How do online grocery retailers survive with lower prices?

The most obvious answers that’ll come to anyone’s mind would be that either these companies which are hugely funded by VC’s offer huge discounts or our neighbourhood market marks it high in order to gain large margins.

Well, interestingly apart from the pricing model there is some other logic behind this.

The online grocery retailers have a large customer base as compared to our neighbourhood market. For comparison, let us consider vegetable market in Colaba v/s Big Basket’s operation in Mumbai. The population of Colaba is approximately 210,847 and the population of entire Mumbai is around 1.8 crores. So, we can say that the potential customer base is much higher for Big Basket as compared to that of Colaba market.

In simple words, selling in Colaba market is like selling 20 mangoes to 50 people and selling online in Mumbai is like selling 2000 mangoes to 5000 people, which is much easier than the former one.

And the highest risk in selling fresh vegetables is the risk of wastage. This risk pertains predominantly in case of our neighbourhood market as their customer base is smaller and unpredictable. Whereas larger the customer base grows and diversifies, this risk becomes lower which happens exactly in the case of Big Basket. And these online retailers harness technology very efficiently by using data analytics to forecast demand better. Thus, the retailers in our neighbourhood market need to price their products higher as their cost is higher due to the high risk of wastage.

Other factor that comes into play is the volume that allows online retailers to procure at cheaper wholesale prices. Thus, economies of scale also contribute to the benefit of these online players.

Thus we can conclude that even without offering discounts the online grocery retailers like Big Basket, Grofers, Amazon Now can have lower prices than that of our neighbourhood market.

(Written by Dhiraj Jadhav, First Year MMS)