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BigBasket.com: Redefining the Business Model

By: Sujo Thomas, Abhishek, Sanket Vatavwala, Piyush Kumar Shinha

BigBasket.com had emerged as one of the major players in highly competitive Indian online grocery retailing market by employing inventory based model. On March 22, 2016, Big Basket had secured Series…

• Length: 18 page(s)
• Publication Date: Jul 28, 2017
• Discipline: Marketing
• Product #: A00151-PDF-ENG

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BigBasket.com had emerged as one of the major players in highly competitive Indian online grocery retailing market by employing inventory based model. On March 22, 2016, Big Basket had secured Series D funding worth USD 150 million from the United Arab Emirates-based Abraaj group for driving its future growth. A few days later, the Government of India came out with guidelines on March 29, 2016, through its Press Note No. 3 (2016 Series) which stated that Foreign Direct Investment (FDI) in the inventory based model of e-commerce would not be permitted. As BigBasket grappled with the challenges of a growing and expanding business, BigBasket team had to evaluate the existing business model. This case traces the predicament of BigBasket in formulating a business strategy for taking the online grocery retailing business further.

Learning Objectives

The main objective of the case is to highlight the issues related to the online grocery retailing industry. The case provides an opportunity to understand different business models operating in the evolving Indian online grocery retailing market and their appropriateness in the existing business environment. The case can also be used to discuss the various opportunities available to entrepreneurs in the online grocery retailing industry. The case will also help students familiarize themselves with the challenges in the online grocery retailing business and ponder over the possible solutions to tackle these challenges. By the end of the session discussing the case, the student would be able to:

• Describe important issues related to the online grocery retailing industry,

• Differentiate between different business models operating in the evolving Indian online grocery retailing market and their appropriateness in the existing business environment,

• Develop an understanding about the various opportunities available to entrepreneurs in the online grocery retailing industry, and

• Ponder over the challenges in the online grocery retailing business and discuss possible solutions to tackle these challenges.

Jul 28, 2017

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Indian Institute of Management-Ahmedabad

A00151-PDF-ENG

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BigBasket System in E-Commerce, Performance and Functionalities of BigBasket

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BigBasket.com: Redefining the Business Model

• By: Sujo Thomas , S. Abhishek , Sanket Vataywala & Pivush Kumar Sinha
• Publisher: Indian Institute of Management, Ahmedabad
• Publication year: 2017
• Online pub date: January 02, 2019
• Discipline: E-Commerce , E-business Economics , Government & Business Economics
• DOI: https:// doi. org/10.4135/9781526487513
• Keywords: bazaars , business models , customers , e-commerce , India , inventory , retailing Show all Show less
• Contains: Content Partners | Teaching Notes Length: 7,959 words Region: Southern Asia Country: India Industry: Food and beverage service activities Originally Published In: Thomas , S. , Abhishek , S. , Vataywala , S. , & Sinha , P. K. ( 2017 ). BigBasket.com: Redefining the business model . Ahmedabad, IN : Indian Institute of Management, Ahmedabad . Organization: BigBasket Type: Direct case info Organization Size: Medium info Online ISBN: 9781526487513 Copyright: Certain material used with permission of Indian Institute of Management, Ahmedabad. © 2017. All rights reserved. More information Less information

Teaching Notes

Supplementary resources.

The potential of online grocery retailing in India has seen different players trying out various business models to capture market share and post a healthy growth rate. Among the different players in India’s online grocery retailing, BigBasket has evolved into one of the major players. It follows the inventory based model which has been generally criticized due to its high capital requirements. The problem for BigBasket is further compounded, as after securing funding worth USD 150 million from the UAE based Abraaj group, it has to tackle the challenge of the Government of India guidelines which stated that Foreign Direct Investment (FDI) in the inventory based model of e-commerce would not be permitted.

This case discusses the online grocery industry in India, the supply chain challenges faced by the industry as well as the opportunities for the industry by predominantly focusing on one of its major players. Various business models followed by the industry are described in detail. Additionally, the case provides a brief background of the existing players in the online grocery retailing market in India, while deliberating upon the ultimate choice of business model for BigBasket to sustain itself in the competitive environment.

