The last time Indian hyperlocal startups rose to fame was somewhere between 2013 and 2016, with more than 50 investment deals totaling slightly over $500M . But 2016 was an year of bloodbath. Most shops shut down, some were acquired by others and a few decided to brace for the impact. Deep discounting coupled with poor unit economics was thought to be the cause. The sector saw 36 M&A deals between 2013–2018 worth $102 million. Since then, a lot has changed. Increased smartphone and internet penetration thanks to Xiaomi and Jio respectively, hyperlocal delivery is back for a second round, with investors pouring in money, and this time even more. In 2017 and 2018 combined, an upwards of $2B had come into the sector. With 2019 coming to an end, this figure goes up roughly by a $1B. Will there be another crash or a takeoff this time around? Let’s jump right in.
What exactly does Hyper-Local mean?
Hyper-local refers to the nature of demand and supply markets where both these participants are in the same locality. Unlike E-commerce wherein, you might be ordering something that would be picked up from a warehouse in a city 500KM away, hyper-local dynamics operate within the same vicinity. Think of what all is inside a circle of radius 3KM around you. Restaurants, grocery stores, pharmacies, handymen, cabs, couriers to name a few. The product or the service is delivered in a very short period of time(usually within a couple of hours). Another interesting point to note is that most of the startups are converting some form of offline activity into an online activity with their respective consumer value propositions. Application in cases like food delivery, grocery delivery, ride-hailing check most of these boxes.
It is different from E-commerce delivery as they vary in terms of customer Service Level Agreements(SLAs) and product/service type. A SLA is a pre-decided set of norms between the buyer and seller parties and contain the terms of service being offered for e.g. the simplest being low ETAs for cabs and food delivery. Hyperlocal caters best to items that require near instant delivery(within minutes/hours). The difference between supply and demand dynamics differ greatly as we move from one locality to another. Considering an example of food delivery, a residential area may receive lesser number of orders during the day than they have at nights on account of a large working population. Likewise, a Central Business District(CBD) may see a huge spike in orders during the day and near zero activity at nights. However, with e-commerce on the other hand, customers are ready to wait for a day or two to receive their order. This point of distinction leads us to the second variation i.e. the product/service type. In hyperlocal, cabs and food are an immediate need and you ideally wouldn’t want to wait for your medicines and small grocery items. In e-commerce, the product/service is generally not needed urgently e.g. apparel, books, footwear, electronics etc. In fact, e-commerce giants Flipkart and Amazon are shifting more than their usual load on third-party hyperlocal startups for the last-mile portion.
Rise of the 3-sided marketplace
Ride-hailing which dominated much of the start of the decade was essentially a 2-sided marketplace. Apps connected drivers who owned cars to people who needed a ride, hence 2-sided. Over a period of time, it further evolved by streamlining the processes and handling almost all components of the end-to-end transaction. With the popularization of the ‘gig economy’, innovative new use cases emerged marking the beginning of ‘Uber-for-X’ revolution.
When food delivery came into picture, it also created a third side in the marketplace — the delivery personnel. Instacart, DoorDash and Postmates had received wild success in the US and Indian startups were quick to adopt such business models. As soon as Swiggy started operations in 2014, a whole new wave of startups were found : TinyOwl, LocalBanya, RoadRunnr, ZopHop, TaskBob, PepperTap, AskMe and every other clever name you could think of! A major difference in the model arose through the delivery fees(fixed in US while free in India). However since US is a developed economy, the willingness-to-pay and ability-to-pay both tend to be high, whereas in India, the willingness to pay extra for the convenience is absent even though people may be able to afford it. The competition was stiff obviously and this led to them bleeding cash. The unit economics just didn’t work out. The funding was under the assumption that as time would pass, discounting would end and optimal utilization of delivery fleet would eventually lead to profitability. For such services to be profitable, the average frequency needs to increase which is what Kabeer Biswas,CEO of Dunzo says they’re doing and are currently in the habit-formation phase.
‘New’ Hyperlocal Business Model
There are two components of a business model — qualitative and quantitative. Let us begin by looking into its qualitative aspects :
Value Proposition : The fundamental proposition of these companies to its various stakeholders is simple and may be described as follows :
1. User — They offer you the convenience of saving time by running your errands in the shortest possible time and all this for a nominal fee ranging from Rs.20–100.
2. Restaurant/Store — Increased sales due to higher discover-ability along with better mapping and management of inventory. Few companies also provide credit and advisory facilities to help.
3. Runner — No obligations towards commitment,work as you please for some extra monthly income.
4. Investors — Become a ‘SuperApp’ and control most of the online market harnessing the power of data and technology to further improve/expand the business.
Market Opportunity : The market size in India for online grocery is currently just 0.2% of the overall grocery market and is expected to touch 1.2% of the overall by 2023. There are several possible reasons for this. One is the definition of the market. Hyperlocal today encompasses more markets than it did earlier in 2015. Second is the expansion of market. Newer ideas such as medicine delivery, homecare services and particularly micro delivery(Milk and other essentials) have seen exponential growth in terms of the number of users. Users of these services can prove to be stickier than those of food delivery and ride-hailing.
