Bigbasket: Delivering the goods
Bigbasket has survived the funding slowdown by keeping its business simple, but with Amazon a looming threat and staff retention a challenge, the online grocery start-up has its work cut out
Bengaluru: It takes three steps for someone to place an order on Bigbasket: browse, select and pay. The simplicity, speed, convenience and, of course, attractive prices are driving e-commerce in India.
What sets Bigbasket apart from the rest is the company’s sharp focus on also keeping its business simple. Investors love it. The company raised $150 million in March amid a funding slowdown even as rivals PepperTap and Localbanya shut down.
That it seems to have survived the storm has a lot to do with its founders—two of them are in their 40s and three in their 50s—who, unlike the young brigade at the forefront of India’s start-up movement, have survived the 2000 dot-com bust, built a supermarket business and sold it before Bigbasket. Thus, what started as an online grocery store in 2011, today sells everything from staples, vegetables, meat and fish to gourmet and ready-to-eat food, household goods and personal care items.
To understand how Bigbasket took shape, one needs to go all the way back to 1999.
It was about two years after Steve Jobs rejoined Apple and revolutionized the way people used computers, mobile phones and the Internet. Much of the world hadn’t adopted the Internet in a massive way then, but Jobs knew that they would eventually do. Three friends in India—Hari Menon, Vipul Parekh and V.S. Sudhakar—shared a similar belief.
“1999 is when we started our entrepreneurial journey with this company called Fabmart.com. It was basically a horizontal, which is what Flipkart is today,” recalls chief executive Menon. “But it was just simply too early for any of the Internet businesses to take off. People were worried about sharing their bank details online. There weren’t robust payment mechanisms. There was no broadband. The dial-up lines were so slow that every time you had to open the site, it was like an endless wait.”
Those days, not even one in every 100 Indians used the Internet. According to the World Bank, it was 0.273 out of 100 in 1999, compared with 18 out of 100 in 2014.
“While there was much hype, there was no customer traction. This went on for about a year before we realized that the business was ahead of its time. We knew that this is the future and it’s going to kind of take off at some point. You could either stay put or shut down and move on. We decided to stay on and run the business, albeit on a lower scale,” said Menon.
Stay on they did. Fabmart first sold music then diversified into books, toys and jewellery before launching grocery in early 2000 in Mumbai, Pune and Hyderabad. Initially, they picked up goods as and when orders were placed from Metro Cash and Carry and delivered them to consumers. Simple as it may sound, the trio realized they were missing a piece in the puzzle. A warehouse, or a storage facility.
They leased storage facilities, a decision that would become no less than a watershed moment in their entrepreneurial journey in the days to come.
“I remember the three of us were travelling to Pune for some work. On our way back to Bengaluru, we were discussing about what next for the business. All of a sudden, this brainwave struck that we’ve got all these small warehouses, so why don’t we get into physical stores,” said Menon.
Thus, Fabmall happened. Around the same time, Kishore Biyani-led hypermarket chain Big Bazaar was planning to launch its grocery business, Food Bazaar. Menon, Parekh and Sudhakar were offered a chance to use the ground floor at the Big Bazaar store in Koramangala, an upmarket Bengaluru locality, for a year until Food Bazaar launched. Needless to say, they grabbed the opportunity.
Over the next five years, Fabmall scaled to a network of 210 stores before the business was acquired by the Aditya Birla Group in late 2006 and re-branded as More.
That was the end of the journey for the three friends, for the time being. Post the acquisition, they chose to go their separate ways. But only until Bigbasket happened.
It was around May 2011 that serial entrepreneur and angel investor Ganesh Krishnan nudged the entrepreneurial bug in the three friends. E-commerce was taking off in India, with the likes of Flipkart and Snapdeal seeming to do everything right around electronics, books and fashion. But there was a glaring void in the grocery space.
Krishnan had a simple question for the trio, “Would you like to give the grocery business another go?” An offer, it seems, they found too good to refuse.
This time, they were joined by V.S. Ramesh, Sudhakar’s brother and another budding entrepreneur Abhinay Choudhari, who, back then, was running an online grocery business called Shop As You Like. In fact, Sudhakar, Parekh and Ramesh were mentoring Choudhari.
