On demand delivery services came on Horizon two years ago when startups like Zopnow, Grofers, PepperTap, BigBasket etc started attracting consumers, investors and job seekers. With estimation of US$ 400 billion worth, unorganized grocery market has become one of the center points of attraction for entrepreneurs to develop their business model.

These on online shops tried solving the grocery delivery problem in two different ways –

  1. Some considered that grocery delivery is more of a logistics based problem because of the time bound nature of the service.
  2. Others took it as procurement based problem and worked on creating inventory and managing it properly to serve customers on time.

Hyper local model came into picture as it was time efficient and it worked with minimum inventory.

Since last couple of month, Grofers – Gurgaon based hyper local delivery startup, remained in news. In November’15, Grofers came in news because of US$120 million in funding from Japan’s SoftBank Corp., Russian entrepreneur and venture capitalist Yuri Milner and existing investors Tiger Global and Sequoia Capital. In December’15, Grofers was in news because of resignation of its CTO Varun Khurana. In January’16, Grofers came in news because of its sudden decision of shut down of operations in 9 cities.

FS brings an exclusive analysis of the major learning from Grofers shut down operations in small cities-

FS Labs -Grofers Shut down Operations in 9 Cities – Lessons for Small Startups

[A] Develop the Business Model – Acceptable, Scalable and Sustainable

Business Model of startup must contain following qualities in it – acceptable to people whom it is targeting, scalable in long run – geographically as well as other verticals and sustainable in terms of revenue generation. FS comprehended the problem with Grofers business model that caused it to shut down its operation in 9 cities–

  • Hyperlocal delivery model would be acceptable by those consumers only who either want to save time or don’t have time in their busy schedule to go out for buying items needed for daily chores and obviously have no constraint in terms of cost. So the acceptability of model is limited to the cost and time based consumers.
  • Scalability of hyper local delivery is limited to metro cities only as the targeted consumers are more in those areas only.Small cities like Ludhiana, Coimbatore, Kochi, Mysuru, Nasik, Rajkot etc are not good choice for hyper local delivery business model as people have ample time to get the grocery stuff by themselves and are more cost concerned.
  • Since the revenue is limited to commission per order, so the model seems less sustainable after calculating the other expenses like delivery cost, technical and managerial manpower cost and other operational expenses.
  • Tier 1 or tier 2 cities have their daily consumable’s supplies routed through local vegetable/ fruit/ consumable sellers who already work for wafer thin margin. Most of the customers, who are less tech savvy, are loyal to the vendors and do not out rightly accept the sudden discount sale offered by the new startups.

Grofers co-founder Albinder Dhindsa said that they ran a series of marketing campaigns including television ads in those cities to test the markets and see if the volume picks up but smaller cities were not ready for hyperlocal business yet, once they are, Grofers would reconsider the strategies. But FS believes that all such campaigns/ feedbacks surveys must be conducted prior to the execution.

Following are the learning for startups / founders from this incident –

  • Thoroughly understand the acceptance of your concept prior to execution of your business model. Feedback surveys, prototype run, consumer behavior analysis are few of the techniques to check the acceptance of new concept by mass.
  • Analyze the scalability of your business model. Scalability of business model is a combination of consumer acceptance, convincing marketing strategies and consumer constraints. So scalability of the model shall be analyzed to avoid the issues on expansion.
  • Check for the Sustainability of business model. The ultimate aim of any of the business models is to ensure the profit generation in long run. Business model with limited revenue faces problems in operations.
  • Reliability of survey results are sometimes ambiguous. Sometimes the chosen few do not represent the actual consumer behavior. And this happens more often in those cases where the player is altogether a new face/ new venture. Acceptability of new business idea is quite low in tier 1/ tier 2 cities.

[B] Analyze the Market – Market Volume, Targeted Consumers and Competitors

To understand the market for your startup concept and targeted consumers at the initial stage is essential to align the long term strategies of the startup. Market volume and targeted consumers estimation helps in determining the right marketing strategies to capture the market. Competitor’s analysis helps in determining the correct expansion strategies. FS comprehended the problem with Grofers market analysis that caused it to shut down its operation in 9 cities –

  • Though everybody needs Grocery in daily life, hyperlocal delivery models are limited to tech savvy population. In metros, the population of bachelors and office personnel are more as compared to tier 2 and 3 cities. So the market volume for hyper local delivery has more potential is metro cities.
  • The competitors for Grofers might be players of same domain, e.g. PepperTap, BigBasket in metro cities but in small city every single shop of Grocery becomes competitor as generally they provide home delivery service on call.

Grofers blamed small cities for its shut down of operations in 9 cities stating that small cities are not ready to accept the hyper local delivery yet. But FS believes that potential market volume and competitors must be analyzed prior to execution to mitigate the expected risks.

Following are the learning for startups / founders from this incident-

  • Estimate the market volume based on the targeted mass of your startup concept. It helps in determining the expected sales and hence marketing strategies and expansion plan.
  • Analyze the market competition very well, big or small, direct or indirect. Market competition of other players should be handled tactfully. Small competitors could easily be handled by achieving operational excellence, customer relationship management and cash burn. Biggies should be handled with more strategically like consumer attraction through discounts, introducing more verticals, or changing the model in right direction of acquisition.

[C] Expansion of Business Model as per Market Need

“Growth for the sake of growth is the ideology of the cancer cell.”- Edward Abbey, American Author and Environmental Advocate

Expansion of business model should be done as per the need of market. General trend of startups is to start their concept with one city and expending it to other cities soon after funds flow. The problem with unplanned expansion is that the loopholes in the system don’t become clear, business model do not become self sustainable and on a large scale it becomes difficult to handle it simultaneously once encountered.

Grofers stated after shut down in 9 cities, “Our focus is to ensure that processes, systems and operations in the current 17 cities are fully efficient. For the next few months we are not looking to grow to any new city.” FS believes that all such expansion must be fully planned in advance and should be done only after troubleshooting all loopholes and problems faced during small scale execution.

Following are the learning for startups / founders from this incident-

  • First target should be to capture all the potential market of your business vertical or geographical location as it determines the potential failures of large scale system.
  • Once the excellence is achieved in one vertical, other verticals/ new geographical location shall be introduced to keep the smooth run of business.
  • Maturity of the business and its acceptability to the customers are the major check points.

[D] Pre-plan the Activities – On each of the Vertical prior to Execution

Every single activity that you are going to do requires at least some planning. For example, if you want to prepare a cup of tea, it requires planning in terms of checking the availability of all the raw material, heating element, pot etc. Tasks like executing a business model shall be pre-planned on each of the vertical – scope of work that needs to be done, schedule for each of the activities, cost associated or assigned to each activity, quality parameters, resource management, risk and opportunities, communication flow, integration of all the verticals etc.

Grofers stated “We have most of our hiring done, particularly those that require heavy manpower during May and June. We are more focused on stabilizing our businesses. We are now concentrating on expanding our categories. We want to achieve few of our internal targets before we think of increasing our capacities. This would take about two to three months.”

It’s good news though that Grofers doesn’t enter the list of startup- hiring and firing rapidly like Housing, TinyOwl, Grabhouse etc. They have offered their work force to switch the bases to the more successful cities.

Lesson for startups is that move ahead with proper planning – execution plan as well as risk mitigation plan.

Read here about the learning from major events of startups in year 2015.

Wish you luck for your startup. Stay tuned with FS labs to know more.