Market Dynamics : The demand side for a hyperlocal startup is composed of its paying customers. They may want to book a cab or a meal or an appointment with the electrician to repair their ACs. The supply side however comprises of two stages. In a ride-hailing scenario which is a 2-sided marketplace, there is only a single stage of supply i.e. Drivers. However in 3-sided marketplaces there are two namely, the provider of the service and the deliverer of that service. For e.g. in a food/grocery delivery scenario, the provider of the service is the restaurant/kirana/supermart whereas the delivery personnel connects the provider to its customers on behalf of the company. On expansion of this model to use cases other than food/grocery as it happened with ‘Uber-for-X’ era, anybody can become a provider and/or a runner.
Operational Complexity : App-opens or eyeballs as they’re called refer to the number of people that have the app opened up in front of them and are in the process of deciding whether to book or not. Drop rates go up when either there is an abnormal surge multiplier leading to prices higher than what those eyeballs are willing pay, or when there are no personnel available/willing to service the customer. Needless to say, both these situations lead to negative customer experience. But surely, showing tens of restaurants with the meal menu containing over hundreds of items to thousands of hungry users, estimating delivery time for so many concurrent orders which further need to be allocated to specific runners for delivery, performing route optimization and finally batching multiple orders to the same runner is not an easy task — in fact not even close. This resembles an even more complicated version of the travelling salesman problem in computer science which itself is a NP-Hard (Non-Polynomial Time) problem. And all this comprises just the parts that are dealt with automation, the second leg of the delivery is still yet to begin.
Business Strategy : The first question the company should look to address is whether to operate in a vertical or in a horizontal space. A vertical is a specific segment whereas horizontal means across multiple segments. Another choice would be to decide to operate in the hyperlocal market with or without an inventory. For a food-only delivery company, there is no inventory but higher predictability of demand when compared to a grocery delivery company. This decision will also decide the kind of labour supply that will be offered i.e. whether to own the delivery fleet or to contract one. Inventory led models like BigBasket have an in-house delivery fleet whereas inventory less models like Dunzo have runner partners. Other questions might be to figure out whether to introduce private labels in FMCG which have better margins that will flow into the bottomline. Moreover, critical activities of the corporate strategy team involve strengthening their moats and/or strengthening the defensibility of the company.
A few quantitative aspects of the business model are as follows :
Revenue Streams : Income for hyperlocal delivery companies usually comes from merchant commissions and delivery fees from customers. Further, depending on the type of product offerings, such as in the case of subscriptions in micro-delivery segment, revenue streams may vary. Commissions fall in the sub 10% range for grocery delivery companies which is lesser than those charged by food delivery and ride hailing companies where they tend to be between 15% and 20%. Some companies also make money from brand advertisements displayed on their apps.
Cost Structures : The cost structure for such internet based businesses generally tends to be variable. These are usually the consequences that stem from the choices the management makes. Paying per delivery may help in on-boarding runners but is not sustainable in the long run and can severely impact the unit economics. Rather, paying for timed slots would change the cost structure to fixed and can improve profitability as the business scales. Apart from other traditional costs like SG&A, such companies also incur payment gateway charges that may roughly amount to 2% of the GMV. However, the highest percentage of costs are made up by marketing expenses and is borne to build and promote the brand. While free/discounted meals and rides may help in gaining users quickly, its value might not always flow down to the bottom line.
Key Performance Indicators : KPIs for short, are metrics which help the management in assessing whether the company is on track to achieve set goals and also in improving business processes over time. While revenue analysis often points us towards the quantity of growth, KPIs aid in the assessment of the quality of growth. KPIs are a function of various inputs that are given by the managers such as the unit of value, growth targets and the pace of operations. For a cab company, different operation managers may use different KPIs pertaining to their work area. A demand oriented OM and a supply oriented OM may use the following individual components of these representational equations to determine their respective departmental KPIs.
Unit Economics : Unit economics in simple terms denotes the value of profit/loss realized on a sale/transaction by the company. Costs are netted out against the revenues to arrive at the contribution margin per unit of business. This is similar to calculation of net income of a company in its P&L statement, but differs in terms of unit of comparison. Net income calculation takes in sum total of all business activities by all users in a particular year, unit economics calculation takes in sum of all business activities by a single/cohort of user(s). Popular unit economics calculations involve computing the Customer Acquisition Cost (CAC) and the Life Time Value (LTV) of a user and benchmarks the ratio of LTV:CAC to a generally assumed ‘good’ value of 3 — however this varies from business to business. Unit Economics are often confused with KPIs. Where KPIs help in analyzing the performance of a business process and improve it over time, unit economics occur as a result of the implemented practices suggested by KPIs. KPIs focus on smaller tasks and the benefit/cost of usage of these is reflected in the unit economics.
So, What’s Next?
There have been several developments in this space in the past few weeks. Most recently Uber sold its its indian food business to Zomato. Reliance has been aggressively expanding its already enormous retail presence through Reliance Retail and already is trading at valuations higher than Tesco in the unlisted market. as it looks to compete with the ecommerce players Flipkart and Amazon. Jeff Bezos was in India recently and unveiled future investment plans in India. They’re looking to grow their grocery + hyperlocal business and also their streaming platform announcing 14 video content titles for 2020. Swiggy has been running its Swiggy Go business and has enough capital to expand. BigBasket acquired unicorn status in 2019. Dunzo was given the permission to test their drone service and Grofers is targetting an IPO within three years. With funding in deeptech on the rise, more companies will eventually enter this space after existing ones will move towards consolidation.