Inside DealShare’s search for an identity

The change was coming at an odd time. DealShare had set up shop in eight states, and had announced plans to aggressively expand that footprint. Just two months earlier, the startup had raised $45 million from the Abu Dhabi Investment Authority, in a round that valued it at $1.7 billion.

At that point, the shareholders struck a bullish note. The company said it was hiring new talent, and co-founder Vineet Rao, then its chief executive, said DealShare would even be exploring an international expansion “in the coming years”.

Privately, however, DealShare would soon begin shifting its outlook. By then, the tech markets in the US had collapsed and the writing on the wall was clear for Indian startups.

In the months that followed, the shareholders would be grappling with several questions on growth, service, margins and finally, the pressing need to conserve capital, which was becoming crucial for all startups.

Over six months, starting April 2022, DealShare had “a series of discussions and meetings” to address these concerns, Sourjyendu Medda, co-founder and co-chief executive, told Mint in an interview. These internal meetings led to an overhaul of the business model. The company scaled back on geographies, dropped a business division, laid off staff, while building a new offline strategy. The upshot of it all is that DealShare has transmogrified from a social commerce-driven online grocer to something resembling a hybrid: a retail online supermarket banking on offline stores.

To be sure, DealShare is not the only startup that has changed tack in this manner. Indeed, many startups that began with social commerce in India have long since pivoted to a broader model. Meesho, for instance, began as a reseller, but switched to the marketplace model. Online groceries have not had much success either. Tata Group-owned Big Basket, for instance, opened self-service physical stores in 2021, spurred by the customer preference to shop for groceries in person. In another instance, ZopNow, an online grocer, shut its operations in 2019 after trying out various models and came back in a new avatar, as Zopsmart, a provider of ecommerce tech solutions.

How it began

When they started up, co-founders Rao and Medda, natives of Jaipur, felt the city would be a good trial ground for their social commerce concept as they were familiar with it. The thesis was to capture market share from kirana or neighbourhood stores by selling groceries to the lower income strata. These stores purchase at a single entity level, as a result, they could not get great prices from suppliers, who operate on large volumes.

Rao was the tech wizard with an IIT background, while Medda, an IIM gold medalist, drew upon his retail experience. Sankar Bora joined them as co-founder and chief operating officer. Their goal was to dangle volumes before suppliers and thereby get discounted prices for their lower-income customers. The plan was to rely on social commerce to cut customer acquisition costs and build a loyal and massive base.

Rao and Medda were inspired by Chinese retailer Pinduoduo’s success. In just a short time, Pinduoduo had dominated the Chinese grocery market with explosive growth, going from zero to nearly 600 million customers within five years of its founding in 2015. It achieved this runaway success by harnessing technology to link farmers with consumers on its social commerce platform. Much of this success was also driven by its use of messaging app WeChat to help users share deals with others.

In the wake of Pinduoduo’s success, several social commerce startups popped up in India. While others went into electronics or interactive commerce, DealShare went into e-grocery, specifically targeting the lower-income strata, where it felt success was more likely as 60% of the Indian shopping basket is still largely grocery items.

The thesis won backers. The company managed to raise close to $390 million from the likes of marquee investors such as Tiger Global, Matrix Partners and Westbridge Capital. Along the way, Rajat Shikhar had come on board as co-founder and chief product officer.

Taking a leaf out of Pinduoduo’s book, the DealShare founders started experimenting with social networks, particularly WhatsApp, to acquire new customers. Like Pinduoduo, DealShare would acquire an initial group of individuals offering discounts on grocery products, and they, in turn, would spread the word. Need oil or sugar? Here was DealShare selling a kilo of oil (or sugar) at ₹1 for the next three days. The discounts would be steeper if more people came in to make purchases.

Whatsapp was the primary business channel and it helped with what Medda calls building “social virality” among customers. The company would spread the word through a select group of agents, who would get small incentives—maybe ₹5 or ₹10—to pass on the message. Community members who accessed deals through the agents got discounts.

The ‘friend and family’ recommendation model and the discounted group buying fuelled the company’s rapid geographical expansion. After Jaipur, DealShare went into Kota, followed by multiple cities within Rajasthan, and within three years it had a presence in Gujarat, Maharashtra, Uttar Pradesh, the National Capital Region (NCR), West Bengal, Karnataka and Telangana. Things were looking good.

Problems set in

But then the script changed. Operational inefficiencies began to creep in as DealShare expanded to eight states within three years. While the startup was seeing high adoption, retention numbers were low. Customers were also not moving to higher-margin products fast enough, said Medda.

At its peak, DealShare was burning more than $10 million a month, Medda said. It had raised $165 million in January 2022, and another $45 million in February. But it was clear that there was a funding winter on the anvil.

This, coupled with the expected capital squeeze, pushed the board and investors to review the business model. In terms of scale, the social commerce strategy had not quite clicked the way it had in China.