BigBasket.com (Innovative Retail Concepts Private Limited), established in December 2011 with its headquarters located in Bangalore, India, had been operating in more than 23 cities in the country by the end of March 2016. 1 In the last four years, it had evolved into one of the major players in the Indian online grocery market. The online grocery market in India was transforming, as it was essentially preferred by the urban class who sought a lifestyle of ease. It had also attracted many entrepreneurs who competed with each other in a market characterized by thin margins. Intense competition ensured that only a few companies survived and sustained themselves. One of these companies was Big Basket, which succeeded in spite of the competition. Big Basket’s success was captured by its Series D 2 funding worth USD 150 3 million from the United Arab Emirates-based Abraaj group in March 2016. 4

In online grocery retailing, different players choose from a variety of business models – an inventory based model, a hyper local based model, a hybrid model and a mobile app based model. BigBasket, one of the prominent players with a customer base of more than 450,000 with a monthly order growth rate of more than 30%, operated under the inventory based model. 5 As BigBasket grappled with the challenges of a growing and expanding business, the Government of India came out with guidelines on March 29, 2016 through its Press Note No. 3 (2016 Series) which stated that Foreign Direct Investment (FDI) would not be permitted in the inventory based model of e-commerce (see Exhibit 1 ). The government’s guidelines defined the inventory based model of e-commerce as “an activity where inventory of goods and services were owned by e-commerce entity and were sold to the customers directly.” 6 The BigBasket team had to evaluate the existing business model along with the available business opportunities. While redefining the existing business model, BigBasket aimed to reach out to a larger clientele, eventually formulating a business strategy for taking the online grocery business further.

Online Grocery Retailing Industry Background

India’s online grocery industry was projected to be around USD 100 million by 2015 and was expected to cross USD 25 billion by 2020. 7 The online grocery retailing industry saw a major shift in the year 2015, when the industry saw investments from venture capital (VC) funds for different entrepreneurs. Some analysts estimated that there were around 25 companies which had received external funding in 2015, which itself was an indicator of the potential of the online grocery industry, as perceived by investors. 8 The growth in the online grocery industry was due to several factors – the growing population of internet users/e-shoppers, the increased penetration of internet connectivity, the increased possession of smart phones/usage of mobile shopping, traffic on roads, parking problems, hectic work schedules and lastly the desire for a comfortable lifestyle.

In the Indian online grocery industry, out of the four prominent business models explained below, the two most widely adopted business models were the inventory based model and the hyper local based model. 9 While the inventory based model was capital-intensive since it required large warehouses, the hyper local based model was seen as a viable option by many, as the need for capital in this model was much lower. In India, companies kept fine-tuning these models as per their requirements and suitability. For example, BigBasket initially started its business by buying groceries based on orders received and then gradually switched over to establishing its own warehouse. 10 Similarly, ZopNow.com had initially started with an inventory based model but later operated as a hyper local based model. 11 Another player, AaramShop Private Limited used to work with local vendors through its website and unlike other business models, AaramShop’s delivery mechanism did not depend on its own delivery staff. AaramShop used to place an order with its associated grocery stores which were in the same locality as its customers. 12

Inventory Based Model

In this model, the online grocery retailer’s own warehouse would be set up in order to have more control over the quality of products, delivered through its own vans or trucks. Apart from timely delivery, the quality of the product played a pivotal role in ensuring customer satisfaction. The retailer needed high working capital to set up its warehouse and run its trucks and vans. Also, the warehousing of perishable items was a risky and costly affair due to the nature of the product. Inventory management would be another key area to concentrate on as lack of stock would hamper the retailer’s reputation. BigBasket followed this model. 8

Hyper Local Based Model

In this model, the online grocery retailer established local tie-ups with kirana 13 or convenience stores to provide goods. This did away with the need to set up a warehouse and hence significantly reduced the capital expenditure on warehousing, cold storage and inventory. This model led to a substantial reduction in expenses, thus freeing funds for geographical expansion. In the hyper local based model, due to tie-ups with local vendors, delivery was expected to be faster. One of the limitations here was the supply-chain related issues of local vendors who would have to understand the nuances of the online grocery business. Another area to concentrate on was the inventory stocked with vendors which was limited. If vendors could not handle demand in excess of inventory, they would likely lose business due to incomplete orders and dissatisfied customers. ZopNow followed this model. 14

