Tuesday, November 17, 2015

Hype ? - about Hyperlocal Grocery

At around $350 billion, India is in the top grocery markets of the world.  This is approximately 70% of the Indian retail business which is around $500 billion. Modern retail accounts for 10 - 20% of this pie.  E-commerce or hyperlocals are obviously a tiny part of the pie just yet. Most companies, therefore, are still at a stage where they have to prove their business models and change consumer behaviour. These type of businesses are expected to reach around 2% of the grocery market by 2020, creating a potential market size of around $10 billion (Rs 60,000 crore).

The hyperlocal on demand grocery has mainly two models -
a) A large player like Big Basket offering localised services. Inventory is carried by the company.
b) An aggregator using the local retailers to source products and handling the delivery
c) An aggregator using local retailers to stock and deliver

It is a no-brainer that an aggregation model, as it is asset-light, is less capital-intensive than the inventory-led one. But having said that, there are merits and demerits in all models

Offline Grocery Stores
1) Offline grocery stores are still the preferred choice for customers with the touch & feel and human interaction.
2) These stores can deliver the products quickly and at times even I have experienced gratification in half an hour. This is far faster than the online grocer
3) Further more due to the physical presence of a retailer, there is a certain amount of trust.

Online Grocery Stores
1) Stocking of a large number of skus is difficult. A local mom and pop store can carry perhaps 2000 skus which is difficult to satisfy the needs of all customers in a particular area.
2) With increasing rental costs, offline grocery stores are becoming difficult to manage.
3) Many customers are also familiar with the regular products they buy and hence will not have any hesitancy in buying online negating the impact of touch and feel to a large extent.

The Issues with Hyperlocal

1) Effective Margins - Having said that product based models earn 2-20% margins depending on the category. And there in lies the problem. The selling point for e-grocery is that it offers more convenience than the neighbourhood store; but to be sustainable they have to do this cost-effectively. And that is not the easiest job to pull off.
2) Managing Inventory and delivery - Normally e-commerce works with a delivery promise of a certain number of days however  with grocery it has to be within a few hours if not immediate. Indians like to be serviced so they need the product to be delivered to their door step. (Internationally, pick-up-point-based delivery models are popular). The key reason is that customers order groceries online to avoid the hassle of going to the store, and a pick-up will undermine the convenience factor.  So a fresh delivery infrastructure has to be created which is different from the existing e-commerce one.
3) Typically people go to the supermarket for their monthly purchase and then do tops ups from the local mom and pop stores on when it is required basis. And the local kirana is just a call away. 
4) Additionally there is a monthly credit and 
5) Delivery is done within an hour.  
6) The lack of 'touch and feel' in the case of online perishables  are pre-packed,
7) Moreover there is always "I can return it" if I don't like it.
8) Scaling up - One of the key issues with online hyperlocal grocery is that it is a locality-specific operation. Every time you add a new locality it is similar to launching the business afresh. This makes grocery a more difficult and challenging business to multiply

Arguably and for good reason margins can be improved. For example:
a) Offer premium products like imported products
b) Increase the basket size
c) Smart sourcing
d) Increase perishables but then again stocking is a big issue.
e) Open offline depots like Grofers

Even with all the pluses I am not convinced whether all hyperlocal  operations are viable.

The basic issues are:

1) Can they generate more revenue per order from customer than the cost of delivering one order? From personal experience it seems these hyperlocal grocers are incurring huge costs in delivering an order as compared to the revenues being generated by an order making it unviable. Even at Rs 20 delivery cost per order that means in a Rs 200 order it is 10%.  There is a certain ceiling on how more the delivery team can be efficient. 

2) Unlike other businesses customers want their orders delivered in half an hour but given the economies of (small) scale it is not possible.

3) Companies like Grofers are opening localised warehouses. Whilst margins will increase, there is a limitation on goods which can be stocked, costs like rentals, manpower etc. will add up significantly

My suggestion

I am inclined to go with an Aaramshop who follow a hybrid, asset-light  aggregator business model. It fulfils orders with a retailer closest to the customer, who will deliver at the consumer's doorstep within a couple of hours of placing an order. This way the cost of delivery is with the retailer. For a small transaction fee (around 0.2%) plus value adds of inventory management, integrated sourcing, analytics, promotional revenue etc.

For high transaction stores I would even partially reimburse the costs of the delivery boys thereby tying in the retailer to the platform. 

