Blogs

Can e-grocers leapfrog supermarkets?

By Waseem Khan, CFA

Head of Research

EDGE Research & Consulting

Posted on: 01 Oct, 2022

One of the first private deals we participated in was Chaldal during their Series B round in mid-2019. Back then we understood very little about early stage investing (we are still probably quite clueless), but on this deal we focused down on one key point – are e-grocers more efficient in their business than traditional supermarkets?

If yes, this would mean there is a leapfrogging opportunity; consumers in Bangladesh would jump from wet-markets/mom & pop stores to e-grocers directly, skipping the supermarket step. This leapfrogging phenomenon is not new in Bangladesh, back in early 2000s, we skipped land lines and went to cell phones. More recently we skipped credit/debit cards and shifted to mobile money directly via bKash.

The formula is pretty straight forward, the newer tech has to provide more customer convenience on the front end and be more efficient on the back end. The convenience part was a no brainer; it is easier to push a few icons on your phone than make a physical trip to the store.

However, the efficiency equation is a bit more complex, it is an equation of expensive rent plus overheads (supermarkets) versus cheap rent plus overheads cost plus technology & deliveries (e-grocers). While I cannot disclose actual numbers, the gist of it came down to this- when planning floor space, supermarkets have to optimize for both “propensity to spend” and rack space. These dual objectives often clash with each other, ultimately meaning sales/sq ft hits its limits. This becomes a problem when prime real-estate is prohibitively expensive.

For e-grocers, the propensity to spend part is dealt with through the customer facing interface, while the (cheap) warehouses can be optimized to the limit to deliver peak sales/sq ft with waves of automation. For example, since our initial investment in mid-2019, order capacity per warehouse has gone up 4x, and further doubling will not be too difficult. Similarly, improvements in user interface can push the upper limit for “propensity to spend” via bundling/smart selling to well above that of what supermarkets can do.

Long story short, e-grocers can generate higher spend per customer at a lower cost base. Since our initial investment, a lot has changed for Chaldal, however, the core leapfrogging thesis still remains intact.