Mobile App Based Model

In this model, companies developed mobile apps and tied up with local vendors. Customers could place their orders with the online grocery retailer through mobile apps, from where the order would eventually be redirected to the kirana store. The company’s delivery persons would pick up items from these local kirana stores and deliver them to the customer. Grofers India Private Limited followed this model. 15

Hybrid Model

In this model, a company with a brick and mortar structure operated in both – online and offline models, following the concept of a franchising model. The company expanded its presence through franchisees, which were given access to the company website, where various items were listed for customers. Once the customers selected the products, the franchisees placed orders with the company, against which the company would send an order confirmation message to the customer’s cell phone. The franchisees would then collect the payment after which the company’s customer service department would take over. In this model, the franchisees did not necessarily have their own stores nor did they need to deliver the items, as the delivery was done by the company. This way, the traditional brick and mortar companies could reach out to customers in small towns where they did not have a presence. Future Group (Big Bazaar Direct) followed this model. 16

As companies kept trying various permutations and combinations, there were other models which were unique. For example, in the model followed by AaramShop, the company provided an online platform to local vendors through its website and unlike other business models, they did not have their own delivery boys. Through the company’s mobile app, the customers created a list of items that they required, after which the order was redirected to the associate local vendors who delivered these items to customers. In this kind of business model, delivery charges, delivery timings and refunds were a matter of agreement between local retailers and customers. Here, the company provided free space to retailers but did not charge a fee or get commission from the retailers and charged no money from customers for using online services. Instead, the company charged from the brands which were keen to have an online presence so that they could increase their sales.

BigBasket – Background and Business Philosophy

In 1999, one of India’s first online businesses named Fabmart.com, was kicked off by a team consisting of Hari Menon (current CEO and Head of Merchandising at BigBasket.com), V. S. Sudhakar, Vipul Parekh, Abhinay Choudhari and V. S. Ramesh. 17 In 2001, this team made the grocery business a part of Fabmart, which dealt in jewellery, music, toys and books. The success of the grocery business led the team to rebrand Fabmart as Fabmall, which projected it as an offline grocery retail chain in southern India. In 2007, the Aditya Birla Group acquired Fabmall and launched it as ‘More’. Later, their sheer passion for the online grocery retail business led the team to launch BigBasket in 2011. BigBasket was valued at USD 500 million in 2016 with its services being offered in the major cities of India. 18 BigBasket was offering its services in various cities and was covering more geographical areas than its competitors. (See Exhibit 2 ). BigBasket’s revenue and profit after tax (PAT) for FY 14–15 was USD 27.4 million and USD (9.3) million respectively. Sales of products through the website constituted 96% of BigBasket’s revenue. 19

In managing its business, BigBasket concentrated on three major areas – customer focus, range of products and technology usage. BigBasket’s delivery mechanism was robust and effective, so it was able to deliver items on the same day, if order was placed before 12 noon. Moreover, in case a defective (broken, leaking, expired) product was delivered, BigBasket had a pro-customer ‘no questions asked’ customer policy, where returned items were accepted without cross questioning customers and the refund amount was credited to the customer’s account for upcoming purchases. It was also very important to ensure that a wide range of products was available in BigBasket’s offering (see Exhibit 3 ). The availability of a variety of products could ensure that customers stayed with BigBasket. It offered ease of purchase to customers and won customer loyalty. Technology played an important role in customers’ experience of BigBasket – be it the introduction of Andriod/iOS mobile apps or the “Smart-Basket” feature which predicted the generic requirements online. This feature would eventually reduce the time to order to nearly five minutes and thus save the time of online shoppers through suggestive selling. 20

Operations at BigBasket

BigBasket which was operated on the inventory-based model had different warehouses located in the cities as part of its supply chain management. It sourced directly from farms, mills and companies like Hindustan Unilever Limited (HUL), P&G and then stored the supplies in its warehouses. It aimed at setting up warehouses so that it could earn extra margins compared to its competitors in the online grocery business. The serving of fresh products was the key to BigBasket’s success and hence it acquired refrigerated vans/trucks to deliver products to the customers. At the beginning of the day, goods were dispatched from collection centers to warehouses. Later, the goods were delivered to the customers through delivery vans or trucks. BigBasket usually offered prices to farmers around collection centers based on the early morning reports from the mandis 21 BigBasket employees reported on the prices of various products from these mandis and if on certain days the warehouse ran out of supplies, products were purchased directly from the mandis .

