Rise of tier-II online shoppers. Can they change Indian e-commerce?

Several new-age companies in e-commerce that have exposure to tier-II markets and beyond have snapped up funds in recent times to expand.
Several new-age companies in e-commerce that have exposure to tier-II markets and beyond have snapped up funds in recent times to expand.

Summary

Only about a quarter of India's 720 million online users had actively engaged in e-commerce transactions, representing the vast opportunity and addressable market for newer players to cater to.

Bengaluru: Ecommerce action is shifting to the country's hinterland as internet networks proliferate, fuelling aspirations. New-age e-retailers such as Rozana and Floryo have sensed the mammoth growth potential in these small towns with a growing bulge of aspirational first-time internet users, as the ecommerce market stagnates in metros.

Investors are aware of this shift, and betting on firms that have moved in aggressively to serve a rising customer base in tier-II towns and beyond that is value-conscious, but unwilling to compromise on experience.

A report by market research firm Nielsen estimated that only about a quarter of the 720 million online users (as at the end of December 2022) in India had actively engaged in ecommerce transactions, representing the vast opportunity and addressable market for newer players to cater to.

Commerce-tech platforms that have exposure to tier-II markets and beyond, which have snapped up funds in recent times, include Rozana, an online store for India's rural consumers, Floryo, which specializes in made-to-order, fresh and functional Indian staple products, and SuperK, a fast-growing supermarket chain that operates in the tier-3 towns and beyond.

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"There are many Indias, they are all aspirational, want to move up and are willing to pay but and each of them needs a specific approach," venture fund India Quotient's partner Kanika Agarrwal said, adding that the new companies need to solve unique problems that the bigger giants cannot solve.

"There is no visible gap between a tier-I city vs tier-II/III and if there is, then that gap is bridging faster. The only difference in the consumption attitudes is people in tier 2 and beyond are very price conscious and value seeking," said Manohar Kumar, founder and CEO of Floryo, which has ambitions to expand into smaller towns.

Agarrwal explained that uptick in internet transactors in tier-II areas and beyond has become more visible in recent times as e-commerce in the metro cities has become quite saturated and, therefore, growth has slowed in the big markets. This can be seen in the funding appetite and financials of such startups that have significant operations in the semi-urban and rural areas.

For instance, rural commerce startup Rozana raised about $22.5 million from Bertelsmann India Investments, Fireside Ventures and existing investors last month. 

Many of these new ventures offer assisted commerce, whereby they help new price conscious consumers navigate online bookings through group orders.

"The revenue generating opportunities [for these first-time players] lie in unlocking the first layer of consumers that are yet to transact online, through a model of assisted commerce, which Rozana has successfully implemented in over 12,000 villages in UP and Haryana," Kanwaljit Singh, founder and managing partner of Fireside Ventures, told Mint

Rozanna's platform shares deals with customers in tier-II towns and beyond and helps them place online orders through peer partners that assist them in the process.

With more examples like Rozana which are coming up, Singh explained that people are increasingly placing faith in using e-commerce to fulfil their household needs beyond metro cities fueled by rapid growth in internet connectivity, aspiration and digital and physical infrastructure.

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SuperK, which runs a chain of mini-supermarkets, not only uses technology for its own business but has also tied up with entrepreneurs in semi-urban and rural areas to help them streamline their business by providing expertise in areas such as procurement, logistics, branding and reaching out to the targeted customers.

Much like Rozana, SuperK is also experimenting with a consumer-facing app to help users track offers and deals. The app, which will serve as an information tool for customers, will also drive store traffic, SuperK's co-founder Neeraj Menta explained.

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Last month, the company raised about $6 million led by Blume Ventures among others. "Folks like SuperK who are organizing retail are giving that first-time experience to the consumers in these areas to have an active role in decision making and helping local entrepreneurs in tier-II and III towns to build profitable retail businesses," said Vikram Gawande who co-led the investment at Blume.

Value conscious

Besides commerce-tech models that enable users to transact and interact with online channels, there are a host of social commerce platforms (which sell products through social media) and direct-to-consumer (D2C) players like Floryo and Citymall which see high potential operating in these markets. Another early mover, DealShare also organized group buying in small towns to attract first-time customers.

In FY23, social commerce startup Citymall saw its revenues from operations more than double to 352 crore. Citymall, which runs awareness campaigns through Facebook and Google Ads, uses Hindi as the language medium to communicate with its target group. These customers who on an average order about 3 times a month typically earn about 20,000- 40,000. 

Barring fresh fruits and vegetables, the platform sells everyday essentials and has a one-day delivery time. It sees maximum demand for products like fast foods, chips, biscuits, atta, sugar, maida, etc.

Citymall, which has about 400,000 monthly transacting customers are present in about 25-odd cities in rural and semi-urban areas. Over the last two years, the company has seen its average order value increase to 430-440 from 350-380 as it added both customers and products, an industry executive said, requesting anonymity.

However, not all is rosy in this sector as capturing market share for groceries from so-called kiranas, or neighbourhood stores, has been quite a tricky task. 

Citymall in the last few years has laid off multiple employees to pare costs, while Dealshare, which started as a social commerce app, has tried to pivot to a broader model resembling an online supermarket banking on offline stores.

With several operational ineffeciences that began to creep in with Dealshare's expansion to eight states in a span of three years, the Jaipur-based company saw its FY22 loss widen manifold to 1,933 crore from 237 crore a year earlier.

That said, business-to-consumer models have seen smoother progression than business-to-business models, as evidenced by the performance of companies such as Citymall that have grown revenues with comparitively lesser cash burn.

Floryo, a typical direct-to-consumer venture that currently operates in Bengaluru and Hyderabad has plans to expand to Pune, Mysore, Coimbatore and Mangalore shortly. However, the company is still at a testing stage and is evaluating demand and consumer dynamics to understand the depth of markets in tier-II cities and beyond.

Backed by investors such as 3one4 Capital, Licious founders Vivek Gupta and Abhay Hanjura, and fintech startup Cred's founder Kunal Shah among others, Floryo provides freshly made daily household staple items notably wheat flour, on its platform. It also provides a variety of whole grain flours, including beneficial multigrain flours, customized multigrain flours, diabetic care, cholesterol care, keto friendly.

Players like Floryo and Citymall also aim to benefit from those sections of consumers who are already introduced to e-commerce transactions by bigger giants such as Amazon, Flipkart and Tata-backed BigBasket.

"With democracy of information in tier-II/III areas, consumers are becoming more aspirational with their purchases." Floryo's Kumar said, adding that the company may get about 30% of its revenues from tier 2 and beyond.

3one4 Capital's Nitya Agarwal also agreed with the assessment that new brands with unique value propositions are seeking customers in areas beyond the metros as their wallet sizes have also expanded with the onset of UPI transactions. 

In her conversations with over 100 brands, some prominent and some new, she said that most have seen 40-50% demand coming from beyond tier-I, underscoring that the next leg of consumer growth in India will be driven by users who represent the thriving middle-income category from these areas. 

"A large number of first-time users are seeking such value-based products which paves way for more such brands to make segway into these areas and newer categories," Agarwal said.

However, some startups that cater to a niche market may choose to run as an offline model. One such example is Lightspeed backed Sumosave which aims to solve the grocery problems for consumers, starting with East India. 

“They are building an omnichannel value retailer, the closest equivalent of which could be DMart but for a very different store size format, which suits this area," Rahul Taneja, partner at the VC firm said. 

“The average demographic and buying behavior in these geos is very different and companies like Sumosave are essentially serving customers who spend a large percentage of their monthly expenses on groceries and are therefore deeply value seeking," Taneja added.

 

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