Hyperlocals at Crossroads
Ajita Shashidhar January 6, 2021
On March 22, when the country went into a lockdown, life came to a standstill. The fear of contracting the virus forced people to stay indoors and as they wondered how to replenish their grocery or other emergency needs such as medicines, delivery boys of Dunzo, Swiggy and Zomato came as godsend. They took orders and delivered in less than an hour. "I never felt so happy seeing the Dunzo delivery boy knocking on my door as I did on the very next day of the lockdown when I urgently needed some medicines," says Mumbai-based graphic designer Arati Mehta. This was the time when the most-dependent kirana stores found it difficult to deliver as their staff had stopped coming to work. Neither could e-commerce giants such as Amazon, Flipkart and BigBasket find their way into people's homes as supply chain mechanisms had come to a grinding halt.
A few days into the lockdown, the likes of ITC, Unilever, Nestle and Britannia hurriedly signed deals with delivery service providers Dunzo, Shadowfax and others to get their products delivered directly to consumers' homes. From a service which picked up a parcel from one point and delivered to another for a cost, Dunzo found itself strengthening its consumer-facing presence, getting its inventory and price points live. "Though we had been working on two parts of the platform for almost 18 months - creating delivery infrastructure in your neighbourhood which delivers in 30 minutes times and working with local merchants to make sure they are able to take orders from consumers - something that would have taken 36 months to achieve has gotten done in nine months," says Kabeer Biswas, Co-Founder and CEO, Dunzo.
Restaurant food delivery platforms Swiggy and Zomato, which were test-marketing their foray into grocery delivery, quickly launched their grocery services. That's not all, 'hyperlocal' suddenly became fashionable and a host of new entrants emerged. From restaurant chains such as Wow! Momos to facility management companies, including MyBrokerHood and MyGate, there was a surge in hyperlocal service providers who either created their respective consumer facing apps or got themselves listed on Swiggy or Dunzo. Logistic providers and aggregators such as Delhivery, WeFast and Ship Rocket also launched their respective hyperlocal services.
It's close to 10 months since the pandemic broke out and with things slowly getting back to normal, the frenzy for ordering online for one's daily needs has halved. Firms such as Wow! Momos and MyBrokerhood have withdrawn from hyperlocal retail, and have gone back to doing what they are best at. Swiggy, too, has withdrawn from grocery delivery as wafer-thin margins didn't make for a sustainable business proposition. Over 70 per cent of grocery bills in India are around Rs 200-250, and for a bill amount of that size Swiggy charged a premium of around 15 per cent, which the customer paid during the peak of the lockdown since he/she didn't have an option back then. But then markets opened up and consumers were not ready to pay the premium anymore. On the other hand, kirana stores, which were working on wafer-thin margins of 9-10 per cent, were also not happy to give Swiggy a margin of 7-8 per cent in the long run. There were also problems with inventory management. With fill rates being as low as 50-60 per cent and hardly 35-40 stock-keeping units (SKUs) to choose from, customers were put off.
In fact, the oft-used model of hyperlocal companies picking up from local stores and delivering to consumers has come under considerable criticism in the new normal. But the interest in hyperlocal retail has hardly died out. While existing companies are re-looking at their business models in order to be more profitable, newer entrants are exploring ways to build sustainable businesses. Post lockdown, fast-moving consumer goods (FMCG) majors have become increasingly serious about e-commerce, and have not just strengthened their presence on marketplaces such as Amazon and BigBasket, but are also looking at hyperlocal retail pretty seriously. Hindustan Unilever, for instance, has strengthened its project MyKirana.com (a platform which does hyperlocal delivery through kirana stores), while ITC has launched ITC eStore. The latter has been aggressively investing in dark stores across metros to make sure consumers get their orders within a day. Similarly, e-commerce giants such as Amazon and Flipkart have also launched their hyperlocal services and are promising delivery in flat two hours.
