All hyperlocal startups went ahead to capture more and more cities without bringing any operational efficiency which eventually led to their failure, they say
PepperTap, one of the heavily-funded hyper-local delivery startups in India, has just gone off the market. In a blog post, the co-founders claimed the huge customer acquisition cost (read discounts offered to customers) and a pessimistic global funding environment led to the demise of the business.
Industry experts, however, feel that there are more to the sudden death of PepperTap than meets the eye, and the challenges faced by the hyper-local delivery industry in general are more deep and fundamental.
“Discount per se to acquire customers is not wrong and is not the problem,” according to K Ganesh, a serial entrepreneur and Partner at Growthstory.in, a seed fund-cum-startup accelerator.
“Changing consumer behaviour and habits are very difficult. For people to try something new, especially an app for something like grocery when there are myriad alternatives available is tough. So as an inducement, discount is fine — just like introductory offers, year-end sales, festival sales etc,” adds Ganesh, who is an early investor in BigBasket, the largest online grocery retailer in India.
Albinder Dhindsa, Co-founder and CEO of Grofers, the second largest grocery delivery startup in India, echoes Ganesh’s views. He, however, says that discounting as a means to acquire customers has become rational and more or less ceased to exist.
“Discounting was a big part of the strategy for majority of hyper-local delivery companies of last year to attract consumers. However, since November, this has more or less ceased or become rational. We are now mostly passing along discounts or offers given by retail chains, so the cost of discounting is no longer borne by e-commerce players,” adds Dhindsa.
The ability to bring a large number of transactions to the table would resolve any issues stemming from discounts. “Discounts are important when you are looking to build velocity of orders in a segment and showcase the online ordering use case to the customers. Beyond the initial few instances, the products and services have to retain the users – which are our focus areas,” says Dhindsa.
Last November, Grofers had secured US$120 million in funding led by SoftBank.
Supply chain — a tough nut to crack
In Ganesh’s opinion, the key to success for hyper-local delivery firms lies in effective supply chain. “The supply chain is very unorganised in the grocery sector. With that, putting an app on top does not solve the core problem. The inventory is not right, quality and consistency is not there, predictability is poor. Stocking conditions and environment is not always conducive. Stock-outs are common,” he explains.
“Under this scenario, a great app is not going to solve any of this. Not even having delivery boys to deliver within one hour going to solve this,” Ganesh adds.
Dhindsa cannot agree more: “I think the biggest issue is a very inefficient supply chain that currently leads to lots of wastage in the offline ecosystem. There is a significant lack of technology penetration in the offline grocery space and a lot of transactions are still unaccounted for as they are not traceable – or from the government angle, even taxable, ” notes Dhindsa.
“This nexus needs to be broken if we want to promote competition and accountability in the space. Eventually, this will lead to a more efficient supply chain with less wastage and fewer middlemen, meaning the end consumer will actually benefit from lower cost of monthly grocery buying,” he explains.
Shameel Abdulla, Co-founder and CEO of grocery delivery startup Jiffstore, which was acquired by PepperTap in January this year, also believes supply chain needs to be improved. “One needs to fix supply chain and last-mile issues in an innovative and cost-effective way to be successful in the space.”
A negative margin business
It is pretty clear that there is demand for the idea, given pace of growth of e-commerce and delivery services in India, adds Abdulla. Though the entire populace might not adopt it, there are people who legitimately do require and repeatedly use these services. That’s why companies resort to discounting and giving other offers. They are, however, still struggling to crack the industry.
“Essentially, there are two fundamental questions that need to be answered,” says Ganesh.
“One, is there a business model at unit level and will the unit economics make money? Two, can the business model really be able to solve customers’ problem and provide delight to the customers, meeting their expectations better than the current alternative options available to them?”
The burn rate in this kind of business is huge; on the one side, there is no customer loyalty and due to flawed processes, customer experience is not 100 per cent. And since companies don’t focus on efficiency, almost every delivery is manual with companies losing INR 180 to 200 (around US$3) per order, while basket size is hardly INR 400 (US$6), says Abdulla.
