An on-demand retail start-up, a byproduct of the digital boom, is currently the posterboy for venture capitalists. With almost 50-60 players each in categories such as grocery, food delivery and home services, the sector has just about taken flight. In an interview with FE Brandwagon’s Meghna Sharma, Mukul Arora, principal at SAIF Partners, gives the investor’s perspective on what makes hyperlocal start-ups a good candidate to bet on, and the future of these technology-backed firms which connect consumers to local retailers/service providers. Edited excerpts:
Has the initial excitement over hyperlocal start-ups died down?
The basic premise for a hyperlocal player is having an app platform as it is location based. And with the rise in mobile penetration, it is becoming very interesting. Earlier, hyperlocals didn’t make much sense as people ordered sitting on their desktops, but that has changed now. With products and services being made available so easily, there is a clear trend that people want things on demand. Traditionally, too, we have been a do-it-for-me society unlike the US where a ‘do-it-yourself’ culture dominates.
How has the market evolved over the past two years?
What is happening in India is unique. If we look at other geographies, especially developed ones or even China, e-commerce was fairly well-established before the hyperlocal phase started and the reason for growth of hyperlocals in all these geographies has been mobile internet. They had established players such as Amazon, e-Bay or Alibaba for years before players such as Instacart emerged. Whereas, in India e-commerce is only a couple of years ahead of hyperlocal and in some categories such as groceries, e-commerce is just two-three years older. Thus, the dynamics are very different in India.
Also, what we are seeing across categories, be it groceries or food or taxi services, is that the adoption is seemingly fast and all of us have been surprised at this positive pace. Today, everyone is used to an easy life where everything is available at the click of the button and that is why the market is expanding. All this proves that there has been a sharp growth in the sector unlike what we saw in the second-third year of growth of e-commerce.
In each of the hyperlocal categories, the comparative intensity is higher than what it was in e-commerce. If we look at e-commerce in 2008-2010, every category had three or four players and out of them a few would raise series A, B funding before a leader emerged. Whereas, in hyperlocal, every category has more than 50 players.
When evaluating a traditional e-commerce set-up versus a hyperlocal start-up, what prompts an investor to choose one over the other?
It is hard to generalise for VCs as a group because every company has its own approach. As for SAIF, we see e-commerce versus hyperlocal on a case-to-case basis. We look at what makes more sense from a customer’s point of view. For example, in a category where there is time sensitivity a hyperlocal makes more sense whereas in categories such as fashion where one doesn’t need the item to be delivered within 30-40 minutes, e-commerce makes more sense.
Is there a higher return on investment (RoI) in an aggregator model as opposed to an inventory-based one?
Again, it is category based. In groceries it is better to have an aggregator model since with a marketplace model you can partner with numerous vendors. For instance, in Gurgaon, PepperTap has partnered with a number of shops and within Gurgaon it can deliver within an hour. Whereas if you are in an inventory model, then there is a need to have a large warehouse at a particular place and delivery can take up to seven or eight hours or even the next day. Apart from this, your investment in warehouses goes up and in categories such as groceries, there is a 2-3% wastage and it does impact profits. Thirdly, aggregation is a more network based business so the more customers you will get, the more merchants you will attract. And merchants too will like to grow with you as you bill more demand. We are seeing a lot of examples where these players have helped increase their partners’ revenue by 25-50%. You start becoming indispensable for both merchants and customers because of better pricing and variety, whereas in inventory, there is no network and you have to do everything on your own.
Do you see consolidation in the hyperlocal space?
Till a few years back, e-commerce saw 40-50 companies raising Series A funding but today only 9-10 players remain relevant. Similarly, in hyperlocal there might be more than 50 players in various categories but a few will only remain in the coming days. Some may run out of cash while others may merge with larger players. Therefore, consolidation is inevitable.