With the government approving Amazon's proposed $500 million investment in the sector, the floodgates of the food retail sector seem to have been thrown open. Most analysts believe that after e-commerce, the food retail sector will be the next big space which is a low-hanging fruit say some. They expect the sector to see a few new entrants and consolidation to heat up further.
Currently, the government permits 100 percent foreign direct investment (FDI) in the food processing sector. As per norms, a foreign company can open a wholly-owned subsidiary in India to retail food products produced and or manufactured in the country by way of opening stores or online.
The government had received investment proposals from three companies - Amazon, Grofers and Big Basket - worth $695 million for retail of food products. While US-based retail giant Amazon is one of the major e-commerce players in India, Grofers and Big Basket are the other players in the online grocery space.
A report in The Economic Times on Tuesday said Paytm Mall is in talks with Big Basket to buy a significant minority stake for $200 million.
Though Amazon, Grofers and Big Basket are big players -- the latter two not at par with the former -- Swiggy cannot be ignored.
The food retail sector in India is characterized by colourful sabzi mandis where men and women like to feel, touch fruits and vegetables and haggle prices before making a purchase. The friendly kirana store in the neighbourhood is a touchstone that no man or woman wants to ignore – be it to make purchases on credit, cash or even for last minute shopping as late as 11 pm or even later. With home-delivery, a service that is offered by most kiranawallahs, this important and integral skein of the retail sector in India cannot be ignored.
What are the strengths of the Amazons of the world that can change the scenario of the food retail sector in India? For starters, it is the deep pockets that no player in this sector in India can currently match up to.
“Amazon has a huge advantage with an end-to-end supply chain. Be it procurement or online delivery, none of the other players in the food sector stand a chance against Amazon,” says Sanchit Gogia, Chief Analyst and CEO of Greyhound Research.
After acquiring US-based Whole Foods Market Inc in early February 2017 for $13.7 billion and having a firm footprint in the brick and mortar space in the US, it was natural for Amazon to secure its presence similarly in India. Amazon can unleash its potential in the food retail sector in India. It has been big on procurement unlike Big Basket which does not have the buying power of the former, said an analyst.
“Amazon can spend money on online footfalls and has the ability to get amazing prices from the back-end as they are big on procurement,” the analyst said.
However, to think that the other players in the league are trailing is to miss the big picture. Big Basket has perfected the local experience, believes Harish HV, Partner, Grant Thornton India LLP. “With Shah Rukh Khan roped in as its brand ambassador, Big Basket has upped its brand,” he says.
Though the business model of Amazon is not known yet, analysts believe that perhaps it will co-opt kiranas for last mile delivery as their knowledge of the landscape is far superior than any of the organised players in the sector. One reason for this belief is because real estate is a costly proposition in India and it would make sense for Amazon to tap into local kiranas to scale their game.
The government opening the food retail sector will see a lot of players entering the market. With the government emphasizing on Digital India and Make in India, Amazon has fulfilled those norms by having a huge local procurement chain in the country and thus having an advantage over other potential entrants in the sector.
If there is a competition that can match up to Amazon, then it is Wal-Mart, says Gogia. However, Amazon has a head start in India compared with Wal-Mart which does not have an online presence like the former. Walmart has a major procurement advantage in India but that is restricted to the B2B sector.
Any player in the market in the food retail sector will now have to up its game to match with Amazon. Many players may consolidate their position through mergers and acquisitions. However, the sector is extremely fragmented.
“It will take much muscle and deep pockets to reach a level for anyone here,” says Paula Mariwala, Partner, Seedfund and Co-Founder, Stanford Angels. She wonders if the Indian housewife or working individual will be keen to order online.
“Though there is a trend of some choosing to buy fruits and vegetables online, it is not significant as yet. How fast will this sector grow is a wait-and-watch game,” she says.
Published Date: Jul 11, 2017 04:53 pm | Updated Date: Jul 11, 2017 05:16 pm