BigBasket claimed that it provided its customers a “Farm to Home” experience. In this model, BigBasket received supplies from the farms and then the refrigerated branded vans delivered the goods. Perishable goods were warehoused for a maximum of 24 hours from farm to warehouse. 22 Once the inventory was procured and stored, based on the registered customer’s requirement, the delivery was done. 23 BigBasket charged INR 20 for delivery if the order was below INR 1000 in value. 24

In order to keep track of the delivery time, BigBasket had acquired support from AssetTrackr which was a fleet and asset management solution provider. BigBasket integrated with the ERP system of AssetTrackr to get the information about the movement of trucks and delivery vehicles. Having tracked the movement of delivery vehicles, a tentative delivery time was provided to customers. The various locations where goods were to be delivered were geo-coded and stored in the database. When a customer placed an order, based on the location, AssetTrackr created a Geo-Zone around the delivery location and recorded precisely the delivery time. BigBasket bought Delyver which was a Bangalore based company, to quickly deliver the products and meet the delivery commitment effectively. 25 These steps gradually helped BigBasket to achieve its goal to supply fresh items as per the committed delivery time (see Exhibit 4 ).

Apart from warehouses for storage, BigBasket also planned to launch “Dark Stores” where 1000–1500 stock keeping units could be stored. 26 Typical Dark Stores looked like conventional stores but were generally not open to the public. Their size varied from approximately around 5000 square feet (in larger cities) to around 10000 square feet (in smaller towns where the warehouses were larger). 27 Dark Stores were expected to shorten the delivery time as the company could directly fulfil the orders from these stores to its customers.

In following the inventory based model, BigBasket faced a high working capital requirement for setting up the warehouses, acquiring refrigerated trucks/vans and designing the IT infrastructure. The warehousing of perishable items was a risky affair because if these perishable items were not consumed within a specified time, the losses could be significant. The inventory management also had to be handled strategically because any stock-out situation would have hampered the BigBasket brand severely.

As the online grocery business depended upon the technology used, it designed user friendly websites for customers to browse products, place orders and make their payment. BigBasket expected that innovation in technology, creativity in website design and hassle-free order placements would help attract the target group and help build a strong customer base. Accordingly, it launched Android and iOS mobile apps, which allowed customers to place an order through their smart phones. A feature called “Smart Basket” predicted which items the customer needed more of, which further helped to reduce the order time and saved the customer’s time. 28

BigBasket allotted nearly INR 800 to INR 1000 million for marketing campaigns to reach out to the masses. 29 It pumped in money in print, electronic, radio and social media for communicating to prospective and existing customers. BigBasket roped in celebrity Shah Rukh Khan, a leading actor of Hindi movies, who the company believed had a widespread appeal that cut across age, gender and geography and was likely to attract an equally broad range of the target audience as a brand ambassador. Realizing that customer testimonials played a major role in increasing awareness and trust, and led prospects to buying groceries online, BigBasket displayed city wise videos of satisfied customers giving feedback on their website. In order to woo customers who were not comfortable sharing their credit card details during online shopping, especially for large value orders, BigBasket start offering ‘Cash on Delivery’ and ‘Card on Delivery’ whereby delivery staff carried credit card machines while delivering the order.

It was a tough task for industry players in the Indian online grocery market to raise funds. Though a number of players plunged into the online grocery business in 2012, only three companies out of 40 had managed to get funding from investors, while 30 had to close down. 30 Lately, investors had turned cautious about backing start-ups in the online grocery business. In 2015, there were fifteen funding rounds that generated more than USD 100 million, whereas in the first quarter of 2016, there had been just three rounds of funding. 31 Therefore, fundraising was one of the major challenges not only for new start-ups but also for existing players. BigBasket, despite the adverse sentiments towards funding online grocery retailing, was able to raise USD 150 million from the Abraaj Group in March 2016. 32

After two years of its inception in 2011, BigBasket had a customer base of over 100,000 in 2013. 33 It had a customer base of more than 450,000 in March 2015 34 and an overall penetration into more than 23 cities by March 2016 35 . Ensuring customer satisfaction and retention and winning new customers were indeed daunting tasks in the online grocery business environment which offered lower margins.

