On September 8, 2015, BrandWagon had released its ‘Hyperlocal Special’ edition. Back then, the sector was touted as ‘exciting’ with investor sentiment at an all-time high, consumers beginning to warm up to the concept, and a host of players flooding the space. We had issued a word of caution though, that survival may not be as easy. Almost six months down the line, the picture is, indeed, different.
Fairly frequent reports of hyperlocals downsizing in terms of their presence and employee strength, is indicative of the state of flux which this subset of e-commerce is in. What works against these companies is the kind of speculative interest they generate and the pressure they are under to grow in a healthy and sustainable manner. Barely five years old as an industry in India, hyperlocal e-commerce needs a lot more thought than what has been given to it thus far. The ‘quick entry-quick growth’ strategy needs to be taken to the next level, if this model wants to prove itself as a sustainable one.
Since over a year, hyperlocals have been in the news for shutting down operations in some cities, downsizing staff, tweaking the services they offer and even making alterations to their business models. Most recent reports have had Grofers shutting down its operations in Bhopal, Bhubaneswar, Coimbatore, Kochi, Ludhiana, Mysuru, Nashik, Rajkot and Visakhapatnam. TinyOwl last year was in the news for a poorly handled downsizing operation in Pune, with a dramatic hostage situation involving its co-founder Gaurav Choudhary. PepperTap recently shut down operations in six cities.
What are the hyperlocals getting wrong then? And what should be the way forward if they are to survive?
Not all black and white
It would be important to note a contrary development reported by The Indian Express earlier this year which announced Amazon entering the grocery delivery space with AmazonNow starting with Bengaluru, where it has partnered with 10-15 supermarket chains. The stage, therefore, for the battle of who delivers a product or service at the best possible turnaround time and at the best possible price, is set. In their defence, hyperlocal companies argue that the markets which they have exited weren’t ‘ready’. PwC and India Retail Forum’s 2015 report Are You Profitability Ready? states that migration into urban areas is as strong as almost 10 million people each year and that the retail spend in India is set to increase by a CAGR of 12.4% over the next four to five years. The
report also states that 91% of smartphone users search for products, 95% of users have searched the internet locally and 54% have made purchases via smartphones — all of this at a modest 13% internet penetration.
Devangshu Dutta, CEO, Third Eyesight, is of the opinion that hyperlocals make the mistake of borrowing business models and terminologies from the Silicon Valley, without adequately understanding the real context of the Indian market. “Is there an existing or even potential demand for the service claimed to be provided? Or are you just going to introduce an intermediation and an additional link in the chain, with additional costs and unnecessary administration involved?” he asks.
The point is whether these players have correctly identified why they are in the business, and what are the primary challenges they must overcome. For Grofers, co-founder Albinder Dhindsa states that differing levels of technology literacy among a majority of merchants and consumer adaptation to the online platform, are the concern areas. The company is looking to bring over one lakh merchants aboard in 2016.
Grofers is also looking towards increasing its partnership with farmers for supply chain improvements in order to get better produce to the markets. “We don’t make annual plans; we plan semi-annually and then execute them in the quarter,” says Dhindsa. Grofers is now operational in 17 cities, namely Agra, Ahmedabad, Bengaluru, Chandigarh, Chennai, Delhi-NCR, Hyderabad, Indore, Jaipur, Kanpur, Kolkata, Lucknow, Nagpur, Mumbai, Pune, Surat and Vadodara.
For some others like Swiggy, consumer awareness is the biggest barrier. Nandan Reddy, co-founder, Swiggy, says, “Given that hyperlocal online services cater to possibly less than 2% of any market they operate in, the focus is currently to grow the market while catering to a wide demographic of consumers.” He admits that in the early stages, the brand had trouble educating even its partners. Furthermore, operating a delivery fleet in an on-demand service offering sub-40 minute deliveries is a challenging task given that there are at least 15 points of failure in an average order.