Choudhari merged his business with Bigbasket right at the beginning and became a part of the founding team, bringing along with him a ready-to-use technology platform.
On 4 December 2011, Bigbasket kick-started operations with a seed capital of less than Rs1 crore, pooled in by the founders.
Menon, an alumnus of Birla Institute of Technology and Science, Pilani is the chief executive officer, while Parekh, an Indian Institute of Management Bangalore alumnus dons the hat of chief financial officer, apart from handling marketing. Ramesh, a former officer with the Indian Navy, oversees the company’s warehouses and storage locations. Choudhari, an Indian Institute of Management Ahmedabad alumnus, heads the express delivery business. Sudhakar, who graduated from the National Institute of Information Technology, Allahabad, is the executive director and represents the company’s founders on the board while also being responsible for innovation, be it around technology or business processes—along with Ramesh.
Bigbasket’s first year was spent on building the back-end, a decision that traces its roots to the founders’ experience in building an offline grocery business. “The year of the back-end”, as it was called internally, went into putting in place a regimented sourcing process, especially for staples and vegetables, strengthening its delivery network and of course, developing technology infrastructure that could support a scaled-up business. It was a conscious decision to abstain from any promotional and marketing activities until all the pieces in the puzzle fitted in, which took about a year.
A key decision that Menon believes helped Bigbasket remain ahead of the rest of the flock was betting big on fresh produce—fruits and vegetables—and staples, and building private brands around them right from day one.
Private labels are brands owned by retailers, and typically, the profit margins on these are higher than on brands that are owned by other companies. In the case of groceries, the margins could be as high as 30-40%, at least double the margins on other brands.
Today, the company owns brands such as Fresho for vegetables, meat, and idli and dosa batter, and Royal and Popular for staples. Last year, Bigbasket launched Tasties, a private label for coffee and snacks. The company has built a thriving business-to-business vertical with its private brands, selling to restaurants, hotels and caterers. The vertical is expected to account for about one-fourth of Bigbasket’s revenue by March 2017, said Menon.
The company also sells its private brands through about 1,000 neighbourhood stores in eight cities.
“The private labels will propel the next phase of growth for online grocery stores as the margins are really high. For example, say some company has two million customers and says that it will give them some non-standardized article at the same price as a retailer. If a customer believes the quality available with online stores is better and they will enable doorstep delivery at the same price as a local grocer does, a customer will avail it. It is a huge market and these brands to my mind will expedite growth. E-commerce will expedite the process of standardization and branding in India for the grocery segment,” said P.N. Sudarshan, senior director at Deloitte India.
Bigbasket launched in Mumbai and Hyderabad around October 2012 after running the business for about a year in Bengaluru, confident of the business model and operational capabilities. It was only in mid-2013 that the company decided that it was time to push the pedal on marketing. It was already making about Rs8.5 crore in revenue by then.
By early 2014, Bigbasket expanded to Chennai, Pune and the National Capital Region, with a warehouse in each city. A popular shopping destination by then, Bigbasket tied up with the Times Group’s Brand Capital to advertise itself and roped in actor Shah Rukh Khan as a brand ambassador in 2015. It expanded further to Kolkata and Ahmedabad, and set its sight on the so-called tier II cities. By the beginning of 2016, it fanned out to 17 tier II cities.
Today, Bigbasket operates 25 warehouses and 63 dark stores (storage facilities). The company claims to have three million repeat customers and is targeting revenue of Rs1,800 crore in fiscal year 2017, more than double of the around Rs750 crore it clocked last fiscal year. To be sure, revenue has been growing steadily, from a meagre Rs3 crore in FY13 to Rs8.5 crore in FY14, before skyrocketing to Rs200 crore in FY15 and Rs750 crore last fiscal year.
During its early years, Bigbasket was banking on the convenience of online shopping more than anything else. But it realized that convenience was not a card it could play for too long.
Then what clicked for the company? It amassed a wide product assortment, including categories such as home and personal care, maintained that quality is sacrosanct, especially in fresh produce, and finally, offered a competitive price.
