Hari Menon is a speaker at the forthcoming RAI Retail Leadership Summit: RLS 2013.
This is Hari Menon’s second innings with grocery retail. Let me start by telling you about the first.
In 1999, a team of 5 professionals - including Hari Menon – launched Fabmart.com. The website started with selling music and books, followed by toys, jewellery and finally, groceries. Grocery was slow to take off online. In the meantime the company had set up an elaborate supply chain for the same, so the grocery offer was taken offline and the company set up Fabmall stores. Later, in 2004, on persuasion from its investors India Value Fund , Fabmall merged with Trinethra, a Hyderabad based grocery chain. A few years later, the combined entity was sold to Aditya Birla Group and re-christened “More” . At this point the company was running 200 stores in 4 south Indian states. Separately, the online business was renamed Indiaplaza.com. This continues to operate as an online shopping mall, and the five founders still remain shareholders
That was then. In September 2011, with encouragement from TutorVista’s K. Ganesh and Meena Ganesh who came in as angel investors, the team of 5 got together again to launch the grocery e-tailing business BigBasket.com. RA spoke to Hari Menon who had the following to say :
RA: The online grocery store did not work 10 years ago. Why do you believe it will work now ?
HM : Things have changed a lot in the last decade. Firstly, the quality of connectivity has greatly improved. Then internet-on-the-mobile has ensured that the user has online access 24x7. And last but not the least, the reluctance of the consumer to swipe the card on the net has reduced. At the same time traffic and parking has only become worse. And let’s face it, grocery shopping is very routine. There is no pleasure in the experience really. You drive, negotiate traffic, park, buy what you need, lug the bags first to your car and then up some flights of steps to your home. And this chore gets repeated once or twice a week. For the time strapped professionals of today, going online to do their regular grocery shopping is just the easier, smarter choice. As a result in 7-8 months we have achieved a size of business that took us 3-4 years the last time around. For your information, of the international models that we watch closely, namely - Tesco, Okado and Fresh Direct - 2 are online-only models.
RA: Who is you Customer ? How have you reached out to them ?
HM : Our marketing spends have been low. We are largely dependent on word of mouth. In Bangalore and Hyderabad we have been targeting clusters of buildings/ gated societies. We do events, distribute fliers, and convert a couple of people. After that the word spreads. Residents of societies are normally connected on an intranet as a result good news goes viral. For instance someone put us up on the Bangalore IIM Alumni website. So long as we can deliver – going viral is good for business. The bad news is that if we mess up – there is a danger of that going viral too.
The only above the line activity we have done is radio which has also worked well for us.
At the last count, 80% of our customer was female. Presently we cater to planned buy / party buy/ weekly buy. We don’t cater to impulse. We cannot deliver in 2 hours e.g. if you want something right now. For that you will still need to visit the closest supermarket. But we will get there eventually.
RA: The barriers to entry in the online space are low. As result there are a number of players who are entering this space. What differentiates you ?
HM: This is not a small player’s game. A number of online sites have come up with local retailer tie ups. But local retailers do not have sufficient margin to share. For the business to succeed you have to get the margin directly from the brands. Also you have to have scale so you can optimise on logistics by ensuring you get maximum deliveries per delivery run of the vehicle.
Additional note : As per information available on the Bigbasket site, RA learnt that the company has chosen to own the last delivery mile. They have their own fleet of GPS enabled vans and are working on a hub-and-spoke model where all the goods will be bought and stocked in a warehouse which further supplies to the hubs. In Bangalore for instance they have 3 hubs– in Whitefield, Kanakpura and Yeshwantpur – which covers the entire city. From there, the delivery executives (called customer experience managers) deliver the goods in four time slots – 7 am-9 am, 11 am-1:30 pm, 3 pm-5 pm and 7 pm-10 pm.
RA: What does your present score card look like ?
HM : Our current run rate is about 800 orders per day with an Average Bill Value (ABV) Rs 1200- 1250. A typical supermarket does an ABV of Rs 400- 500 with the better stores achieving Rs 800 – 900.
Our business becomes attractive when we start doing 1200 – 1500 orders /day/ city. At this point the business becomes operationally Ebidta positive. Currently the size of business presently (annualised figure ) is between Rs 30 – 35 crores. Our offer in Bangalore is 12 months old, Hyderabad is 3 months and Mumbai 1 month. Our HO is in Bangalore.
So far we have achieved 99.3% on time delivery. Presently we have time slots within which we promise delivery. At the next stage we hope to be able to specify the expected time of arrival within the time slot. And yes, the branding on vehicles – we have 40 vans in Bangalore - also helps spread the word on us.
RA: Supermarkets typically work with a net profit of 3-4%, does the online model offer you a higher return.
HM: Yes, we are aiming for a GP between 20 – 23% and net profit between 5- 7%. There are a number of reasons we believe this is achievable. For instance, we have our own private label in staples which allows us higher margins. Fruits and Vegetables contributes 20% of the business. Here also the margins are set by us.
Besides growing the GP we also have some margin advantages as an online model such as no shrinkage, while the brick and mortar stores have shrinkage as high as 2%. – 4% which goes straight from the bottom line. Also while our logistics costs are high, our costs on rentals are low. Not having stores, further helps us save on cost of utilities – electricity, telephone etc.
Additional note :As per information available on the Bigbasket site, RA learnt that the company currently sources staples from the mandis which is routed through a supplier who cleans and packages those. From mandis, they plan to move further down the supply chain to the mills, and that is how the margins are expected to rise. One category, which is expected to be a big differentiator is fruits and vegetables. The company has a farm-to-home concept where they intend to get the produce directly from the farms, without the intermediaries. In the initial phase they have been working with Safal but over a period of time they plan to build a network of farming bodies that will help them ship directly to buyers. Another growing category is seen as frozen meat and dairy products and also FMCG foods and non-foods (toiletries and personal care). Presently they deal with the distributors in these categories, including Metro Cash & Carry. But once volumes start building they will approach the brands directly. Alongwith introducing private labels in categories like jams and pickles.
RA : The challenges of the business ?
HM: One thing that has not changed in all these years is the inefficiencies in the supply chain.
But that is a universal challenge. There are other challenges which are specific to our online format.
Challenge 1 : in the online space people expect 100% fill rate. If even 1 item is short they crib that they have to now go to the market. Whereas if they were buying offline they could look for substitutes or go to another store.
Challenge 2 : QC pick errors. The picker picks and packs the wrong product. However, this has now been addressed. We have invested in special scanners which record the order and if the picker scans the wrong product the scanner shows the error.
Challenge 3 : Presently when we send goods the delivery boy is taken straight into the kitchen. This has its own requirements. To minimise the time spent, the uniform for the delivery boys is sandals since these are easy to slip out and slip in. It also saves the danger of smelly socks ( retail is detail!). The delivery is done in open cartons., not plastic packets. But still the process takes time and the delivery boy is held up till the process is completed. We now want to tell the customer that they should trust us on account of our sophisticated systems. If there is a problem that arises, call us and we will give a refund. The purpose is to save time for the delivery boys.