Prominent Companies in the Indian Online Grocery Market

India which was the world’s sixth largest grocery market as per research firm IGD, was projected to overtake Japan and secure third position in the world by 2016. 36 The 2014 United States Department of Agriculture (USDA) attributed the growth in online grocery industry to the rise in total internet users, a fall in mobile handset price and a rise in smart phone penetration. 37 Indian online grocery market was flourishing particularly in cities like Delhi, Mumbai, Kolkata, Bangalore and Pune which had a large number of easy lifestyle seeking urban class. As per the consultancy organization Technopak, the online grocery market was estimated to grow at a rate of 25–30% year-on-year basis in the major cities of India. 38 Apart from BigBasket, a number of other players, described below, were trying to find a foothold in online grocery market. The major opponents of BigBasket were ZopNow, Nature’s Basket, One Kirana, AaramShop and Grofers. Also, a few other companies in online grocery market such as MY247MKT by Tata Group, Mukesh Ambani’s Reliance Fresh Direct, My Grahak, BazaarCart and Pinkcitykirana were trying to make inroads in this market. My Grahak had partnered with WeAreOpen for delivery in Delhi National Capital Region (NCR) region and was providing free delivery to its customers in this region. There were players like LocalBanya and Greencart which had temporarily suspended their operations. Initial euphoria about online grocery business seemed to be dying as other e-business players like Ola, Paytm and Flipkart had also shut down their online grocery retailing verticals as they found online grocery industry a tough nut to crack.

Incorporated in 2011, ZopNow was a Bangalore based online grocer, which was valued at around USD 50 million in 2015. 39 It offered services at Bangalore, Mumbai, Navi Mumbai, Thane, Pune, Hyderabad, Delhi, Gurgaon, Mysore, Faridabad, Noida and Gaziabad. 40 ZopNow operated on hyper local based model and delivered the goods in three hours and offered free shipping on all orders. ZopNow had raised USD 10 million worth funding led by San Francisco based Dragoneer Investment Group, with investors Accel Partners, Qual-Comm Ventures and Times Internet in April 2015. 41

Nature’s Basket

Founded in 2005, Nature’s Basket was a prominent grocery e-commerce company owned by the Godrej group with its head office located in Mumbai. It started as a single fresh food store and currently offered its online grocery services in five major cities – Mumbai, Pune, Delhi NCR, Bangalore and Hyderabad. 42 Nature’s Basket worked on hyper local based model and promised to deliver the goods within three hours from the time of placing the order in these five major cities. It charged INR 30 for delivery if the order was below INR 1000 in value. 43 In 2015, Nature’s Basket acquired online grocer ekstop.com 44 and tied up with e-commerce giants Amazon and Snapdeal to sell its products online. 45

Founded in 2011, One Kirana was a leading North Indian online grocery shopping destination, offering services in New Delhi and Delhi NCR with a network of 5,000 local stores and a warehouse. 46 One Kirana operated on a unique business model where they owned a warehouse in Delhi and they had also tied up with many local stores in and around Delhi. It also promised to deliver goods in less than three hours after order confirmation and there were no delivery charges. 47 Amira Pure Foods Pvt. Ltd., a major international producer of packaged foods, had tied-up with One Kirana in December 2014. 48

Started in 2011, AaramShop was a Delhi based online grocer that operated through 3,500 local shops. As per AaramShop’s unconventional business model, shopping list was created by customers and then the company used a merchant app to direct the order the retailer in customer’s vicinity. AaramShop operated on ‘freemium’ model, 49 where it did not make revenue on margins made by vendors but offered premium services like advertising options and marketing. 50 Due to this type of business model, they did not require high manpower, and consequently staffing cost and overheads were reduced considerably. Delivery terms and charges was a matter between customers and local vendor of AaramShop. 51 In 2014, AaramShop tied up with Red Bucks Grocery to launch its services in Pakistan. It intended to enter in East African (Kenya), South East Asia (Vietnam, Indonesia) and Middle East (UAE) through franchising model. 52 It was planning to raise USD 12 million from a VC fund, as part of Series A funding, to expand its operations across new markets like Sri Lanka and Dubai. 53

