Fast and furious. That would describe the pace of growth at Udaan in its first few years. By March, 2021, the e-B2B player had cornered a big chunk of the market, built up a network of over 3 million users and on-boarded over 25,000 sellers across 1,000 towns and cities. In FY21, the company’s revenues jumped more than 500% to nearly Rs 6,000 crore and it boasted a valuation of $3.2billion.
But even the best laid plans can go awry. For all the growth, the business wasn’t making money. Analysts estimate the operating loss in FY21 was Rs 2,823 crore on the back of a near Rs 2,700 crore loss in the previous year.
The cash burn forced “a different rhythm” for the company, as co-founder Vaibhav Gupta puts it, compelling it to work on a profitable model. Udaan’s turnaround strategy has been a four-pronged one: enhance customer service, increase penetration, push private brands and improve cost efficiencies.
“We are now making sure customers have a strong value proposition, we give them competitive pricing and the facility to order in small bulks,” Gupta told FE adding, “we make sure any complaint is handled in 24 hours, that’s new for us.” Given how repeat orders are critical in a B2B business, it’s been a big focus area for the company says Gupta and one where he believes his competitors have failed.
Udaan is also driving penetration rather than walking into every town and city. The scaling down of the footprint from 1,000 cities resulted in gross revenues falling sharply to `5,629 crore FY23 from `9,900 crore in FY22. “Unless you build density in a city, you will never be able to get the profitability,” says Gupta. Udaan rolled out its iOta plan to get more penetration. In its key market of Bengaluru, it now reaches 70,000 of the 100,000 outlets and the goal is to hit 90,000. Moreover, it wants to get 90% of them to make repeat purchases every month.
In the rest of the country, Udaan’s penetration is far less deep. Of the 50 clusters that it works with, it is present in only 15 and the penetration is just about one-third of that in Bengaluru. The potential to grow across the country is enormous—analysts at Bernstein believe a compounded annual growth of 40% is possible which would take the e-B2B space to $100 billion in the next decade. But, Gupta says he has learnt how important density is to control costs. “We can’t simply acquire 10% of the outlets because the costs will be too high,” he says.
At the same time, scaling up is critical. Experts point out the power of the e-B2B model is amplified in less prosperous geographies where distribution chains are less efficient. In fact, the shopkeeper base that Udaan caters for is largely in the smaller towns: of the 20 million kiranas in the country, the top 30 cities account for less than 1-1.5million. Gupta points out that Udaan’s customer adoption, for FMCG products, is stronger in smaller towns because the distribution there is weaker. “Our core business is working in the mid-market and markets like Varanasi, Azampur, Jaunpur or Baliya as they are big growing clusters for us”, he says adding the Captain Harvest brand has done equally well in these towns so prices have not been an issue.
In fact, Udaan is betting big on its premiumisation strategy. Currently, close to 80-85% of the products—cereals, poultry, dairy, or even garments—that shopkeepers buy and sell are unbranded. Udaan is attempting to aggregate the demand from the shopkeepers, build a sticky base and sell them branded products. “We are able to assure them quality consistently. Our Captain Harvest private brand is seeing a good pick-up and has helped us to double our gross margins to about 6-6.5%, Gupta says. Experts believe steady state gross margins in this business could be bigger at about 10%.
In fact, they explain the reason large FMCG players have failed to make it in food products is because their models are based on a higher sales and distribution cost base and gross margins of 40% or so. In Udaan’s case, the model envisages a total distribution, sales and credit costs of just 2.5% and gross margins of 6-7%.
The company is also working hard to get a grip on costs. Gupta feels cost is a competitive advantage that Udaan must have. “In the mass market segment, you can only provide value to customers if you are superior on costs,” he says. Udaan’s costs would already have come down by 70%, as a percentage of sales, in the last two years but that’s not good enough. “We definitely match the benchmarks of the offline markets in terms of delivery and supply chain costs. But we are three-fourths of the journey away,” Gupta says. He believes some of the efficiencies will come from scale but “some has to be deliberate work on costs”. Udaan’s hoping to bring costs down by another 25%, in about a year making it superior to anyone on costs.
Already, over the past 18 months, the Ebitda burn has come down by about 85% or about 1,600 basis points of Gross Merchandise Value (GMV). Last month Udaan raised $340 million but at a valuation of about $1.8 billion. With revenues estimated to grow at 45-50% annually for the next five years, Gupta believes the firm can become ebitda profitable around September 2025. That would make it more eligible for a market listing.