Two very contrasting piece of news has come out of Indian startup ecosystem within a month.
In mid-January, Amazon shared news of going ahead with its hyper local grocery delivery app launch. Amazon had launched experimental platform in March’15 to check the possibility of exploring new business vertical – hyper local grocery and FMCG product delivery.
Down the line, after almost 1 month Flipkart announced shutting down of its experimental localized grocery delivery app – Nearby. Flipkart had launched its experimental platform for grocery delivery in October’15. Through this Flipkart were trying to gauge the potential of the hyper local business vertical.
How Hyperlocal Business became a Hot Topic?
This brings us to a basic question – why all of sudden in 2015, E-commerce leaders jumped into hyper local delivery market?
As per FS Labs analysis, before 2015 it was only Ecommerce companies which were able to get funding worth 30 million dollar or more. But in 2015 PepperTap and Grofers came on the Indian startup Horizon and these two won hefty funding from Tiger global, Softbank and Sequioa Capital. This sudden pump of huge investments in hyper local delivery startups gave rosy dreams to entrepreneurs.
For Grofers, Tiger global and sequoia capital invested $10 million and $35million in two different rounds in February and April 2015. And then came the blockbuster funding with Softbank joining the board. In November 2015, Softbank, Tiger Global and Sequoia Capital together pumped $120 million in Grofers only; While Peppertap booked a net funding of $51.2 million in 2015 only. Peppertap also acqui hired Townrush and Jiffstore to gain substantial share of business in hyper local delivery market.
As per the market analysts hyper local delivery has a potential of annual revenue close to $18 billion.
If we add the daily orders received by three market leaders – Grofers ( 50k/Day), Peppertap (30K/day), and Bigbasket (20k/Day) with an average value of 800 Rs/order , its amounts to only $435 million only. So the potential of industry is huge. Race from $435 million to $18 billion is on. And this value is what led the E-commerce giants to run for the hyper local delivery “Gold Rush”.
Why Flipkart is then Shutting its Hyper Delivery App “Nearby”?
Flipkart Nearby, hyper local delivery concept which was launched as a pilot project in October 2015 in Bengaluru was announced to be shut down. The shutdown is driven by the major factors like “Poor Consumer Demand” and “Less Profit Margins”. Startups like Grofers, Zomato, PepperTap has already shut down their operations in few cities as part of their future strategies.
As far as Flipkart is concerned, it was actually coming. The only matter of fact was – when?
Flipkart’s experimentation in search of achieving elusive ‘Profitability’ led them into trying hyper local delivery. One thing to note is that here again they tried emulating the steps of Amazon.
One reason for this “App Closure” could be – Tiger Global. They being the major investor in Grofers and Flipkart, might have suggested Flipkart against launching altogether new hyper delivery marketplace. Anyway if Grofers gains enough traction and becomes hit in India, may be after 2 or 3 years down the line, Grofers could be merged with Flipkart to ensues the IPO –which requires profitable business model. But if Grofers leaks money – as it is leaking now, then there is no point of adding one more loss making vertical for Flipkart as they are badly chasing the word “Profitability”.
FS Labs stand on Amazon’s “Kirana Now” Launch Decision
As per FS Labs analysis, Amazon is playing strategically to gain something out of every opportunity. Amazon is the leader in world market as for as hyper local delivery is concerned. They might be having some tricks to run the hyper local business model profitable.
Actually by declaring the launch of “Kirana Now” Amazon might be trying to open one more battlefront for all the Ecommerce players in India. It might be actually a strategic move to let others join “money leaking business vertical”.
And its benefit would sure be a blessing for Amazon, who is not worried about pouring money into India till they win the market leadership game. As far as others like Flipkart and Snapdeal are concerned, they are vulnerable to lose money in such less profitable business vertical. Any fancy step could make their balance sheet look more troubled.
Is Hyper Local Delivery Business is a Pan India Thing?
Recent steps by Grofers, Peppertap and Zomato definitely raise question about the Pan India applicability of hyper local delivery business model. Its success is restricted up to Metro cities only. Metro cities are the one where most of the nuclear and working families live. Hectic nature of job combined with complacency and freely running money boosts the hyper local business model. Workaholics on weekdays, party animals on weekends seldom get time for arranging their daily market requirements. Hyper local delivery is for them by providing convenience and time saving.
In Tier 2/3 cities, every family has got a member who takes pride in arranging daily market requirements on their own. Paying a few more bucks for not so good vegetable is not something what they look for. FS labs thinks Indian tier 2/3 cities are not a good choice for hyper local delivery unless a growth suddenly changes the lifestyle of people living in these cities.
Flipkart Nearby Shutdown – Learnings for Startups
FS brings the learning part for entrepreneurs from Flipkart Nearby Shutdown- Why startup should focus on sustainability prior to unplanned experiments, expansions and cash burn.
Business Model Sustainability
The very first step of startups is to get a business model that should be so much compelling that people are ready to pay for it. The recent shutdown of startups has revealed that the business model with limited consumer base either in terms of age groups, geographical restrictions or consumer traditional mindset, has less probability of survival.
So, entrepreneurs must understand the sustainability of their business model prior to execution to avoid the wastage of available resources like money, manpower, time etc. Here are few guidelines from FS to understand the business model –
- Check for the Acceptance of your product by targeted market. More genuine the targeted problem is more is the market volume for your concept.
- Check for the Market Competition for your startup. Direct as well indirect competition should be evaluated.
- Check for the Infiltration of your concept into others’ market volume. Your concept should be strong enough to compel people to get shifted to it.
- Check for the Scalability of your business model. All other features, verticals and areas that can be incorporated into your business model.
Based on the combination of above factors, you can decide the sustainability of your business model.
Once the business model for startups is decided, the next step is to optimize the cash flow of startup to earn profit. Shutdown of operations in few cities by Grofers, Peppertap was driven by the facts that the operational cost was high as compared to the revenue generation.
Hyper local delivery revenue model is based on the commission per sale model. If the average order cost is considered as 300 rupees and the commission as 10% (=30 rupees), minimum number of orders required per delivery boy is (15000/30 = 500) per month (assuming the cost to company per delivery boy is 15000 rupees). So the financial stability will consume hell lot of time.
So, entrepreneurs must check for the financial stability of their business model in long run. A business model dependent only on funding has very limited probability of survival –
- Check for the Cash-in and Cash-out of your startup periodically. Cash burn must be aligned with the allowable liquidity.
- Seek for the External Fund Flow for expansion to avoid liquidity break down.
The next step of successfully handling the business model and funds is managing the entire show in a planned way and altering it as per the fluctuating needs of market.
Here are few tips from FS to entrepreneurs to ensure the management sustainability –
- Pre-plan the work on all the aspects to avoid future failure. Work Schedule, Time Frame, Cost Estimation, Quality Parameters, Communication Flow, Risk Mitigations and Opportunities Enhancement Plans, all related verticals shall be pre planned.
- Continuously monitor the progress, downfall to take the required actions on time. Gaps in actual and expected results give the scope of improvement.
- Control and Change the work as per the changing needs of market. Market competition and consumer expectation decide the guidelines for required alteration in the existing business model.
This was the analysis of hyper local delivery market analysis driven by Flipkart Nearby Shutdown. Stay tuned with FS for more updates.