It also had to ensure customer stickiness. According to Menon, grocery buying has three distinct patterns: planned, bulk purchase at the beginning of every month; weekly purchase that typically revolves around items with a short shelf life such as milk, fruits and vegetables; and specialty store buying. Specialty stores are local stores that garner a very loyal customer base for a particular product or brand, which customers typically refuse to buy from elsewhere such as Karachi Bakery’s biscuits in Hyderabad or Bengaluru’s Iyengar Bakery’s breads. Bigbasket has those kind of niche stores listed under its specialty stores category.
Initially, Bigbasket serviced the first category. Fast forward to 2016, the company has launched a 90-minute express delivery service to cater to the second category, a segment which is being eyed by hyperlocal delivery start-ups including SoftBank and Tiger Global Management-backed Grofers, and started aggregating local specialty stores online to capture the third category of customers.
To be sure, grocery delivery as a segment has been on a rise globally. According to a report by CB Insights in May, grocery delivery start-ups globally raised $436 million in funding until May this year, surpassing food delivery start-ups, which raised $352 million, for the first time since 2012.
Still standing by their original principle of doing things one step at a time, Bigbasket’s future plans are somewhat less exciting, perhaps, when compared with what some competitors have had in the recent past.
Two of its major competitors, Tiger Global Management-backed Grofers, which has raised $165 million so far, and PepperTap, paid the price for aggressive expansion. While Grofers expanded rapidly before closing down about 10 locations between December and January citing poor demand, PepperTap shut shop in April, about seven months after raising $36 million from investors.
Bigbasket had originally planned to expand to 50 cities in total but has now scaled that back to the 25 it currently operates in. “Our expansion has stopped now. We are now not going to expand anymore for some time to come. Now, our whole thing is to go deep into these cities and start making each city work well,” said Menon.
And one of the methods the company has identified as key to achieving this goal is analytics. With analytics, which are constantly being built upon in-house, the company’s aim is to populate a customer’s basket based on their most recent and frequent purchases, alert them if they have not added something they usually buy in case they have forgotten it and inform them if an item they normally buy is about to run out. To that effect, it already has a feature called Smart Basket. Other key focus areas in the days ahead include the fruits and vegetables supply chain and organic and private labels.
While Bigbasket has no acquisition or fundraising plans, it does expect to start making announcements about profitability between now and next March. The company has so far raised at least $220 million from investors such as the Abraaj Group, Bessemer Venture Partners, Helion Venture Partners, Sands Capital, International Finance Corporation and Zodius Capital among others, making it the most well-funded online grocery start-up in the country.
And even though the likes of Amazon have already entered the e-grocery space, throwing up questions around Bigbasket’s future, Menon remains unfazed.
“The Indian retail market is about $550 billion and 70% is grocery. It is such a large-sized market that it is very difficult for one player to play. The more players that come, the better it is for the market because it opens up faster and customers become a lot more confident. That is what you are going to see,” said Menon.
According to industry experts, an inventory model helps online stores extract significantly higher margins as it buys directly from brands and manufacturers. On the contrary, hyperlocal delivery start-ups such as Grofers accept orders on an app, collect items from nearby stores and delivers them, often at a discounted price.
Consequently, these firms operate on wafer-thin margins as they charge the local shops a small percentage of the overall order value, anything between 2% and 10%, and lose money on every order because of discounts and offers in an attempt to attract customers.
“In the inventory model, quality is better addressed but delivery is typically faster in a hyperlocal model. The nature of the product, whether it is standardized or non-standardized, dictates which is a better model. For instance, if it is milk, which is standardized, hyperlocal may be a better model because delivery is faster. But if somebody wants to buy some expensive cheese, they would be more quality-conscious. So, the nature of the product, immediacy of the requirement, the price-quality association plays a determinant. Some products will fly more on hyperlocal and some other products on the inventory model. For non-standardized and expensive products, where consumers are looking for quality, inventory model makes sense, while for standardized products, hyperlocal model works,” said Deloitte’s Sudarshan.
A challenge for Bigbasket, though, has been employee retention. Of its 12,000 employees, almost 70% are blue-collar workers. The company has formed a trust that supports workers’ families and ensures there are no extra working hours, said Menon. Still, every time the company expands, its workforce grows too and that continues to be a problem area.
“One of the key decisions of making us who we are today is starting fresh from day one. That has paid off and paid off well for us as we’ve gone along. The second good thing that we’ve done is making sure this business model, which has all three ways a customer buys, is brought in,” added Menon.
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