Ganesh, however, believes that even without discounts, hyper-local delivery is a negative margin business.
“At unit level, even without discounts, given the margins on grocery and the cost of delivery, average order size and cost of acquiring the customer – these just don’t converge to make a positive contribution. Forget the discount, even without discount, this is negative margin, which means the more orders you execute, the more are your losses,” he says.
PepperTap was founded in November 2014 by Navneet Singh and Milind Sharma. The company raised its first major investment in April 2015 — a US$10 million from SAIF Partners and Sequoia Capital, both prominent VC firms in India.
Then in September, it got a whopping US$36 million in Series B led by e-commerce giant Snapdeal. This was followed by a US$4 million debt funding from InnoVen Capital. On the way, it became the third most-heavily funded grocery delivery company after BigBasket and Grofers.
The huge funding helped PepperTap scale fast — from just one city in 2014, the company grew to almost 17 in October 2015, covering all the major cities in India. Ironically, this super fast expansion in a way did the company in.
Abdulla says that all hyperlocal startups in India went ahead to capture markets by deploying in, say, over 23 cities in less than a year.
“Given that this was the expectation set, any company with lesser targets would be termed unambitious by investors. As businessmen, founders have to be ambitious. However, priorities have to be set based on the state of business. All hyperlocal startups went ahead to capture more and more cities without bringing any operational efficiency. There were loads of operational personnel on the field at any time,” adds Abdulla.
Another expert, who chooses not to reveal his identity, believes if PepperTap had focussed on city-wise operational efficiency after the US$10 million funding in April last year, the story would’ve been different altogether. “However, if that was the case, PepperTap might not have raised the next US$35 million,” this person adds.
This essentially means the VCs exerted huge pressure on the company to scale fast, eventually leading to its shut-down.
“The rapid expansion also strikes back the startups to make any fixes after one level — communication between teams, change of processes and efficiency takes a hit and takes longer time. The culture is set in one way and it is difficult to roll back. Founders get the real experience of riding a tiger which is just running off a cliff,” the person adds .
“We cannot blame investors in investing in teams that have more possibility to win, and so they keep on investing in them. However, the strategy followed now is to check who has presence in more cities without considering the operational and unit economics aspect. It may have worked in several other domains. However, in groceries and hyperlocal services, it will not work as main crux is to find the unit economics,” he feels.
What is the remedy?
PepperTap is not the first company to wind up operations in India over the past few months. Many other startups in this domain have either scaled down or completely shut down towards the end of last year or in the beginning of this year. The names include Flipkart’s grocery delivery unit Nearby; Grofers, which in January shut down operations in nine cities; and Zomato, which has withdrawn from four cities.
According to Abdulla, a startup who focusses on operational efficiency in groceries still has a place in Indian market as the demand is huge. However, the focus should be on innovation and unit economics rather than mindless expansion.
Ganesh lists out a few remedies that could fix the issues in the hyper-local delivery space.
“One, you need to be able to control quality which you can do if you have control over supply chain – just sitting on top of existing players does not work. Two, margins are low on grocery – you need scale and large capital to make it work. This is a PE game and not just a VC game,” he notes.
For average gross margins to be meaningful, he adds, you need a good mix of own brands or white-label products. You also need to be able to offer a wide assortments so that the customer does not have to go outside to others for their monthly needs. This means having more than 10,000 SKUs. No local store can stock that. So trying to deliver from there form your cool app is not going to solve the problem.
“The average order value or basket size has to be large enough to make unit economics work – at least above INR 1,000 (US$15) per order. Also, the frequency has to be high; you need to consistently deliver good quality products and good service. Average order frequency has to be at least two per week to make it a valuable business,” he explains.
Most importantly, it is a “grocery business” and not a “hyperlocal delivery “ business — Merchandising, sourcing and quality control are like in any offline business and need to be addressed first before making app and last-mile delivery work,” he concludes.
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