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Swiggy has expanded into grocery with Swiggy Stores and hyperlocal delivery with Swiggy Genie.
Swiggy has expanded into grocery with Swiggy Stores and hyperlocal delivery with Swiggy Genie.

The fall and rise of startups in the hyperlocal delivery space

Investor appetite for hyperlocal delivery space is far from satiated, with $533 million invested so far this year, following $286 million last year and a whopping $1.7 billion in 2018, according to Tracxn data

PepperTap, Opinio, TinyOwl, Foodpanda India—well-funded hyperlocal delivery startups closing operations in India are legion. Several ran out of gas and got picked off by bigger players—Runnr by Zomato, Scootsy by Swiggy, Grab by Reliance and Pickingo by Shadowfax, for example.

And yet, investor appetite for this space is far from satiated, with $533 million invested so far this year, following $286 million last year and a whopping $1.7 billion in 2018, according to Tracxn data.

The lion’s share of this has gone to food delivery startups Zomato and Swiggy, followed by significant funding for concierge app Dunzo, which raised a $28 million series E round recently after its $45 million series D last year.

Despite the ground littered with fallen startups, investors still see scope for smaller players. Hyderabad-based Laalsa, for example, raised $1.4 million in seed funding in May amid the pandemic, according to Tracxn.

“It’s not that a large startup can do everything better than an upstart. Smaller startups can grow in a niche or area that the big players may not care so much about," says Arpit Agarwal of Blume Ventures, an early investor in several hyperlocal delivery startups, including Dunzo, MilkBasket, Yulu Bikes and LoveLocal.

Funding challenges

Most of the players focus first on product-market fit, operational efficiency and scaling up. The likes of Swiggy have been burning investor money like there’s no tomorrow. Those who don’t get that kind of funding have a shorter runway to prove their value and fall by the wayside.

“The challenge is to make money on a per-transaction basis," says Agarwal. “Otherwise, you will bleed fast because there are hundreds of thousands of such transactions in a month."

This challenge is accentuated in India because customers, used to dropping in to neighbourhood stores and vegetable pushcarts delivering fruits and vegetables to their homes, are unwilling to pay anything more than the bare minimum delivery charges.

So, for unit economics to work for a hyperlocal delivery service, key metrics are the average order value and the number of orders per delivery person. A higher order value raises the margin, while quick turnaround for delivery lowers the cost.

Dunzo, for example, calculates the number of orders per kilometre to decide whether to keep serving a PIN code. About 500 orders per kilometre makes economic sense. Anything less would mean delivery persons are covering longer routes, which makes it uneconomical.

“Density is an important notion in on-demand businesses because economies of scale can come into the picture," says Agarwal. “And density depends on capital to some extent, the entrepreneur’s endurance and the demand of the service in that hyperlocal area."

The second main challenge is that they all rely on gig workers, because hiring permanent delivery staff would be impossible to manage in such a fluid business. Not surprisingly, delivery personnel cannot be expected to be loyal and they are ripe for poaching by rivals. This means an ongoing headache of constant recruitment and training, which adds to costs.

“The quality of people who can deliver things from point A to point B is still a big challenge," says Deepak Ravindran, who founded one of India’s first concierge apps, Lookup, in 2014, which connected consumers to local businesses over chat. It had big backers and got acquired by NowFloats in 2016. “When we were running Lookup, we got dependent on companies like Roadrunnr for providing a quality delivery experience seamlessly. Even today, that kind of support is a big thing to have, like a delivery API (application programming interface). Payment, which was also a big issue for us, got sorted because of UPI. But even now hiring good people is difficult, and you can’t keep relying on discounts for stickiness with customers."

Growing demand

Despite these challenges, the hyperlocal delivery space has seen vigorous action in the year of the pandemic, when the demand for home deliveries went up. Swiggy has expanded into grocery with Swiggy Stores and has a hyperlocal delivery service Swiggy Genie as a counterpoint to Dunzo.

A thumbs-up for this space came from a recent Goldman Sachs report that forecast Ebitda (earnings before interst, tax, depreciation and amortization) profitability in FY2022 for the leading players, as they “turn incrementally more constructive".

It’s a constant balancing act between going after scale and expansion, to keep up with rivals or ward off new competitors, while learning to become profitable. Dunzo, for example, claims to have turned profitable in its main city Bengaluru this year, but has at the same time expanded to seven other cities where the road to profitability remains foggy.

Sumit Chakraberty is a Consulting Editor with Mint. Write to him at chakraberty@gmail.com

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