Amazon India (KiranaNow)

In the first quarter of 2016, prominent e-commerce player Amazon, partnered with local stores and supermarket chains like Big Bazaar, Reliance Fresh, and Nature’s Basket to launch its grocery arm KiranaNow. It delivered products in Bangalore through an app called Amazon Now and claimed to deliver the products in two hours. It planned to expand its presence in 10 cities every year. 54 Amazon India intended to enter the market with a hybrid model that was inventory led as well as direct pick-ups led. 55

Naturally Yours

Founded in 2010 in Mumbai, it was a platform to buy organic and ayurvedic 56 products online. It kicked off as a brick and mortar set up and catered to a niche segment. Naturally Yours tied-up with farmers, bought products from them and sold under the brand of Naturally Yours. They delivered their products across 23 states and union territories in India. 57 Mostly products were delivered in a day or two if delivery was within Mumbai whereas outside Mumbai, it took eight to ten working days for delivery. For a bill value above INR 499, the delivery was free and below this amount, delivery charges were INR 40. 58 In the year 2015, Naturally Yours raised fund from angel investor Sanjay Mehta. 59

Incorporated in 2014 as OneNumber, initially Grofers followed Business-to-Business (BtoB) model but later shifted to Business-to-Customer (BtoC) model. It was valued a little below USD 400 million in 2015. 60 The customers had to select stores and buy goods through mobile app to get the items delivered. It was operating in Agra, Ahmedabad, Bengaluru, Chennai, Chandigarh, Hyderabad, Indore, Jaipur, Kanpur, Kolkata, Lucknow, Mumbai, Delhi NCR, Nagpur, Pune, Surat and Vadodara. 61 In January 2016, Grofers stopped its operations in nine cities across India namely Bhopal, Bhubaneswar, Coimbatore, Kochi, Ludhiana, Mysore, Nashik, Rajkot and Visakhapatnam. 62 Grofers delivered goods in 90 minutes and it charged INR 49 for orders below INR 350. 56 In November 2015, Grofers raised USD 120 million funds from SoftBank with Russian entrepreneur Yuri Milner and existing investors Tiger Global and Sequoia. 63

Big Bazaar (Direct)

Launched in 2014 by Future Retail Ltd., Big Bazaar Direct was a BtoC portal, through which it aimed to sell directly to customers through franchisees. The unique business model followed by Big Bazaar Direct, allowed interested parties to become their franchisee, who needed to spread awareness about Big Basket Direct, make customers and take orders online for Big Bazaar Direct. Post receiving the order, delivery was done by Big Bazaar Direct to the customer. Through its online presence, Big Bazaar, which also had brick and mortar structure, was operating as hybrid model. 64

Other than the above prominent players, there were other players in online grocery market like MY247MKT by Tata Group, Mukesh Ambani’s Reliance Fresh Direct, My Grahak, BazaarCart and Pinkcitykirana which were surviving in this market. My Grahak had partnered with WeAreOpen for delivery in Delhi NCR region and was providing free delivery to its customers in this region. There were players like LocalBanya and Greencart which had temporarily suspended their operations. Initial euphoria about online grocery business seemed to be dying as other e-business players like Ola, Paytm and Flipkart had also shut down their online grocery retailing verticals as they found online grocery industry a tough nut to crack.

