B2B e-commerce: The nascent, unexplored segment of online marketplace carries huge profitability potential

Projected to reach $99 billion by 2024, according to a report by Goldman Sachs, India’s e-commerce market is one of the fastest-growing in the world. Food and Grocery e-commerce is one of the largest segments of it that has gained immense traction in recent years, with both B2C and B2B e-commerce growing at a very fast pace. Both these segments come with their fair share of pros and cons. Let’s take a look at a comparison of the B2B and the B2C models in grocery e-commerce.
Behind the face of a kirana store

Home to over 1.4 billion people, India lives in lakhs of neighborhoods spread across thousands of miles. Distributing an essential item in this vast and diverse country, be it an expensive medicine or even a 5-rupee biscuit, is a complex ordeal. An extremely critical and highly challenging function that India’s wide network of retailers, i.e., kirana stores, make us believe is as easy a task as opening the shop every morning and sitting at the front desk. Almost all groceries buying in India is unplanned. Often, we go to a kirana store and we get the product we are looking for or at least a desirable alternative for the same. But have you ever wondered how do these products come there?

Behind the calm front-end of a kirana Store is a buzzing and intricate web of service providers like traders, stockists, distributors, wholesalers, aggregators, and transporters – the B2B food & grocery market.

Indian retail is a $1 trillion market of which food & grocery comprises 65%. However, 96% of this market remains unorganized and is served by over 14 million kirana stores. 3% of this is organized brick & mortar retail, also called modern trade, and only 1% constitutes B2C e-commerce. Therefore, the GMV opportunity in B2C food & grocery e-com is $6.5 billion.

While the B2C food & grocery e-commerce is roughly a $1 billion revenue opportunity overall, the B2B e-commerce and O2O opportunity where businesses like kirana stores, hotels & restaurants, offices, etc are targeted online, offer a $60 billion revenue opportunity. One may argue that the growth opportunity in B2C e-commerce is exponential.

By 2025, the food & grocery retail market is estimated to be $1.1 trillion. Let’s assume that the combined share of organized brick & mortar and online grocery will be 15% by then (current US online grocery penetration is around 15%). This translates to a roughly $950 billion market size of the unorganized food & grocery in 2025, assuming 7.5% of online grocery share of the GMV opportunity in B2C grocery e-commerce is $85 billion. As we can see, the B2B e-com and O2O opportunity are 7.5 times that of the B2C online grocery market opportunity.

Higher revenues with lower cost structures

An Indian household is a smaller unit to serve as compared to a kirana store. A typical Indian household consumes about Rs 10,000 to Rs 12,000 worth of food & grocery per month. Even if 50% of this wallet moves online and the consumers order on a weekly basis, the average order value (AOV) of online B2C food & grocery platforms will plateau between Rs 1,500 – Rs 2,000 on an aggregate basis.

Compare this to an average kirana store who buys about Rs 6 lakh worth of supplies every monthly. If 50% of this wallet moves online, and even if the kirana store orders online on a daily basis, the AOV will be at Rs 10,000. This is an order of magnitude higher than that of consumer-led online grocery.

In B2C e-commerce, the warehousing and logistics costs are roughly 8% of GMV. Thus, orders below Rs 1,000 become loss making to fulfill. At a Rs 2,000 basket size, the gross profit would be Rs 140 per order. In contrast to this, in B2B e-commerce warehousing and logistics costs are roughly 3% of GMV, which means a gross profit of Rs 700 per order on average.

Thus, not only is the market size 8X in B2B e-commerce, the per unit profitability is 5X that of B2C e-commerce.

Meant to happen

While the B2C segment has seen players gain a foothold and establish brands already, the B2B market is still very nascent and unexplored and set to expand rapidly. The key reasons why the timing is opportune for B2B adoption are:

Increasing smartphone and internet penetration
A willingness by retailers to adopt newer technologies in the face of online threat
Increasing formalization
Regulatory reforms such as GST and CST
The increasing cost of compliance for small offline wholesalers
Increasing cost of labor and rising minimum wages
The rapid change in habits due to COVID-19.
Growth in B2B e-commerce is driven by pricing, large assortment, dependable supply, and efficient and error-free execution. Given such a large addressable market and the unique dynamics of this business, India shall see an emergence of multiple large B2B e-commerce companies in the near future.

(The writer is Samarth Agrawal, CEO at MaxWholesale)