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New Delhi: As concerns around profitability hover around hyper-local delivery companies, start-ups such as Grofers and PepperTap are looking for newer avenues such as advertising to sustain margins.

Grofers (run by Locodel Solutions Pvt. Ltd) and PepperTap (Nuvo Logistics Pvt. Ltd), which currently work on a commission-based model, are in talks with consumer companies such as Procter and Gamble Co. and PepsiCo India Holdings Pvt. Ltd to display ads on their mobile applications and websites.

Hyper-local businesses, especially in the grocery space, work on thin margins. They earn around 7-8% in commissions for delivering groceries and 12-15% from fruits and vegetables from the merchants they work with.

These start-ups end up burning tens of crores of rupees on discounting to acquire new customers and forgoing commissions in some cases to increase supply.

“Grocery is a business where the commission percentage is very bleak. We are spending a lot on marketing and operations. There is no second thought about the need to have additional revenue," said Milind Sharma, co-founder and vice-president, business, of PepperTap.

“We are exploring static ads, push notifications to customers as well as full-page ads for the companies," he added.

PepperTap is in talks with companies such as PepsiCo for an exclusive product launch of its Tropicana range of products on the app. Sharma declined to give further details on a likely deal.

Last month, Snapdeal.com (run by Jasper Infotech Pvt. Ltd), India’s second largest online marketplace, bought a minority stake in PepperTap. The company claims to be doing close to 27,000-30,000 transactions per day.

“We get most of our traffic from mobile…over 80-90% transactions happening through it. So all these customers will instantly get to know if there is a new product that has been launched on the app," said Sharma.

Grofers has already launched a banner advertisement for Hindustan Unilever Ltd’s ice cream brand Magnum and is in talks with other packaged consumer goods companies to display their ads.

“We have started, but the process would build up steam in the next one month. By Diwali, we will have some really interesting ads to display on the app," said Ashneer Grover, chief financial officer, Grofers.

Mint reported on 7 October that the company is in early talks to raise $120 million in fresh capital, largely from Japan’s SoftBank Corp. and Russian entrepreneur and venture capitalist Yuri Milner and existing investors Tiger Global Management and Sequoia Capital (mintne.ws/1Nm0JXc).

K.K. Chutani, Dabur India Ltd’s executive director for the consumer care business, said that while Dabur is already evaluating these emerging avenues for advertising, it will be interested only in advertisements customized to meet the requirements of individual users.

“We will not be looking at plain-vanilla advertising, but it will be more action-oriented advertising along with awareness building and with e-commerce linkages," said Chutani.

Rohit Bhatiani, director at consulting firm Deloitte in India, said hyper-local delivery companies can easily leverage their mobile platforms to track consumer behaviour and offer consumer goods makers customized ads on the basis of their requirements.

According to him, the benefits the hyper-locals have over the regular e-commerce companies is the frequency with which a customer uses a hyper-local app. “It is much more than a regular e-commerce app, just because of the nature of the category," he said.

India’s largest e-commerce firm Flipkart is also readying its mobile ad platform to start serving ads on its mobile app, a new, potentially key business for the online retailer, Mint reported on 24 April (mintne.ws/1JyGjnK). As soon as it starts publishing ads on its app, the company will encourage its ad clients to shift their marketing efforts onto the mobile.

Online grocer BigBasket.com has been running advertisements of consumer brands on its app and site from Day 1. “Roughly 1% of the revenue we generate per month is what we get from here," said Hari Menon, co-founder and chief executive officer.

Online hyper-local companies are struggling despite nearly 25 grocery delivery firms in India having cumulatively raised over $160 million in the last 10 months, according to data from start-up tracker Tracxn.

Earlier this week, online supermarket Localbanya.com temporarily suspended operations citing technology and services upgrade issues. The company has been in the market to raise around $15-20 million for the last few months, according to a report in The Financial Express.

In February, online grocer EkStop.com was acquired by Godrej Nature’s Basket, the premium food retailer owned by the Godrej Group. The acquisition later led to the closure of EkStop.

Hyper-local services have failed to get local “mom and pop", or kirana, stores on board due to existing gaps in technology and integration. The increasing competition in the space has been forcing grocery delivery companies to burn investor money in acquiring new customers and market share.

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