Recently, Snapdeal-backed PepperTap has decided to shut down its hyper local grocery delivery operations by the end of this month to shift their focus on e-commerce logistics. The decision of complete change of business model was made just after two months when Peppertap shut down operations in six cities including Mumbai, Kolkata and Chennai to deepen their roots in the limited cities like Delhi, Noida, Pune, Hyderabad, Ghaziabad, Gurgaon, Bengaluru rather than expansion in different geographical locations.
Navneet Singh, CEO of PepperTap stated, “We are pulling plug from B2C grocery business and pivoting to a full stack e-commerce logistics company. Shutting down PepperTap is extremely difficult call for us but it’s the need of hour.”
As per the sources, Peppertap order share per day was about 20,000 in December 2015 which reduced to less than 1000 orders since last month.
Previously, other players joining the list of operational shut down are – Flipkart by shutting down its experimental localized grocery delivery app – Nearby, Zomato and Grofers by shutting down operations in Tier II and III cities, Ola by shutting down Ola Café and Ola Store.
Is it again Tier I, II, III Cities Phenomenon Excuse?
Till date biggies have given excuse of their operational shutdown in terms of limited market acceptance in Tier II, III cities. Zomato and Grofers business model was shut down in small cities because the acceptance was low while e-commerce players like Snapdeal, Flipkart claim that half of their sale is driven by Tier II and III cities.
So, the question from an outsider point of view is that “Is it again a tier I, II, III cities phenomenon that is forcing Indian Startups to shutter their business model?”
In explanation of limiting the presence to cities like Delhi, Noida, Pune, Hyderabad, Ghaziabad, Gurgaon, Bengaluru in early 2016, Navneet stated “The startup has decided to focus on depth rather than breadth, given the short to mid-term investment climate outlook. We are digging our heels in for the long term. We will focus on building a stellar customer experience by providing additional categories and services that differentiate us from our competition in cities where we continue to operate.”
So, why instead of taking better measures like customer service experience, relationship management and enhancing product catalogue, why PepperTap decided to shut down the hyper local grocery delivery operations completely.
This time Navneet came up with some realistic problems that they have faced during their journey through Peppertap blog post. Three drivers of Peppertap shutdown are as follow –
[A] Integration of App with Partner Stores – Peppertap was started in November 2014 and since then it was able to serve approximately 20,000 orders per day across 17 cities. With funding of $50 Million in their hand, their trajectory of expansion was exponential. Due to this huge expansion and integration, the problem that consumers faced was the inability to see the entire product catalogue from a store and sometime even the essential items were missing from the catalogue visible to them.
So, they had to integrate the inventory of partnered local offline stores into their App. They have to change the inventory management and billing system of local store to electronic. For bigger chains and hypermarkets, the data generated by their system was being plugged into Peppertap system. To align up to date price and availability of product ie inventory status, the data needed to be updated at the very least, thrice a day.
[B] Excessive Cash Burn – Cash burn was another major contributor. Peppertap was losing cash in two ways –
- Cash burnt in terms of the discounts given per order to consumers.
- Buffer capacity in logistics and operations team to meet 2 hour delivery time.
Combined cash burn of both the ways was increasing on every single order quickly with no immediate end in sight. So to reduce their cash burn rate, PepperTap decided to shut down operations in cities with small consumer base in early 2016.
With this initiative, they were able to increase the value of their average sale twice and were finally beginning to build value and loyalty – the cornerstones of a sustainable business. They were still financing orders and discounts with capital but now this was a more concentrated burn with a clear goal, timeline and geography in mind, However the timeline and the path to profitability was looking long (very long in fact) and arduous.
[C] Funding Environment – Seeing the global funding scenario, there was no point of losing cash on every single order. Mathematically speaking, this was certain that they would run out of cash by losing money on every order.
Navneet stated, “We couldn’t shake off the feeling that we were walking (not racing like some other companies) towards the edge of a cliff hoping that things will get better before we reach the abyss.”
So they decided to shut down their cash burning grocery delivery business and shift their focus on e-commerce logistics firm.
Naveent further told, “Had we tried everything? Were we convinced that this was not the space for us? Was hyper-local commerce finished as a sector? The answer to all these questions was a resounding “No.”. But let us be clear about one thing, we haven’t taken the task we set out to do in the late summer of 2014 to its rightful culmination in the limited time that we have had. And that’s the simple truth.”
