Porter's Five Forces – Pure Play Groceries Market in BRICS

When was the last time you ordered your groceries online? The BRICS nations are increasingly seeing more and more consumers venturing in to online shopping for their daily groceries.

The growing sales of smartphones, tablets, and laptops are one way to indicate the increasing importance of internet in our lives. And with internet has augmented the need for convenience among the rising income, lifestyle changed people of the BRICS countries. A shift from bricks & mortar shops to trading goods and services over internet is on an upward trends in these regions. While the consumer sees the option as an alternative to getting stranded in the heavy traffics, long waiting and service lines; the retailers are not much behind. An alternative to high rental costs, rising economies of scale, inventory holding costs seem to attract more and more players towards pure play.

While we talk about pure play, let us consider the major hurdle the industry faces. While catering to the consumer's convenience through an all new experience, are the retailers compromising on the quality? And if not, do they pose any challenges in the form of infrastructure, supply chain and a suitably maintained inventory to meet the demand for fresh & quality produce? All this while trying to reach economies of scale in the low margin business. Well, this differs across the emerging economies and the varied consumer perceptions and acceptance of e-grocery sector. This article tries to understand the competitiveness of e-grocery across the BRICS countries through Porters five forces model.

Country wise overview of e-grocery market:

Brazil:

In Brazil, the online sales of packaged food recorded USD 259 million in 2014 and the market is being estimated to see growth rates of 20% in the coming years. However, similar to other emerging economies, Brazilians do not seem to prefer online market for e-groceries as they see it as something they cannot afford. And for the e-tailers the output is still is very marginal. The key perception issue which the Brazilians face is that of online grocery shopping is for the wealthier group and for those who send it to their children studying in far universities. The middle income consumers prefer to choose their own groceries. Thus the online food sales market 1% of the total grocery market far below the developed markets. This is in spite of brazil being one of the most developed nations in terms of internet penetration.

The major players in the market include Muffato and GPA.

Russia:

Russia is a seeing an expansion of the global e-commerce retailers in its market to meet the requirements of the burgeoning middle and upper income classes. The Russian consumer is highly price sensitive and prefers to spend time on determining the most effective e-store. According to a survey done, the 2013 data shows 59% of online shoppers preferring ‘Cash upon receiving' method as a payment option. However, this is declining with more people preferring internet banking and secure payment terminals for their transactions; what with the internet penetration growing at 10% every year and more than 7 million new users entering the market. While the online presence is growing, the groceries sectors accounted for only a small percentage; with food and beverages taking up only 2.7% of the total internet sales (source: Euro monitor). Another trend being observed is the increase in age group people of> 40 years preferring online e- grocery more than once a week. Russia has strongly regulated e-commerce market.

The current economic crisis and lowering purchasing power of people will force e-grocery players to increase the prices, the positive growth rates are expected and the online food and beverages market is being estimated to grow by more than 10%, as this channel is seen as as more convenient alternative to the brick and mortar stores and what with suppliers like Mondelez eyeing this sector as a potential growth option.

India:

For Indians, the neighborhood ‘Kirana' and ‘Mom & Pop' stores, who are a phone click away are a preferred choice to buy their groceries. Then what is driving the USD 12 billion food and grocery e-tailing in the country. Through a survey it was found that the high conveyance costs, crowded areas, and ease of delivery, informed payment options, and easy navigation for products not available in the retail stores seem to be the possible drivers. Of the total consumers shopping online for groceries, 63% are the male population and more than 80% shoppers being in the age group of 22 to 45 years.

The demand to maintain fresh produce and deliver on time are requiring the major players in the Indian e-grocery market to look at enabling best sourcing practices, redefining their distribution networks, packaging, using technology to meet the growing demand for frozen foods, and reduce their inventory wastage costs. All this, while focusing on repeat customers and enforcing their business model as a better alternative to ‘Next door kirana guy' plus considering the growing internet penetration and increasing consumption of the rural consumer.

The major players in the market include Bigbasket, Local banya, Ekstop and Zopnow. The market is seeing entry of several players like Ambanis' reliance, Tata's and the Godrej's.

China:

China is one of the most developed markets for e-tailing in grocery, overtaking US and European countries. According to National bureau of statistics in China, online shopping accounted for 10.6% of total retail sales, of which grocery accounts for just 2%. Today, Chinese companies are focusing on after sales service and logistics optimizations models to strengthen their reach now in to tier 3 and 4 cities and villages after getting a strong foothold in the Tier 1 and 2 cities. China has become a launch pad for foreign players to introduce their products in the online grocery segment. The shy Chinese consumer who hesitates to buy new brands/products in the retail store finds online grocery shopping a viable alternative. The educated, middle to high income young user class, between the age group of 25-35 years constitute a major share in the e-grocery segment for new brands and products.

For the Chinese consumer, price is a major differentiation factor and consumers study competitors pricing before deciding upon the e-grocer. Apart from the price another major trend being observed is the Chinese consumers demand for safe and quality produce and his willingness to pay a premium unlike the US consumer. Another major factor to be noted down in the Chinese market are their payment systems which include Alypay and Tenpay payment systems. The online e-tailing model for groceries is highly technology driven in china what with virtual supermarkets, increasing usage of smartphones to place order, and high brand visibility targeting the office goers.

The major players in the market are Yihaodian, Tmall & Tabao and Jingdong with major share taken by Yihaodian.

