Grofers (run by Locodel Solutions Pvt. Ltd) and PepperTap (Nuvo Logistics Pvt. Ltd) that currently list neighborhood stores on their platforms, plan to launch staples such as pulses, rice and oil. Online grocery store BigBasket already sells private label items such as fruits, vegetables, meat and bread with private-label offerings accounting for about 35% of its revenue.
Typically, private-label products have higher gross margin compared with the commissions that hyperlocal delivery firms get from their merchants, which range between 1% and 5%. Products such as staples have good margins, to the tune of 20-25%. Besides, these are the categories which do not have established brands in the market so far.
Both companies said they would be procuring staples from wholesale markets and sorting and packing them. Grofers plans to hit the shelf with its products by December end.
There is a regulatory hitch, though. Indiaís single-brand retailing laws do not allow companies having investments from foreign investors to sell their private label products to consumers directly. The companies can only do B2B business i.e. they can sell products to merchants and distributors. This may be an issue since Grofers is in talks to raise $120 million in fresh capital, largely from Japanís SoftBank Corp. and Russian entrepreneur and venture capitalist Yuri Milner. Earlier this year Snapdeal bought a minority stake in PepperTap leading a $36 million investment round, which also saw participation from Russiaís Ru-net, Japanese private equity firm Jafco, BeeNext, and existing investors Sequoia India and SAIF Partners.
To work around this hurdle, Grofers plans to sell its private label offerings to the merchants listed on its own platform, who can sell them through either its online platform or offline through their retail stores.
Private labels come with their own set of risks. There is an inventory risk because the companies are procuring and doing the packaging and then selling the products. There will be larger working capital requirement. Also, in certain commodities, such as pulses, there are instances of price fluctuations that can erode all the margins.
Currently Grofers has over 5,000 merchants across 27 cities on its platform, while PepperTap has 200 merchants across 18 cities.