Limitations of Hyper Local Delivery
The value that the core business model of hyper local delivery adds to the consumer is only getting thing at your door step, that too, if consumer is willing to pay additional for that. Here are major limitations associated with hyper local delivery system –
[A] Demand Fluctuations – Following factors contributes to the demand fluctuation of every day –
- Since the need of grocery is generally at the moment, so people prefer to go for easy option available in the market. Nobody is going to keep waiting for 2-3 hours for a cup of tea, if the milk is running out.
- People who prefer time to money are the major consumer of hyper local business. So based on the need of consumer, priority and selection of available options changes
- When so many players are working in same domain, consumers have alternatives to switch to the best fit.
These fluctuations can’t allow the player to optimize the operational team and other resources. You are forced to keep the buffer resources.
[B] Limited Revenue Model – Revenue model of hyper local delivery is limited to commission per sale which if assumed 5% per order, is quite low unless the volume is huge.
The cash outflow includes the manpower cost, assets cost, technology cost, discounts and customer acquisition cost, marketing cost and other inevitable expenditures. So the volume needs to be quite high to meet to balance the cash-in flow generated through limited commission per order.
[C] Operational Optimization Problem – Since the demand is not fixed, the operational optimization can’t take place suddenly. Every single order is different and unique.
Further, 2 hour time bound put a restriction on delivery fleet optimization. Spare capacity needs to be kept to avoid the time bound. Also, the clubbing of delivery is difficult, even though in same areas and particular time span.
[D] Market Competition – Since a lot of other players are also working in same domain, market competition is stiff for long run survival.
Even most of the small shops of nearby areas keep a spare guy for home delivery service for their loyal consumer base, though the process of ordering is not so tech savvy, dependent on phone call, yet it creates tougher market competition as the delivery time is quite less for these smaller shops.
Scope of Improvement is Everywhere
The relevant question here is, “Is there any scope of improvement that can be implements to overcome these limitations for other players?” Here are few thoughts from FS on the same –
[A] Cash Out-flow Optimization and Alternative Source of Making Money – Since the revenue is limited with existing setup, it’s better to reduce and optimize the cash out-flow and find the other ways of marking money with similar model –
- Clubbing of delivery orders to reduce per order delivery cost
- Market dependency for small deliveries in nearby areas ie mixed delivery fleet of own and shops
- Self-inventory introduction for better profit margins
- Advertisement on packaging and delivery vehicles
- Introduction of other product catalogues
- Last mile delivery of other players ( say e-commerce )
[B] Demand Stabilization Tactics – Since the need of grocery can be easily controlled based on the frequency of consumer usage, it’s good to implement strategies to force consumer to purchase again –
- Daily, Weekly, Monthly order management system allowing consumers to fix the delivery schedule as per their need
- Targeted marketing to reach the in-need consumer base. For example targeting office personnel having hectic lifestyle, old age person needing alternative of going to market.
- Smarter recommendation of next purchase to consumers. For example – Recommendation of organic food in place of normal etc.
The whole concept is to ensure that the demand of old customer shall become known for their every time need and new consumers shall get attracted by the advantages given over other players / alternative.
[C] Smarter Cash Burn – Cash burnt in giving discounts is good enough to ensure the traction but not a sustainable strategy to make loyal consumer base. Cash burnt to give people some reason to return is essential –
- Loyalty discount for next time use of app. Say 10% discount on next purchase order.
- Free gifts. Gifts plays a long term impact on consumer mindset rather than 30-40 Rs discount
The point here is to burn the funds not is just giving discounts but in smarter way to win their loyalty.
Logistics – New Hope of PepperTap
The next plan of Peppertap is to become logistics player. As stated by Navneet, “Our foray into full stack logistics space is a well-pondered decision and our experience in consumer as well as business-focused logistics will certainly help us to build next generation e-commerce logistics startup.”
No doubt, with increasing numbers in e-commerce, hyper local delivery, food tech startups and their loyal consumers, logistics is definitely an area in demand. Though the journey is not easy as it seems as other players like LogiNext, Delhivery etc also exist in the market and will definitely create a tough competition for Peppertap. Also, the move of already existing players in the logistics domain will be to reduce the penetration of Peppertap.
What Next in Grocery Delivery Segment?
One of the burning questions here is what next in Grocery Segment. Will other players like Grofers, Big Basket etc face the same fate? Or they will find the way to survive the cash burn, funding toughness and consumer loyalty storm.
The deciding factors will definitely be the operational excellence and optimization, alternative ways of making money and convincing people to remain stick to the same player. Also, the small shops who are losing their business because of these players will definitely come back with better consumer management solution.
Stay tuned with FS for more updates. Till then happy reading.