Readers of this blog might be aware that I’m not a big fan of hyperlocal grocery delivery firm Grofers’s business model. The problem is that there are no costs saved to make Grofers its margin – apart from the retail inventory expense incurred at the retailer (from whom Grofers procures), there is also the last mile delivery expense that is incurred which doesn’t leave much profits.
The reason for Grofers scaling back from nine cities in India, however, is not related to this. It is more to do with market size and scale.
Given the uncertainties in terms of demand and service times, a business such as Grofers makes sense only when there is a minimum critical mass in terms of demand. Serving a locality with only one delivery person doesn’t make sense, for example, since uncertainty in demand will mean that either that delivery person is underworked or service levels cannot be guaranteed.
If the average demand in an area can support more delivery persons, though, this can smoothen out the uncertainty (that aggregation smoothens uncertainty is one of the fundamental principles of operations) and higher service levels can be guaranteed without building in too much slack.
While the cities that Grofers has pulled back from are not small (Mysore/Vizag/Coimbatore etc) it is unlikely that any of them would have had the size and density of demand in order to support a scale of operations which would make sense for Grofers. There are several reasons for this.
Firstly, Grofers only captures the incremental demand for grocery delivery, and with most small retailers already offering grocery delivery, the value Grofers adds is to deliver from large retailers. While I don’t have data to support this, my hypothesis is that large retailers have a smaller share in small cities thus cutting Grofers’s natural market.
Next, the transaction cost of travelling to the store is lesser in smaller cities, given shorter travel times (on account of both size and traffic), further cutting demand for on-demand delivery. Thirdly, while smartphones are widespread across the country, my hypothesis (again don’t have data to support this) is that usage is lower in smaller cities (compared to larger cities). Fourthly, smaller cities are likely to be less dense than larger cities (data on this should be available but NED to compile it now) meaning delivery personnel have to cover larger areas.
Some thinking can lead to more such reasons, but the basic point is that not only are these cities small, but demand for on-demand hyperlocal grocery delivery is also much lower (on a per capita basis) than in larger cities for several reasons.
These two factors have together meant that the scale (and density) of demand that is necessary for Grofers to be viable as a business was simply not there in these cities. So it’s a logical move for them to pull out.
This doesn’t answer, however, the question of why Grofers entered these cities in the first place, since the above factors should’ve been apparent before the entry. My hypothesis here is that some fast-growing startups measure their growth in terms of the number of cities they’re in. I’ll elaborate on that on another day.