“Social commerce is a lot more dependent on the uniqueness of consumer behaviour in each geography. The segment is not one of the easiest to crack right off the bat,” said Neeraj Shrimali, managing director and co-head, Digital & Technology Investment Banking, Avendus Capital. “Chinese shoppers were already online and had a larger average order value when they migrated to social commerce. There are a lot of players in Indonesia, Vietnam and other geographies where social commerce startups, even those smaller in size, have done well and are profitable or close to profitable,” she added. “The journey of the Indian shopper into social commerce, in comparison, is still early. When you are early in the journey, your disposable income may be slightly lower, and you may not transact as much.”

Smaller footprint

As it began to assess its future, the first decision was to scale back on geographies. It decided to focus only on Delhi-NCR, Uttar Pradesh, West Bengal and Rajasthan—regions where its customer retention was high.

This meant it had to let go of people, infrastructure and its broader network over the next several months. For DealShare, shutting operations in certain geographies was harder because it has an inventory-led model. The move also caused a fair bit of pain. In January, DealShare said it had laid off 100 people as part of the business rework strategy.

With 40% of the business now in the NCR region, the company also took the call to shift its headquarters from Bengaluru to Gurugram.

Secondly, it also decided to widen its product offerings beyond staples. DealShare began offering personal care, FMCG, food, general merchandise and home care products in a bid to expand the customer’s basket and improve its margins.

Curbing expansion meant its gross merchandise value (GMV) would also drop. At its peak, the GMV run rate was around $900 million. DealShare reported revenues of around ₹1,933 crore at the end of fiscal 2022, and a loss of ₹67 crore. The startup has not reported its FY23 numbers yet, but its GMV run rate is half of what it was at its peak, said Medda.

Offline focus

The biggest pivot for DealShare is a shift from its online-only model to a more hybrid one. Margins are thin in the online grocery business, and so the board and investors decided that DealShare would need to go offline to capture a significant pie of the grocery pie, and enjoy a better margin.

This pivot saw the company announce on 31 July that Rao was stepping down as CEO. When DealShare decided to focus more on offline retail growth, it made sense for Rao, who has a largely tech background, to step away and help the company identify its next leader, Medda said. Rao has an 11% stake in the company.

Medda, who has a deep retail background with stints in Metro and Raymond, says he is also in the race for the job. He is currently the co-CEO, and has a 7% stake in the business.

But it is not clear why Rao stepped down instead of continuing until a new CEO was appointed.

Emulating D Mart

Medda is hoping that DealShare can replicate the success of DMart—the hypermarket brick-and-mortar chain that sells everything from apparel and personal care products to household items and groceries—in the offline sphere. Yet, he draws a distinction between the two companies. “DMart is offline first, looking to go online. We are online first, looking to go offline. The journey will be different,” he asserted.

Further, DealShare will be going one level down in the income strata—focussing on customers with income levels of ₹25,000 to ₹1 lakh as against DMart’s target audience of ₹75,000 to ₹1 lakh. It will keep 1,000 stock keeping units as compared to DMart’s 5,000 units, Medda said.

DealShare will also look at opening smaller stores—maybe 1,500-2,000 sq. ft—in greater numbers in smaller cities, Medda said. This would be in contrast to large format DMart stores of around 20,000 sq. ft, which are mostly in metros and Tier-1 cities. “Effectively the market in Tier-II and Tier-III towns is larger than the top metros, not because of price or value, but because of volumes,” said one of DealShare’s investors. “Dmart is still slightly aspirational, we are firmly middle India,” added Medda.

To begin with, DealShare has opened five offline stores in Jaipur, where it first started and expects to set up more, in other geographies. Eventually, it expects offline volumes to overtake its online share.

Dropping B2B

The offline pivot also coincided with the company’s decision to cut back on its business-to-business (B2B) division. Essentially, this was the business through which DealShare supplied grocery items to the local kirana stores.

In the beginning B2B was important for DealShare, because it was helping the company get a better deal on inventory from suppliers. Suppliers need volumes if they are to give a discount, and they got the volumes from DealShare because the startup sold to neighbourhood stores as well as customers. At its peak, B2B accounted for 50% of the company’s GMV.

But B2B has far lower margins than B2C, one DealShare investor told Mint. “Cutting down this division will automatically help improve the margin profile of the company, which is good,” he added. It has also helped reduce the company’s burn rate to around $1.5 million. But the vertical’s closure has again led to painful restructuring, including layoffs.

With the cutbacks and the restructuring process out of the way, DealShare expects to hit profitability by FY26, Medda said. However, the size of the business is likely to be much smaller than initially envisaged.

The company is still sitting on over $100 million in cash reserves from the last round of capital raising. It is working closely with investors to decide on the focus of the capital expenditure, which will be geared towards opening offline stores in the immediate future.

“What we have done is basically decide the future contours of the business,” Medda said.

Whatever the future may hold, the many twists and turns in DealShare’s journey, and the journey of other startups, suggest that Indian retailers still haven’t been able to crack social commerce. And, in a market still largely dominated by low-income consumers, it certainly will not be easy for any company looking at a pure-play online grocery business model.