Challenges and Opportunities

The New Climate Economy Report by The Global Commission on the Economy and Climate for 2014, backed by the United Nations, stated that India was on the “brink of an urban revolution” and its population in towns and cities would reach 600 million by 2031. 65 By 2020, the Indian middle class would be the third largest in the world, and by 2030, it would be the largest in the world. In another development, the number of Indian internet users had increased from 350 million in 2015 to 460 million in 2016. 66 This number was projected to be 500 million by 2020 as per the report by the Internet and Mobile Association of India. 67 In 2015, 60% of internet users were accessing the internet through their mobile phones. 68 According to a Couterpoint Research report, India would overtake the US as the second largest smart phone market in terms of active unique smart phone users, crossing a user base of 220 million. 69 Online grocery players had sensed this huge opportunity and were in a race to emerge as front runners. The working class in metro cities found it very difficult to buy their groceries amidst their hectic work schedules; increasing disposable incomes also led to a desire for a comfortable lifestyle. A survey conducted by Nielsen stated that consumers in the Asia Pacific region were most willing to buy groceries online. 70 Another factor was the traffic problems in most cities; 43% of the country’s roads were not suitable for vehicles. 71 Finding suitable parking space was a time-consuming effort. These factors propelled the demand for online grocery as it offered ease in buying items of daily use.

Margins in online grocery retailing varied between 5–10 percent 72 without factoring in the delivery costs. If these costs were included, companies would likely make a loss. As the margins earned were generally low in the online grocery business, the processes adopted by the market players in different business models had a vital role in determining the margins. 73 The cost of sourcing, storing, maintaining and delivery were the major factors leading to the drop in the margins, if the online grocery business was being run on an inventory based model. The process of maintaining the inventory efficiently or improving the inventory turnover ratio or reducing spoilage and shrinkage was crucial to any model if a company wanted to improve its margins. For instance, if the online grocery business followed the hyper local based model, inventory expenses were reduced drastically but one had to pay a premium to rope in local vendors for managing inventory.

For implementing the hyper local based business model, the local vendors from where goods would be supplied had to be identified and the delivery boys would then pick up goods to supply these to the customer. In this model, a typical problem that used to surface was that the goods stocked with vendors were limited, which again cost heavily in terms of losing customer base and leading to a poor reputation. The industry players were well aware that for efficient supply chain management, heavy investment in technology was necessary and vendors were expected to be techno-savvy. The Indian market observations were different as only a few vendors were open to using technology and most were technophobic and cynical about the online grocery retailing business. For the hyper local business model to succeed, it was critical to strengthen the distribution network, so that the vendors were open to changing the traditional way of operating the business and were willing to work with technology and innovative practices.

The very nature of the online grocery market in India did not allow players to cover the whole market, even in a city. Therefore, any typical city saw multiple players existing in one market, competing with each other fiercely in terms of the various schemes they offered to the customers and growing their customer base. In such markets, the range of choices for the customers was quite wide and the benefits they received were numerous. For instance, a customer based in Bangalore would have wider choices with multiple online grocery players competing in the limited space available, like BigBasket, ZopNow and Nature’s Basket. Likewise, in this limited space, another way to monitor the competition as well as to give tough competition to the rival players was to differentiate the offerings. The customer preferences and tastes also differed as per the geography, which was one more reason for maintaining product differentiation. In the online grocery business, one way to achieve this was by selling specialized products like international or organic foods, which though profitable, added to the cost exorbitantly. Another challenge was that even if these products were sourced, the maintenance of the perishable items and adhering to the best quality was a difficult task.

Online retailing of grocery demanded skilled employees who could understand business models and inventory management in this business. Employees needed to understand market trends and consumer behavior to ensure better service for the end consumer. It was extremely important to have a competent team that understood the business and could perform in the complex business environment. The communication between supplier, company and on-field staff needed to be seamless if the business was to succeed. In the rural areas, lack of education and infrastructure and the tendency of consumers to buy their daily necessities from local mandis / bazaars posed a challenge to expanding the online grocery business beyond major cities. Indians were traditionally accustomed to buying from local kirana stores and understanding consumer behavior vis-a-vis online grocery retailing was crucial for survival.

The Next Steps

The heavy investments in the inventory based model invited strong criticism from industry experts and a majority of the competitors followed the hyper-local based business model which was not very capital-intensive. For instance, Webvan, an American giant in the online grocery industry which after raising USD 800 million went bankrupt, was a miserable failure due to its huge investment in infrastructure. 74 Having signed a USD 1 billion contract with Bechtel, Webvan invested heavily in building its own warehouses. 75 It created advanced technology oriented centers with automated robots that could help in increasing the pace of production and shipment. The colossal expenditure eventually led to the downfall of Webvan. Consequently, Webvan was an eye opener for all those players who were building huge warehouses for stocking goods. From the online business perspective, it was questionable whether BigBasket’s inventory-based model could sustain itself in the long run and stay ahead of the competition.