“Instantaneous service delivery is an expectation in a hyperlocal model,” says Debadutta Upadhyaya,
co-founder, Timesaverz. “That is something we are trying to deliver through tech intervention wherein the entire process is managed through mobility solutions.” These sentiments are echoed by Varun Khaitan, co-founder, UrbanClap, where leveraging technology to provide the best of services is imperative.
Some of the major challenges in a hyperlocal market are optimum resource utilisation and matching locations, price points, and other specific requirements to the customers’ needs. Timesaverz currently has a service range spread across 40 categories, aided by network of over 2,500 service partners across five metros.
Who is responsible?
Dutta believes that investors need to recognise that they have a bigger role to play than just getting firms off the ground. “Many investors have been guilty of not providing the harsh reality filters that are needed to temper the natural enthusiasm that entrepreneurs bring to the table,” he muses.
Vinod Murali, managing director,
InnoVen Capital points out that the hyperlocal industry is in its nascent stages and needs a fair amount of time to grow. “One aspect to keep in mind is that a large sized equity cheque does not imply that a company has achieved operational maturity or robust business metrics, especially in this segment,” he notes. Given the recent consolidation in this category, the survivors have the opportunity and time to focus on improving unit economics and demonstrate that their businesses are viable and valuable.
Experts predict that 2016 is likely to see most of these companies focussing on profitability (even if it’s through localised cohorts) and also on experimentation with buyer behaviour. However, these companies probably need to focus on achieving a critical mass to reach a considerable scale for efficiencies.
“Creating critical mass simultaneously on dual fronts — customers and participating merchants — is essential. Very few start-ups have the bandwidth or even the mindset to be able to do both,” says Dutta. This is in addition to having a realistic demand identification and estimation.
For instance, the claimed demand gap may not even actually exist because local vendors are already highly service oriented, and this service may already be embedded, at no extra cost, in existing business models.
2016 might just become the year of consolidation in the hyperlocal space. Dhindsa notes, “We can’t expect 10 players in every niche space, and since grocery in the hyperlocal market is a bigger arena, probably five players will survive, but consolidation will happen.” Grofers, in 2016, aims to ensure its turnaround time is under an hour.
Reddy of Swiggy believes the key is achieving differentiation — only the companies which are able to create a differentiation, be customer focussed and excel in service quality will survive. “Consumers are willing to pay for services which provide a value-add. Heavy discounting without value addition will not help companies build a sustainable business model,” he says.
Timesaverz’s Upadhyaya is optimistic that support and interest from investors in the sector will help companies address their challenges with time. The Indian market has tremendous potential for growth according to the players, especially as we see a rapid development across urban areas, leading to significant changes in lifestyle and social networks. “We estimate that the services market in India is worth $50 billion, and is only growing,” Khaitan says.
All said and done, investor sentiment in India is seeing dips as was reported earlier this year. Investments by venture capitalists have dropped from $2.12 billion (October- December 2014) to $1.15 billion (October-December 2015), according to a report by CB Insights and KPMG International.
The true test before hyperlocals is how well they can resist the temptation of spreading themselves thin across all aspects of services. They need to identify and narrow their focus on key areas that need work, as well as develop a lasting relationship with delivery partners, vendors and consumers. Only then should they shoot for the stars and attempt at an expansion of their physical presence.
* Does well in metros, owing to the nature of young working couples who value convenience and want groceries at their doorstep
* Delivers more than 35,000 orders daily on an average. Back-end is technology driven
* In Q4 2015, the firm ‘acquihired’ teams of SpoonJoy and Townrush to bring dynamic learning to the table
* Communication spends are around 15% of overall spends, focussed on brand building and customer acquisition
* Revenue model is a commission-based one where 80% of earnings from consumers are shared with service partners
* Video tutorials, blogs, social media are used for targeting consumers
* Owns a delivery fleet of 3800 delivery executives enabled with smartphones to deliver food to customers within an average of 38 minutes
* No minimum order policy
* Repeat consumers contribute to over 80% of orders
* Has over 250 employees
* Is looking to expand to 10 cities by the end of FY 2016