that Grofers offers a degree of convenience that you pay Grofers rather than incurring the cost yourself of getting the goods from the shop. This has two problems, though – firstly, a large number of small and medium retailers in India anyway offer free home delivery (and take orders by phone). Secondly, the cost incurred by Grofers for delivery is a transaction cost and irrespective of who bears it, it results in a reduction of total volume of transactions.

In its last round, Grofers raised $35M. Given the above fundamental inefficiency in its model, it is hard to see the business being worth that much in the long term.

12 thoughts on “Why Grofers is not a sustainable business”

  1. I believe Grofers current model of sourcing from retailers of more of a lean scale up strategy. Once (if) they gave requisite scale, they’ll start building their own inventory in large market, thus cutting out the retailer margin, and hence related inventory cost.
    For a short lifecycle, high wastage business like vegetables and some groceries, it would be imprudent to start building a centralised inventory when still operating at a small scale in large geographic areas.

    1. Doubt they can build inventory with current FDI laws. And the political fall out of allowing FDI in grocery retail will be enormous I imagine.

    2. Agree that FDI in grocery retail is practically impossible politically.

      But, do they really need FDI? Thought a lot of the money flowing into startups was from domestic HNIs.

  2. Author is totally missing the point here . currently these companies are in harvesting phase. I think ATL campaign is a very good idea . Currently Customer Acquisition Cost of every user via internet is more than 1800 INR that too with limited reach and it rarely build brands and add credibility . A radio advert offer a reach which is unparalleled and over all math works insanely positive for any startup. people are more loyal if they have seen it on TV.

    Plus on an academic level . Author is comparing the Economics of a shop to that of a marketplace . Even in real world retail ..its the shop who come and go out of business .Shopping malls rarely go out of business. Do you know that Instacart sometime use UberBlack to deliver stuff in 50 Min and on top of that they also give $20 to every shopper who do the running around . they are loosing insane amount of money on every transaction . So is Amazon.. So is Uber . Why signal out Grofer ? They have better economics than most of the guys . Chill and enjoy the discounts .. there is a bigger play here … managed by people who are smarter than us and (presumably ) know what they are doing .

    1. I will disagree with the call to authority – this smarter and know-more business is just hogwash in investing. History is littered with the graves of those that thought they knew more and eventually were known to only be “herd” investors. Which is why the rich valuations in these plays are unsustainable – these could be good small businesses, but at these valuations it might turn out difficult for an investor to exit.

      These very arguments – that they know more, that delivery is big, that they should build delivery infra.

      We’ve heard it before, and very recently. The world’s biggest dot com failure was webvan. Which, it turns out, was a grocery delivery service.

      (I’m going to hear the “This Time Is Different” bit surely 🙂 )

  3. From a customer standpoint, online marketplaces offer greater liquidity compared to their offline counterparts, even if it’s just marginal and hence, there’s a market for such firms. From an investor perspective, you might have a point. But as you’d agree, all of this is just a gamble where the net gain/ loss is too small for investors to pull the plug and deem these businesses as “unsustainable”.

  4. Awesome article. Don’t know how I stumbled on this piece of gem, but this is going to my bookmarks.

  5. Excellent way to put the dynamics of this market. The value or the disruption that is created in Grofers is home delivery. In BigBasket it is net discount on goods purchased plus delivery. For Grofers to create competitive advantage on current model is near zero – cabs can deliver, stores can deliver. It would need very strong supplier partners who’s inventory it can share.
    Once the discounts stop will the orders?

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