Ultimately for Swiggy, though, it will need to find a model that not only draws customers in but is also sustainable across multiple categories. And this is the real challenge. It is faced with two options. Swiggy must choose between simply aggregating local supermarkets and wine stores, or creating a retail model by maintaining its own inventory and supply chain.
A source who was briefed on Swiggy’s grocery bet says that the company will start with aggregating superstores for the supply of groceries. This, though, will remain at an experimental stage as Swiggy is venturing into the segment with trepidation.
On-Demand Grocery Startup
Swiggy’s refusal to go all-in is based on the experiences of businesses such as on-demand grocery startup PepperTap. PepperTap raised some $50 million but shut down within just two years of operations in April 2016. It followed an inventory-less, hyperlocal delivery model. Similarly, Ola burnt money by running a grocery delivery pilot which was shuttered a year after it began. Flipkart very recently relaunched grocery delivery after its initial pilot—Flipkart Nearby—failed to take off.
An investment banker, who requested anonymity, explained this play. In a two-kilometer radius (within any metro city), there could be at least four supermarkets which essentially stock nearly every grocery category, he says. These already have an established base of walk-in customers, but their delivery operations are either non-existent or inefficient. He believes Swiggy can help these supermarkets increase their sales.
However, unlike in the restaurant business where margins are high and Swiggy can charge a 20-25% commission, margins in grocery are low. Accordingly, Swiggy will have to take a hit on commissions. For the venture to remain viable, says the investment banker, Swiggy will need to charge a commission of at least 5-10%. Supermarkets are unlikely to agree to higher commissions than this, he believes.
Swiggy will face similar issues with a hyperlocal alcohol delivery play as well. Alcohol retailers will not part with 20-25% of their earnings since they get their stock from multiple vendors themselves. Additionally, there is also the cost of obtaining and renewing an excise license. When asked if it will indeed employ an aggregation-based model for a groceries and alcohol delivery service, Swiggy chose to skirt the question rather than deny it.
In the short term, Swiggy can eat these losses. But as it gains greater insight into purchase behavior and demand hotspots, etc., Swiggy will have to move to an inventory-led model in order to increase profitability.
Inevitability of inventory
An inventory-led model, as Swiggy has realized with its private labels like Homely, allows Swiggy to earn higher margins. Similarly, as it looks for improved profitability in the consumables delivery space, maintaining its own inventory of products will help Swiggy maximize profitability.
This wisdom is borne out by the experiences of grocery delivery startups Grofers and BigBasket. Grofers, which began in 2013, initially followed a hyperlocal aggregator model—partnering with local stores to source fresh products and ensure speedy delivery. By 2016, in the face of mounting losses, it pivoted to an inventory-led model where it did its own sourcing; stocking inventory in its own warehouses. BigBasket, which began in 2011 and also started in the same vein as Grofers, was already pivoting to an inventory-led model by the time Grofers was still in its infancy. BigBasket currently also offers a hyperlocal model for its express service.
With learnings and insights from its initial aggregation-based grocery and alcohol delivery, Swiggy will be hoping it, too, can plan and execute an inventory-led approach. In this regard, Swiggy will be looking to replicate Amazon’s evolution in the grocery space.
“If you look at Amazon Now, it was earlier doing grocery delivery by aggregating multiple stores such as Big Bazaar and SPAR. Once they gained insights into how grocery ordering works, they have started opening up their own dark stores,” said the person quoted earlier who is aware of Swiggy’s operations.
Swiggy is already making moves to this end, especially when it comes to alcohol delivery. Swiggy is in discussions with alcoholic beverage manufacturer Diageo India for a direct retail partnership, according to a source aware of the development, who requested anonymity. Diageo India owns and produces liquor brands such as Jura, Dalmore, Whyte & Mackay, Black Dog, etc. When The Ken enquired about this, Diageo refused to comment while Swiggy was unwilling to either confirm or deny a potential partnership.