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The hard thing about selling groceries online

Hari Menon, co-founder of BigBasket, tested and proved his theory that the biggest factor in grocery is delivering everything on the customer’s list.raj sam/mintPremium
Hari Menon, co-founder of BigBasket, tested and proved his theory that the biggest factor in grocery is delivering everything on the customer’s list.raj sam/mint

  • How BigBasket’s Hari Menon resisted the pressure to pivot, stuck to an inventory-led grocery model, and was vindicated
  • If a customer can’t fill a basket with everything he needs, he will go to another store, online or offline, and buy everything there

It was a time when Tiger Global came roaring into the e-commerce scene in India. The US investment firm led an unprecedented billion dollar funding round in Flipkart in the summer of 2014. It was eyeing other internet businesses like classifieds, real estate and online grocery.

Apart from the billions in its own coffers, Tiger Global hunted in a pack with other mega investors like Japan’s SoftBank. Such aggressive funding and the rapid scaling it enables could shut out rivals. So, when Lee Fixel and Kalyan Krishnamurthy of Tiger Global sought a meeting with the founders of India’s online grocery leader BigBasket, they knew what was at stake.

Saying No to Jugaad, a book about BigBasket’s journey released last week, recounts what transpired in a cramped room at the online grocer’s old head office in Indiranagar, Bengaluru, on a drizzly day in the monsoon of 2014 : “Five minutes into the meeting and it was evident that BigBasket’s asset-heavy model didn’t appeal to the duo," write the authors, BigBasket’s HR head T.N.Hari and analytics head M.S.Subramanian. “At the end of the meeting, Lee and Kalyan communicated in an oblique way that new asset-light models, which made sense from a scaling perspective, would prevail."

For Hari Menon, co-founder and CEO of BigBasket, it was a test of his conviction that grocery had to be more inventory-led—and therefore asset-heavy. His earlier experience in retail as a co-founder of Fabmart and its offline sister Fabmall, which the Aditya Birla Group bought in 2006 and rebranded into the More chain, had convinced him of this.

Still, it tested his resolve when tons of money was seeking an asset-light model. A few months after Fixel’s meeting with Menon, Tiger Global led a $10 million funding of Big Basket’s young rival Grofers, which already had backing from Sequoia Capital India. Such a large series A round was a new phenomenon in India, but more was to follow—a $35 million series B came two months later in April 2015 followed by a series C round of $120 million led by SoftBank in November of the same year.

First Principles

“The announcement of significant funding to Grofers led to one or two very interesting weeks for us," recalls Menon in a chat with Mint at BigBasket’s large new HQ in Domlur. “It makes you wonder if there’s something in that model, which looks capital-efficient on the face of it". He went into a huddle with his co-founders. Board meetings followed. “We had to take a call on our thinking about the emerging model versus our inventory-led model," says Menon. “We had to pivot or stay the course."

In the end, the decision boiled down to a first principle. “We understood, having done this business for so long, that if you don’t have control over inventory, you’ll never get fill-rate right. And the single biggest thing in grocery is fill-rate," says Menon.

It means that if you can’t fill your basket with all you need, you will go to another store, online or offline, and buy everything there. “We have 99.5% fill-rate, which is globally the best," he says. Doing that required holding inventory across a wide range of SKUs (stock-keeping units) in warehouses with quality control checks. “Dark stores"—which are not open to the public and only fulfill online orders—took stocks closer to customers for faster delivery.

Post-fixel scaling

It’s much harder to achieve fill-rate, slotted delivery and quality control with an asset-light model that relies on picking up items from multiple stores instead of one’s own stocks. That Grofers subsequently moved into an inventory-led model with warehousing and dark stores was a vindication of the call that the BigBasket founders made in 2015.

But Tiger Global, SoftBank and Sequoia aligning behind Grofers that year did concentrate BigBasket’s mind on the one piece where an asset-light model could have an advantage: hyperlocal delivery. So it acquired logistics startup Delyver, which also added a fleet of bikes to the vans used for delivery. This accelerated the shift to “express delivery" in 90 minutes, supported by more warehouses and dark stores.

Simultaneously, BigBasket began to expand. From serving three cities in 2014, it jumped to ten tier-1 cities within a year. “That is when we brought in Shah Rukh Khan," says Menon, crediting the actor with a significant marketing push.

The expansion proved easier than anticipated because three years after its launch in 2011, BigBasket had nailed down the back end processes. “All ten tier-1 cities behaved identically." That allowed a cookie-cutter approach. But tier-2 was different. There BigBasket started with a smaller range, about a fifth of what it had in metros. The smaller cities were more price-sensitive.

Farmer connect

Expansion went hand in hand with ramping up backward integration with farmers to cut the supply chain and ensure the quality of fresh produce in particular. It has set up 37 collection centres around the country and sources 80% of its farm products directly from 8,500 farmers.

Fruits and vegetables, being perishable, are much harder to manage than other grocery. But they can also be the differentiator for an online grocer that is able to deliver a consistent quality across a wide range, catering also to the emerging demand for organic and exotic produce. “Quality perception comes out of fruits and vegetables, not soap which is a logistics game of delivering a standard pack," points out Menon.

The BigBasket way is to buy only from farmers registered with it. That’s different from the opportunism of buying from the farmer offering the best price. It builds relationships with farmers by offering price transparency and direct payment into bank accounts within a day. In return, it gets assured supplies and quality. It’s an ecosystem that takes time to build and can’t be replicated fast by a rival.

Express delivery, expansion, farmer connect, inventory—scaling up takes money. In August 2015—the year money started pouring into Grofers from Tiger and SoftBank—BigBasket announced a $50 million funding round led by Bessemer Venture Partners.

In March 2016, when the venture capital funding tap dried up in India after the “irrational exuberance" of the previous year, BigBasket raised $150 million from new investors.

Then Chinese giant Alibaba came in to lead a $300 million funding, preempting its global rival Amazon’s expansion into the grocery business in India. This year a $150 million round led by South Korea’s Mirae Asset-Naver Asia Growth Fund made BigBasket a unicorn.

Many an entrepreneur may have quailed when Lee Fixel walked away from the BigBasket office to pump money into a young rival. But to the grizzled veteran Hari Menon, who turned 58 this year, it was just the impetus BigBasket needed to leap to the next act in a grocery play that began for him in 1999 with Fabmart.

Sumit Chakraberty is a contributing editor with Mint. Write to him at chakraberty@gmail.com

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