Thursday, October 15, 2015

Food Gone Good - Food (Delivery) will Work

The 'hot' business till a year ago is seemingly ' hot to handle' now. There is a pervading sense of fear exacerbated by the closure some famous start ups in food delivery business. However, the naysayers will not question the potential in food delivery-

  1. The organised food business in India is worth $48 billion, or Rs 3 lakh crore, of which food delivery is valued at $15 billion (Rs 94,755 crore).
  2. In developed nations, takeaway and home delivery contributes to about 35% of the food business. In India only about 10% of the orders are for takeaway and home delivery. Furthermore, 80% of the orders are made through phone calls.  Eateries like Dominos, Pizza Hut etc. alone get 50-60% of their sales through eCommerce.

 At last count there were around 120 start ups in this space, all jostling for the same customer in the same areas.  Given the low entry barriers and healthy wallets of investors start ups have mushroomed. That is reason enough to have these all players playing with their back to the wall.

Having said that, there ‘seems’ to be some insurmountable flaws that are causing such businesses to fail. On closer scrutiny here are some flaws, which I have identified:

  • Definition of the Business

The very nomenclature of the business by the various brands is perhaps the biggest stumbling block. Most businesses today have a kitchen (made to their requirements) that prepares food. And by that investment it is not merely a delivery business but a food & logistics business (pretty much like a airline catering business). The task is then to sweat the real estate and not look at just delivery since obviously the size of the delivery market is not large enough.  
Some points which these start ups need to ponder are:
  1. Am I able to serve food in other parts of the day - breakfast, morning/ pre lunch snacks, evening snacks etc.? 
  2. Can I get corporate/ B2B bulk deals?
  3. Can I serve this food to canteens or other restaurants?
These are not a comprehensive list of questions but some pointers, which indicate that these businesses are not in just food delivery alone but food as a whole.
This model has been proven by QSRs largely which have been in this business for many many years. This is perhaps a key learning for new food delivery brands that tend to narrow their focus on delivery alone.  The QSRs have dine in and delivery which caters to the customer either in our outside of their outlet.

  • The Logistics Angle
I have sampled food from various food delivery companies and there is a blatant misuse of delivery boys. More often than not (and in peak time) one delivery boy will travel 4 kms just to deliver one order. This shows that there is very little effort put into managing deliveries. If the same delivery boy were to deliver just one more order then the costs of delivery alone would come down by half. This is not to say that there cannot be single deliveries but proper route mapping and planning needs to be done.
A related example can be when a high loader from an airline catering company depending on the time and load may actually service between 1 and 4 air crafts thereby optimising costs and efficiencies.
An alternative would be to outsource deliveries to specialized delivery companies - no costs of manpower and only incremental costs.  I would personally recommend a mix of both.
Sceptics may mention that the location can be anywhere within a 5 km radius. Look at airline catering companies, they have to reach the food within the same distance too. And yes! An hour after preparation is a long time to deliver. Food needs to go hot and reach the customer hot!

  • Food Quality
I have heard that one of the biggest problems of the food delivery brands has been consistency of food quality. I have heard employees tell me that it is really difficult to maintain consistency. Frankly this is a feeble excuse for the lack of systems and processes. 
Some of the biggest issues which these start ups are not doing are
  1. Non - standardization of recipes
  2. Lack of detailed SOPS. And if there are, then poor adherence to them. 
  3. No menu sampling of food amongst the kitchen staff prior to introduction
  4. Non-availability of key ingredients due to improper planning
This is contrary to how a food business should be run.

  • Recruitment
Such a cliche but alas it is true. Getting the right people for this business is absolutely necessary.  I happened to see some recruitment listing that looked for professionals from premier schools to manage their kitchens. While the role is interesting, I do sense fatigue setting in very soon. There is nothing glamorous about this job infact a lot of dirty work. (Been there!).

The Larger Opportunity
  • Surplus capacities of existing eateries.
Unfortunately most food delivery companies are competing with existing restaurants/ eateries. The biggest advantage has been low entry barriers, which in turn has also been the biggest disadvantage. They are creating a business that rivals the existing businesses.  There are huge surplus capacities in most popular cuisines namely Indian, Chinese and Continental. To top this, walk ins are reducing over week day lunches and to a smaller extent for dinner.

  • Opportunities
1. Marketplace
There are large players already like Swiggy and Tiny Owl that serve this segment wherein the players list eateries and then facilitate the ordering and delivery.

2. Curated  Standardized Marketplace
The market place model has some demerits, the quality from many restaurants have been questionable.  In this model, the standards like recipes, hygiene, menu, packaging etc. are decided by the aggregator, who in turn will facilitate the ordering and delivery. There is perhaps only one company with this model - Cookaroo

While I am a strong believer in both these models,  I am inclined to explore more of the second model. Here the aggregator will have a lot more control without capital investments and lesser manpower costs.

Parting Shot

Lack of understanding, lack of processes and a myopic view can never be answers for writing off a business. Coupled with this is the same model being followed by multiple players especially since the entry barriers are low. There will be shakeout and consolidation. And it has already started! But don't write the business off.

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