Is owning inventory in a dark store and then delivering to customers within an hour a better model than picking up stocks from the local retailer and then delivering that to the consumer? Hyperlocal entrepreneurs are asking tough questions, as the obsession of buying online is gradually fading out. "Despite the lockdown getting over, the demand has been higher than what we had pre-pandemic. It's now for us to keep building consistently better experiences for them (customers) to come back to the platform," says Dunzo's Biswas.
Though Dunzo has grown by over 80 per cent in 2020, Biswas admits that his delivery platform had to make do with 3-4 per cent lower margins in the past few months. "That is because we are trying to drive growth. During the pandemic we really didn't have to drive growth as there was lot of incoming traffic," he adds. While an average customer is no longer interested to fulfil her day-to-day grocery needs from a hyperlocal delivery company, he/she does want to use its services for other things - from picking up clothes from the dry-cleaner to getting a cake from a reputed home-baker for the child's birthday. Despite demand being higher than earlier, unit economics has come under pressure as volumes have dipped. "In a typical hyperlocal model, the rider is dedicated to a particular customer's delivery. However, most hyperlocals are not following that model, they are instead trying to match demand. If there are two-three orders from the same area, the rider will pick them up and deliver. This model does make sense, but the delivery time get extended. Most players are trying to make business profitable," explains Akshay Ghulati, Co-Founder and Chief Business Officer, Shiprocket.
Though Shadowfax, like Dunzo, actively played the role of delivery partner to several FMCG companies during the lockdown, Abhishek Bansal, Co-Founder and CEO, agrees that picking up inventory from the kirana store and delivering to consumers is indeed cash-guzzling. "If you pick up from a retailer your cost of delivery would be somewhere close to 10-15 per cent. Unless the consumer pays for it nobody has that kind of margin built into their system to pay for the cost of logistics." Bansal sees more merit in setting up dark stores. "The retailer has 7-8 per cent margin, the distributor has another 6 per cent, which translate into 15 per cent. If you set up your own dark store and buy directly from the company, the entire 15 per cent flows to you," he explains.
However, Shadowfax isn't looking at owning inventory in its dark store, it has instead started running hyperlocal dark stores for FMCG and pharmaceutical companies. Swiggy, on the other hand, is also considering a re-entry into the hyperlocal grocery space through the dark store model. Dunzo is also testing the dark store concept in Bangalore.
Kirana Is King
Why is the kirana store inventory pick-up model unviable? "Hyperlocal companies started charging 7 per cent margin from the kirana store, when the store's gross margin is just about 10 per cent. So, on an order size of Rs 1,000, the delivery company would make Rs 70 and from that their marketing and delivery cost would get deducted. Bulk of their margin goes in delivery cost, which means they would make just about Rs 10 per order. If you hold the inventory, your gross margin will be around 15 per cent. On a Rs 1,000 order your gross margin will be Rs 150, and after paying for delivery, warehouse and marketing costs, you can still make Rs 50," explains Ashish Kumar, Co-Founder and CEO, Near Store. He says most kirana retailers list unbranded items such as pulses, which give them higher margins so that they can afford the 7 per cent margin which the hyperlocal delivery companies charge them.
Though owning inventory in dark stores surely seems more profitable, hyperlocal delivery companies can't ignore the 15-million strong kirana store network in India. This had led to the emergence of multiple models around the kirana ecosystem. Technology service providers such as Jumbotail, Snapbizz and Near Store are focusing on empowering kirana stores to becoming robust omni-channel retailers. The belief is that if 60-70 per cent of the grocery bills are below Rs 200, it is only the neighbourhood kirana store that can fulfil those needs. "It won't make business sense for a large marketplace to service an order as low as Rs 200. They need an average order size of at least Rs 1,500 to break-even," points out Prem Kumar, CEO and Founder, Snapbizz.
According to Ashish Jhina, Co-Founder and COO, Jumbotail, empowering kirana stores technologically doesn't end with providing shopkeepers point of sale machines or creating consumer-facing apps. "You have to look at the retailer as a customer and not as a channel. We need to make sure they have enough selection to offer customers. If a customer orders 10 items and only six turn up, it's a bad experience. We need to help them evolve their stores in a way that they solve their customer's needs."
