The Indian online grocery space is abuzz with activity. With swords drawn between Flipkart (backed by Walmart now) and Amazon in the battle for leadership in the online retail space, the focus has now shifted to what is the second biggest segment online after fashion and mobiles – groceries.

The interest is not without a reason.

“Grocery is the mother of all categories with its inherent characteristics of high frequency, repeat rates, ability to launch own brands (high margin) and sheer size of the sector,” said K Ganesh, serial entrepreneur, partner, GrowthStory and promoter of BigBasket, FreshMenu, and Homelane, among others.

Online grocery is expected to be the fastest-growing segment in online retail and is expected to almost quadruple over the next three years to Rs 100 billion in revenues, according to a Crisil report, released in February this year. Investments in technology, new strategies such as introducing private labels, same and next-day delivery options, and business-to-business food services, will further aid growth of the segment, the report said.

To be sure, there have been several big moves in the segment already, including Walmart’s acquisition of Flipkart, which has given a boost the firm’s focus on food and groceries, Amazon’s launch of Pantry, and BigBasket’s fund raise of $300 million, the largest by a niche online grocer in the country.

Earlier this week, media reports surfaced that BigBasket and its smaller rival Grofers have revived talks for a potential merger. While both companies declined to comment, if the merger happens, it will give a massive leverage to BigBasket, currently India’s numero uno online grocery player. The merged entity will have a larger market share and a bigger pool of deep-pocketed investors as “Alibaba Group Holding Ltd and SoftBank Group Corp. look to join hands ahead of a costly market share battle with Amazon and Walmart Inc.-owned Flipkart to dominate India’s online grocery market,” said a Mint report.

“It’s a gradual move that one witnesses in any business... it starts with the core and then the action shifts to ancillaries. In ecommerce too, it started with the broader play – horizontals, as we call them in ecommerce, and now the action has shifted to niches such as groceries. It’s a business that offers revenue visibility, a family in a metro city needs grocery of Rs2,000 to Rs4,000, so one can have visibility of purchases of almost Rs50,000 per year from a customer, hence the room for growth is huge,” says Anil Joshi, managing partner at Unicorn India Ventures, a venture capital investment fund.

In May, when U.S. retail giant Walmart acquired 77% stake in the Bengaluru-headquartered Flipkart for $16 billion, it was clearly indicated that Walmart’s game plan in India is not just to enter the online retail market through the largest player. But, it wants to leverage the expertise that the two companies have individually built, to become a powerhouse e-tailer here and get an edge over its arch rival Amazon, in what is easily one of the fastest growing ecommerce markets.

As Walmart is very strong in the food and grocery space, the segment is emerging as an area of huge focus for Flipkart as well. Last month, Flipkart launched its grocery offering called Flipkart Supermart in Bengaluru. It plans to expand the service to half a dozen other big cities by the end of the year. It has also launched a private label ‘Flipkart Supermart Select’ in the staples category.

Last year, rival Amazon had launched its grocery service Pantry as a pilot in Hyderabad. The service is now available in over 30 cities across India. It had also received an approval from the government to invest up to $500 million in food retail.

In the meantime, its not just the strategic moves, the segment is also becoming a hotbed for investments. BigBasket has so far raised $556 million from investors, the highest in its category, followed by Grofers, which has raised $226.5 million, according to Tracxn estimates. So far this year, online grocery firms have raised $385.7 million, compared with a mere $50 million in all of 2017.

The investors’ interest is being piqued by what can be called the category’s sustainable growth potential. Online grocery market in India is expected to grow at a CAGR of 55% through 2021, according to a TechSci Research report–“Online Grocery Market in India By Product Type, Consumer Behaviour, Competition Forecast and Opportunities, 2011 – 2021”.

“The growth that we are seeing in the online grocery space is here to stay. Going forward, competition in this segment will become more intense than less,” says Kanwaljit (Kanwal) Singh, founder and managing partner, Fireside Ventures, an early-stage investment platform for consumer brands. Singh was earlier the co-founder and senior managing director of Helion Venture Partners, which was an early investor in BigBasket.

Singh believes unlike ecommerce where the battle of supremacy is between two players, there will be four to five key players in the online grocery space.

“But one needs to understand that this is a hard category - particularly for the fresh vegetables and fruits segment, where the supply chain and infrastructure needs are very complex. Also for these products, the sourcing has to be localized. Maintaining this supply chain, warehousing and infrastructure and back-end requires capital, so in that sense eventually we will see the segment consolidate into a few players,” says Singh.

Also, there could be offline players such as Future Group or Reliance, the modern trade retailers, who may also want to have a similar strategy of having an omnichannel play.

“The good part of this segment is that it has the stickiest and most loyal base of customers, amongst all categories. If one is able to provide quality products and a reliable, well-managed timely service, the model can be very efficient as the percentage of repeat customers can be very high. The business force multiplies as one needs grocery if not daily, then at least on a weekly basis, unlike mobile phones that one probably buys once a year,” says Singh.

Meanwhile, there are niche players that are emerging in the segment, such as DailyNinja, an online milk delivery app which also delivers bread, eggs, fruits and vegetables;, which offers certified organic food items and online meet shop Licious.

The only guarantee that these startups are currently exploring is opportunity. Till then, game on

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