Why India’s huge online grocer pulling out of 9 cities is scary for small players

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Grofers – one of India’s largest online grocery chains – has shut operations in 9 Indian cities. The move was to focus only on its significant revenue generating markets. This indicates a push to lessen burn rates and scale up existing operations, in a market which is becoming tighter for late stage funds.

Gofers continues to operate in 17 cities. It has raised about US$166.5 million in capital to date, from investors such as Softbank, Sequoia Capital and Tiger Global Management.

Online grocery and hyperlocal logistics have been some of the most volatile sectors in 2015, with many startups shutting shop or getting gobbled up by bigger fish. Investors become cagey to invest in follow on rounds in startups which show no clear path to profitability. Grofers, for instance, has acqui-hired startups last year, including Townrush, MyGreenBox and Spoonjoy. Already a few of them such as Shopveg and Grocerywalk have shutdown.

Gurgaon based Grocerywalk has shutdown

“We were experimenting in a few smaller cities to know how these markets respond to our offering. We are currently re-assessing our operations in these cities, and will be temporarily closing down our services as smaller cities are not ready for hyperlocal business yet,” a Grofers spokesperson said.

The nine cities which Grofers withdrew from are Bhopal, Bhubaneshwar, Coimbatore, Kochi, Ludhiana, Mysore, Nashik, Rajkot, and Vishakhapatnam. The delivery staff and executives attached to those centres have been asked to move to bigger cities where Grofers is scaling up operations.

Less than 100 delivery staff are expected to be impacted by this move. “Though we can’t quote numbers, a very small number of staff will get impacted due to this move,” the spokesperson added. “We are refocusing our business in select key markets that continue to show high growth.”

Natural death for small fish

India’s grocery business runs on wafer thin margins of one to two percent. There is an additional delivery cost of US$0.5 per order. In most early orders by a customer, companies end up making losses. Thus to sustain and compete, external funds have become an imperative and those which don’t raise die a natural death.

Many smaller players in online grocery retail and hyperlocal logistics have either suspended or shut operations in India. Bennett Coleman-funded LocalBanya suspended operations in October last year while logistics player Pickingo shut down in November. A few days later it was announced that Shadowfax onboarded about 45 of Pickingo’s employees in a cash and stock deal.

Grofers competes with its larger rival BigBasket and smaller rival PepperTap. While Grofers and PepperTap pick up orders from nearby stores and deliver to customers in a just-in-time model, BigBasket stocks its own inventory.

Hungry for acquisitions