The industry was flooded with many competitors; despite this, the opportunities to grow were certainly not limited. Apart from urban markets which were significant in size, there was always scope for players to penetrate further and realize the last mile connectivity. How difficult would it be to penetrate into other virgin territories? Would BigBasket continue to focus on urban India or would it be feasible for any of industry players to explore rural India? Online grocery players were expected to keep fine-tuning their business models to deal with the mammoth challenges and at the same time grab emerging opportunities to win over customers. To sustain in the long run, a marketer had to understand trends to forecast future growth for the company. What innovative business models could possibly emerge for BigBasket as alternatives to existing business models?

While BigBasket was planning to utilize the USD 150 million funding for its expansion, it received the news about recent guidelines by the Department of Industrial Policy and Promotion whereby FDI was not permitted in the inventory based model of e-commerce. 76 Regulations by government put many e-commerce companies in limbo including BigBasket due to its inventory based business model. In this scenario, companies had very few choices left – they could switch over to other acceptable business models or restructure their already complex models, which meant starting from scratch.

After the new guidelines were placed in the public domain, Future Group CEO Kishore Biyani, owner of India’s largest offline grocery retail stores, attacked BigBasket and termed its operations as illegal. 77 While Vipul Parekh, co-founder of BigBasket, had a contrary opinion on the regulation, this regulation was the biggest hurdle for BigBasket in continuing with its existing business model. For BigBasket, which had invested heavily in the inventory based model in the absence of a policy for online retail, government regulation could turn out to be a nightmare. The employment of significant funds and the complex management of inventory with supply chain activities presented a challenge to BigBasket in terms of redefining its existing business model. Additionally, intensifying back end operations, cut throat competition, influential brick-and-mortar grocery stores and distribution mechanisms through Dark Stores were a few of the areas which necessitated focused attention. Therefore, industry players were making every effort to create various permutations and combinations, in order to refine a business model that was more profitable. The business model adopted by BigBasket had several challenges which required thorough examination.

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2. Series D funding is the fifth round of investment by private investors in a startup where the seed-stage funding is first round of investment.

3. 1 USD = 65 INR as on March 31, 2016.

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Exhibit 1: Foreign Direct Investment Guidelines for E-Commerce Industry in India

Source : Developed by authors using (a) Press Note No. 3 (2016 Series), Ministry of Commerce & Industry, Department of Industrial Policy & Promotion (FC Section). Retrieved on December 08, 2016 (b) Mishra, A. R. & Dalal, M. (2016, March 30) “Govt. defines E-Commerce Marketplace rules, allows 100% FDI”, livemint . Retrieved from http://www.livemint.com/Politics/hglep85yZOQzChj6KRrrCK/Govt-allows-100-FDI-in-ecommerce-marketplace-model.html on December 8, 2016

Exhibit 2: Indian Grocery E-Commerce Industry’s Geographic Spread

Source : Developed by authors using data from (a) BigBasket. Retrieved from www.BigBasket.com on December 08, 2016, (b) Grofers. Retrieved from https://grofers.com on December 8, 2016. (c) Zopnow. Retrieved from https://www.zopnow.com/ on December 08, 2016 (d) Onekirana. Retrieved from http://www.onekirana.com/ on December 8, 2016

Exhibit 3: Product Range of BigBasket

Note : Numbers in brackets suggest the number of items available in a particular category.

Source : BigBasket data. Retrieved from www.BigBasket.com on October 10, 2016.

Exhibit 4: Operations at BigBasket

Source : Developed by authors using (a) Choudhury, S. D. (2015, September 05). What’s behind the basket? livemint . Retrieved from www.livemint.com/Leisure/9t02bTKYMoCkor48gkHYgJ/Whats-behind-the-basket.html on July 12, 2016 and (b) BigBasket, “FAQs”. Retrieved from http://www.BigBasket.com/faq/ on July 12, 2016.

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