MUMBAI : Milk-delivery startups, recent entrants in the hyperlocal market, are eyeing mergers with the bigger companies in the sector as availability of large sums of capital to scale independently becomes a challenge.

"The smaller milk and grocery delivery startups are finding it challenging to independently scale without significant equity funding and there is likely to be continued consolidation in the space," said Ankur Pahwa, partner and consumer internet leader at EY India.

For instance, grocery unicorn BigBasket is in advanced discussions to acquire subscription milk delivery platform DailyNinja, a startup backed by investors such as Sequoia Capital and Matrix Partners, said two people aware of the development. The talks come as DailyNinja which was trying to raise funds for growth for over six months has faced challenges in those efforts, said one of the people cited above. Dailyninja could be sold for about Rs100 crore, the person added.

Milkbasket, a Gurugram-based firm which supplies milk via its app in an inventory-led model, has also been looking to raise at least $30-50 million for the last few months, but it too has faced headwinds, with few investors willing to commit the large chunks of capital which are needed in these sectors, said an investment banker aware of the company’s fundraising plans. “It is also the lack of any near-term profit visibility for these firms which is also one the major investor concerns," he added. Milkbasket has raised $26 million so far, from investors such as Kalaari Capital, Blume Ventures and Unilever Ventures.

For larger entrenched incumbents in the hyperlocal delivery space, these milk-delivery startups are attractive as they offer customer stickiness that comes with the daily delivery of essentials like milk.

Another startup, Bengaluru-based Doodhwala, shut down its operations last month, and migrated its customers to FreshToHome, signaling a battle for survival in this space.

Bigbasket did not reply to emails seeking comment. Milkbasket declined to comment. Dailyninja denied the development.

Startups engaged in the milk delivery business such as Milkbasket and Dailyninja see as many as 80,000-90,000 orders a day, indicating their need and popularity.

However, the challenge of competing with mature and well funded rivals such as BigBasket, Grofers, Flipkart and Amazon makes it a low-margin and competitive business.

"Given the nascent stage of this space, startups will need to find deep pockets to make long tenured investments since unit economics will take a long time to evolve," said Niren Shah, Managing Director and Head of Norwest Venture Partners India, an investor in Swiggy, which acquired Suprdaily for an undisclosed amount last year.

Consolidation in the sector also stems from the proposed entry of Flipkart and Amazon, which have the ability to sustain long period of cash burn to dominate the market.

"Hyperlocal delivery has also matured with a number of large e-commerce as also food tech players who have deep pockets and a strong logistics network. So the smaller players are finding it difficult to sustain the business. Unless they can add greater share of private labels and increase average order values, economics are difficult to achieve," said EY’s Pahwa.

While Amazon launched two-hour delivery service for groceries and essentials a few months ago, it has already committed to invest $500 million over five years to sell third-party and own private-label food products.

Flipkart’s board has approved an investment of up to Rs2,500 crore for its foray into food delivery business.

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