Jumbotail, through its J24 offering, has converted traditional kirana stores into modern omni-channel stores.
"We give them data on what's selling so that they can continuously improve the choices they are providing to customers. The J24 stores include all the benefits of walking into a modern retail store, but you still have the personal connection that you have with your neighbourhood kirana," explains Jhina.
Most of these tech providers earn their revenue by getting 3-4 per of the retailer's margin and have stayed out of delivery since they believe it's not their forte. "On a Rs 1,000 order we make Rs 40. The entire Rs 40 is margin for us because we don't do delivery. The case wherein you work with kiranas and deliver doesn't work," says Kumar of Near Store.
In fact, Prem Kumar of Snapbizz says the new-age kirana store owner not just wants to embrace technology, he is also pivoting from being a supplier of grocery to being the concierge of the house. "If you want to be a concierge service to a household you have to cover the maximum number of items that you can cover and grocery is on the top of the list. A consumer may even need an electrician or plumber once in a way and kirana stores are even trying to offer those services. A grocery store doesn't sell meat and fish, we have created a link at the backend so that the grocery merchant's catalogue has meat and fish from a reliable source and then the delivery happens. The grocery store gets a small cut on the order."
Hyperlocal business models are a lot about collaborations. A single player offering technology, managing inventory and then doing delivery is considered monolithic and not scalable and profitable. Partnership and collaborations are the new rules of the game.
Delivery aggregation platform, Shiprocket, has listed delivery companies such as Dunzo, Shadowfax and Delhivery on its platform, which enables consumers and retailers to choose which service they want to use. "We allow you to check rider availability across multiple providers at a cost. If one company doesn't have a rider available at a given time, a second or third might," explains Ghulati.
Distribution and supply chain company ShopX is also using an unbundled approach for its hyperlocal venture. It makes the inventory of retail partners visible to customers and the order fulfilment is done by delivery partners. "We are partnering with various hyperlocal delivery companies. We are not great at delivery, our ability is to offer in-depth and accurate listing of inventory and that is what we are doing," explains, Amit Sharma, Founder & CEO, ShopX.
Sharma believes an unbundled solution will enable companies adopt different kinds of roles and scale up faster. "Hyperlocal has a strong future. However, there will be many hyperlocal players who will talk to each other using technology. There will be a hyperlocal who will enable product and price discovery and enable consumers to collect from the store, there will be a model where the kirana store will deliver directly, and one needs to digitise that. There may be a partnership-based approach where a company like ShopX can work with local stores and enable a third party to pick up the product and deliver to consumers," he adds.
Sanjay Hungund, Co-Founder and Chief Strategist, CostpriZe, agrees with Sharma that components of hyperlocal grocery retail are separate and no one company has the best ability in all components. "There is retail, technology and last-mile logistics (LML). Managing Retail (supply chain and operations) by itself is a very big thing. Offline supermarkets are good at this. If technologists try to do retail they will fail. If retailers try to build technology they will not do a good job. Likewise, LML needs a different set of skills and organisation."
The newest kid on the block is Beckn, a non-profit organisation co-founded by Nandan Nilekani, Pramod Varma and Sujith Nair, which has created specifications to offerinter-operability in commerce (on the lines of UPI in the world of payments), especially for local businesses so that they embrace digital better.
"Today, the buyer and seller have to be on the same platform in order to interact, Beckn is trying to make it possible for the buyer and the seller to be on any platform of their choice and interact. For this, you need a common, open specification. We have created free, open specifications, that is published online and anybody can download and integrate into their platform to make it inter-operable for commerce," explains Sujith Nair, CEO and Co-Founder Beckn.
Nair believes that the inter-operability feature will allow kirana stores to find ways to be more discoverable online. "As a local retailer, if we take away the question as to how many customers will download my kirana app, and instead receive orders on a range of apps that customers choose from, including mainstream apps for maps, messengers and payments, then all that I need to worry about is how I update my inventory and make it available for any online order."
Hyperlocal retail is definitely here to stay. It's all about who will be able to crack the right model and build a sustainable business.