South Africa:

Unlike most developing BRIC nations, South Africa is still in the nascent stages of shopping online for groceries. For a South African resident, the brick and mortar retail stores apart from providing groceries provide additional services of banking, bill payments and money transfers. Shoprite, a market leader in retailing hasn't still forayed in to online retailing and is focusing on expanding in various sub Saharan countries. The sub Saharan African region is dominated by informal stores and inspite of a growing middle class, the adaptability of consumers towards online payment is very low when compared to its counterparts in BRICS nations.

The internet usage is well below the global average and only few players like Pick n Pay and Woolworth have forayed in to the online grocery business. The South African region has a maximum number of mobile phone users, and what with the smartphones share increasing, this is being seen as a potential option by grocery e-tailers to push for marketing strategies on mobiles. Also, supply chain complexities, poor infrastructure are proving to be a reason for long wait by companies to enter the market.

Bargaining power of Supplier:

In Brazil and South Africa factors like low consumer preference for buying groceries online and less number of players, seem to deter suppliers from catering to the online retailers and focus on entering partnership with formal and informal retail stores. This points towards a high bargaining power of suppliers.

In India, Russia and China online e-grocery buying is dominated due to busy lifestyles, traffic jams, increasing internet penetration. These regions are seeing an established presence of players with a defined business model and strong expansion plans. The suppliers are vying for share in the online market and since the e-tailers consider the switching costs to be low and give more importance to margins, the bargaining power of suppliers is low in these markets.

Bargaining Power of Buyers:

The South African and Brazilian consumers in spite of a growing internet penetration and smart phone usage are less responsive to online grocery shopping. Consumer's perception of online shopping to be an option for the wealth and the high costs push consumers towards formal and informal retail stores. Also, the touch and feel factor is very high among Brazilians. This is forcing online players to increase their marketing expenditures and look at their pricing strategies in the price sensitive market. Since there are few players in the region, the bargaining power of consumers is high.

In the markets of India, Russia and China there are increasing number of players foraying in to the market. Also, the suppliers and distributors with their established distribution network are also potential players entering the market. Being a highly fragmented market and since the grocery segment hardly sees product differentiation, the switching costs is very low for buyers. Buyers can easily switch to e-tailer where the pricing is low, delivery is on time, payment options are secure and where food quality is high.

Most of the retailers seem to follow a business model based on economies of scale and since these nations are highly populous countries, switching cost of customers is low for the e-tailers. However, the players seem to focus on retailing customer to increase their repeat sales. Hence the bargaining power of buyers is medium.

Threat of New Entrants:

A resistance from South Africans and Brazilians is seeing less number of retailers entering in to the online segment. The poor infrastructure in the Sub Saharan regions and low foreign investments in these regions can put the threat of new entrants to be low in these markets.

In the regions of India, China and Russia the logistics are developed around major cities and the companies are developing infrastructure, pricing and product strategies to enter the rural markets. China, India and Russia with their high internet penetration are seen as a major driver for new entrants in the market. In India Foreign direct investments to the limit of 51% are allowed in e-commerce, thus increasing the funding to the players where working capital is a major requirement. Hence the threat of new entrants is very high in these regions. In India, with the entry of reliance fresh, godrej's nature basket and Tata's latest entrance prove to be a threat for the established players like bigbasket, local banya, ekstop and zopnow. In China, Yihaodian enjoys the market share as the Chinese are brand specific, recent entry by Jingdong mall in to the grocery segment can seem to be a potential threat. The suppliers and third party distributors with their strong distribution networks can put pressure on existing players and their margins. China's leading logistics provider SF express launched online grocery commerce subsidiary SF best.

Threat of Substitutes:

Consumers are willing to a premium for quality, convenience and variety. However, poor infrastructure and the lack of cold storages in the supply chain is a major deterrent in the market as freshness of the product is of major importance. A poor quality, and a long delivery time can deter consumers from buying online and result in them shifting to the formal stores, local kirana's or super markets. Hence the threat of substitutes is high.

Rivalry among competitors:

High price wars exist in this fragmented market and this can hit the bottom line of online grocery players. The players in this industry have a huge marketing expenditure in the form of print, media and discount sales. The concentration ration, which determines maximum market share owned by major firms is used to measure rivalry. In India, Bigbasket, local banya, ekstop and zopnow take up a major share with bigbasket being the market leader. In China, Yihaodian and Tmall & Tabao lead and Utkonos, Azbuka Vkusa and Sedmoi Kontinent are the major players

Hence the rivalry among competitors is high in the online grocery segment which is dependent on economies of scale.

Conclusion:

The major focus in the market should be on supply chain efficiency, Product quality, secure payment mechanism, conversion rate and better services for companies to grow and sustain in the online grocery market. While each country is driven by cultural differences and perceptions, infrastructure problems, and untapped rural markets, what is common in the BRICS markets are the middle class populations, rising purchasing power, internet penetration levels, smart phone users, severe traffic & long billing lines and the need for convenience. E-tailers can look at various methods to improve their services. Options of Click & Mortar where people can order online and collect their grocery in stores is one such option. With several potentialities for growth, online grocery shopping is a market for investors to consider for future investments.

We specialize in Market Research Consulting, Market Research Reports, Market Sizing Reports, Industry Research Reports, Global Strategic Business Reports etc.