This article has been co-authored by Mishaal Nathani and Ashutosh Gehlot.

The e-commerce/online retail market in India has taken a sharp turn in recent times towards an ‘online-to-offline’ (O2O) model founded on the principles of our neighbourhood Kirana stores. While there are multitudes of models being explored by the e-commerce, grocery and hyperlocal delivery startups of our times, the real retail crown-jewel has been an attempt to provide a complete consumer-facing digital ecosystem to physical general stores.

In this article, we will try to provide a picture of what this nascent online-offline ecosystem currently looks like in India and what the advantages and challenges are.

What Are These O2O Retail Ecosystems?

On offer will be products ranging from groceries to medicines to personal care - all of which are usually available at your neighbourhood general stores or convenience stores. This is an ambitious attempt to completely tap and digitize the ~USD 700 Billion (2019)  Indian retail market. The front runners in this space include larger players such as Reliance JioMart “New Commerce”, Flipkart and the combined forces of Amazon and Future Group, along with relatively smaller but equally ambitious players like Dunzo and Swiggy Stores.

The underlying model seeks to create a win-win situation for all stakeholders including the Kirana store owner, brands/manufacturers, consumers and the platform. The platform creates a digital marketplace for customers on which they can browse and purchase the products available in the catalogue. In order to fulfil those orders, the platform uses the inventory, and in many cases the delivery services of the physical stores. These physical stores are often the local Kirana stores and brand-owned ‘Dark Stores’. Additionally, the platform acts as a wholesaler or intermediary in the supply of product inventory from manufacturers and brands to these physical stores.

Sizing Up The Massive Opportunity

Everyone Wins

In ideal circumstances, the physical store owners benefit from higher demand and better inventory management, customers happily accept the convenience and potential for discounts and manufacturers/brands get an easy entry into the otherwise complicated world of offline retail.

Access To The Entire Consumer Pie In India

While the online retail industry is growing rapidly in India, e-commerce only accounts for less than 3% of the Indian retail market. In fact, according to a recent report, over 90% of the Indian retail market is still owned by unorganised players. Additionally, Kirana stores sell 75% of all FMCG goods in India. Considering India is set to emerge as the third-largest consumer economy by 2025, the O2O model represents a golden opportunity for the online players to gain access to the consumers that primarily shop at their neighbourhood Kirana stores, as well as their priceless data.

Reliance Retail, and several other players, are also providing M-PoS devices in an attempt to help Kirana stores manage inventory and digitize payments. In return, they get access to the data of every customer, what the best selling products are, the preferences of customers in particular areas, a small commission of each transaction, and most importantly an entry into the O2O market.

The value of reaching this customer has been brought to the fore during the lockdown due to COVID-19. While e-commerce companies have had to significantly scale down sales, the Kirana stores are more in demand than ever - and are single-handedly providing consumers with everything they require.

Solving The Last-mile Problem Of Traditional E-commerce

A major point of attraction for e-commerce behemoths such as Amazon is the fact that these Kirana stores are the perfect warehouses for smaller items and especially for perishable items like groceries. In most cases, the Kirana stores can deliver these items as well which is a major benefit. This is invaluable in the race to reach all of India, especially the smaller, underserved cities which are often either skeptical of e-commerce, or do not have the infrastructure to support it.

Amazon India has a programme -  “I Have Space” - which is one of their attempts to tap into the network of Kirana stores. Amazon itself describes this programme as “a business opportunity in which local entrepreneurs/stores partner with Amazon for delivery and pickup services within an area of 2-3 kilometers.” They claim to have tied up with 18,500 stores in 225 cities as of 2nd April 2020. As pointed out in this article in the Ken, “I Have Space” has been an integral step for Amazon to reach tier-2 and tier-3 cities in India.

Improved Economics For Grocery Delivery

The food and groceries market in India is estimated to be worth around $550-billion. In comparison, the e-commerce players in the space are only worth around $2.5 billion. In the online grocery space, Bigbasket currently does over 100,000 orders a day, while Grofers manages more than 40,000 orders per day.

While these numbers sound impressive, they’re barely a drop in the ocean. By accessing these Kirana stores, companies will gain direct entry into the grocery market, which is the most valuable part of the retail sector according to most - especially considering the fact that people shop for groceries at least once a week.

The Key Challenges

The Question Of Last-Mile Deliveries And Dark Stores

A major operational decision and challenge for players in this sector would be ‘last-mile deliveries’. Last-mile deliveries are typically the highest cost component of any e-commerce delivery business, going up to nearly 40-60% of the average cost of delivery per order. While Dunzo and Swiggy Stores are essentially hyper-local delivery platforms, carrying major efficiency advantages as well as the willingness to charge their customers for delivery, they will most likely be able to achieve positive unit-economics only through the higher margins that are attainable in a self-owned ‘Dark Store’ model. Even then the most profit-friendly strategy would be to focus on high-density and high order volume geographies, which are fast becoming the essential conditions for any successful hyper-local operation.

A contrasting approach towards last-mile delivery would require Kirana store partners to make final deliveries to customers, as is being successfully done by companies like Shadowfax and initiatives like Amazon’s “I Have Space” programme. In the context of an O2O model, this would require the platform provider to operate through Kirana store merchants ( accepting the consequent lower margins as compared to self-owned dark stores) and require them to fulfil orders as well as provide last-mile deliveries. While this would be a lower-margin prospect in high-density geographies, especially with low AOV products like groceries, the massive potential for scalability provided by the nearly 15 million Kirana stores in India could more than make up for it.

An ideal business model would have to balance the use of both the dark store model and Kirana stores in order to optimise profitability, which is what Reliance is attempting to do with their Smart Store outlets designed to fill the gaps presented by their Kirana store partners.

Inventory Management In A Fast-Moving World

The age-old problem of operating a retail outlet continues to be inventory management. Any player who is able to optimise inventory decisions at their partner Kirana outlets or dark stores will be able to reap huge dividends in operational economics. In order to achieve this, Reliance Jiomart, for example, uses its M-PoS services for inventory management, along with helping the store owners with facilities such as low-interest working capital and GST compliance help. On the other hand, Swiggy Stores, which helps onboard Kirana stores on its platform and provides delivery services, is trying to use their data insights to open self-owned dark stores to directly supply to end-users. This enables them to make calculated inventory decisions before scaling up.

Convincing Kirana Stores of the Value

As mentioned earlier, in an ideal situation everyone wins. Unfortunately, that is rarely the case in reality. While Kirana stores are promised increased footfall, incremental income, easier inventory management, and a way to access today’s digital consumer, this is often not the case. For one, these stores do not have a proper delivery fleet. This prevents them from doing enough deliveries in a month to make a significant amount of money. Credit cards are still extremely rare in India, and people are often prepared and prefer to pay by cash at their local stores. Offering digital payments is unlikely to provide a significant increase in footfall.

While inventory management is extremely helpful, local stores often already know what their best selling products are and are used to the supply chain they have in place. By allowing companies to come in and digitise this they don’t gain too much but they expose all their data.

The Promise Of Improved Customer Experience

A major challenge that e-commerce companies face is having to establish trust with people that are used to seeing their products before paying for it. It has taken ages for companies such as Flipkart and Amazon to get here, and one bad experience can erode years of hard work. When partnering with local stores, it is difficult for the companies to ensure the quality of products. This is never an issue for these Kirana stores because people tend to see the products firsthand before choosing what they want.

Another issue with customer experience is setting up a robust framework for refunds and returns - both things that have become synonymous with online shopping. Keeping track of returns and refunds in the hyperlocal delivery chain is extremely difficult - especially when the payment is digital.

Keeping an eye on the future

The O2O retail ecosystem in India is rapidly heating up. Players like Reliance and Amazon are leaving no stone unturned in their ambitions to capture the entire retail ecosystem, while others are choosing to bet on niche areas like groceries or hyper-local services in urban centres. Undoubtedly, there are operational difficulties and several challenges associated with onboarding Kiranas or opening up dark stores across the country. Having said that, the jumbo-sized retail field is currently an open game for all e-commerce players and partnering up with Kiranas will provide a major step forward.