Athira A. Nair, Yourstory

Bengaluru, 5 February 2016

Till a couple of years ago, the idea of hyperlocal services in Tier II cities would have been unthinkable. The whole point of hyperlocal services is instant gratification. A comparatively slower pace of life, poor Internet penetration, and a reluctance to adapt technology were expected to be roadblocks for such services. But the startup boom that India has witnessed over the past few years has ensured that some daring entrepreneurs have ventured into these untapped markets beyond the metros.

Of course, this does not mean that they have had a smooth ride. The biggies who entered Tier II cities have had to remodel themselves, while local startups are struggling to find funding for scaling. Then, there were other setbacks. Online grocery app Grofers pulled out of nine cities– Ludhiana, Bhopal, Kochi, Coimbatore, Vishakapataman, Mysore, Bhubaneshwar, Nashik, and Rajkot – in January 2016 due to lower-than-expected uptake. A few weeks ago, restaurant discovery and food ordering platform Zomato also shut down its online ordering service in four Tier II cities – Lucknow, Kochi, Coimbatore, and Indore – owing to the small market there. Understanding the market and devising strategies for each city have proved essential for the survival of these players – whether it is in online groceries, or logistics, or tech-based service providers.

Tier II has its own advantages…

An undeniable advantage in Tier II cities is that the market is unorganised compared to Tier I cities. But B2B logistics will grow regardless of who runs the consumer-facing show. Puneet Chauhan, Business Development Manager at Bangalore-based logistics startup Parcelled, says: “The Tier II market is untapped except for in FMCG. Of course, logistics is always in demand in metros and Tier II cities, but customers are very loyal in Tier II cities.” Parcelled gets about 10,000 orders via B2B and B2C logistics services from the four Tier II cities they serve in. They provide intercity and intra-city services for their clients, which include e-commerce majors like Flipkart, Jabong, Zivame, Lenskart, and Paytm.

However, in the B2C business, the one factor that boosts hyper local services in Tier II cities is the growth of the city, bringing in a more urbane tech savvy population. Kerala’s capital city Thiruvananthapuram had the first IT park in the country, yet it has no shopping malls. Shan M Hanif, Co-founder of online grocery store Kada, says: “The techie population must feel a bit lazy after a hectic week at work; but since there are not a lot of options for outings, they do grocery shopping on some weekends. However, they prefer ordering online on weekdays.”

Coincidentally, Hubli – a Tier II city and the largest after Bangalore in Karnataka – has also seen hyperlocal startups mushrooming. The city is awaiting an international airport; yet labour is 70 per cent cheaper than Bangalore. Three-month old startup Freshboxx – which delivers organic fruits and vegetables to the customers’ doorstep – has had the advantage of a cheaper labour force too. Founder Rohan Kulkarni says: “We could move to metro cities too, but there are many hyperlocal startups already. I first want to move to other Tier II cities – namely Belgaum, Dharwad and Karwar – and then Goa, where nothing is really cultivated.”

…and disadvantages

Despite the growth in industry and economy, startups in Tier II cities still face basic problems. Devangshu Dutta, Chief Executive at Third Eyesight management consultancy, says: “Smaller cities often lack the demand concentration that is needed to create a critical mass, which can over time provide the foundation to build a profitable business. It’s a long runway of growth (rather than a rocket-launch), as consumer demand grows across the country over the next decade, and online transactions become more common.”

According to Saurabh Kumar, Co-founder of online grocer Grofers, although Tier II cities have potential, it will take time to grow to accommodate multiple players. “Currently, it is in a nascent stage as people still prefer to go shopping themselves. We might go back [to Tier II cities] after some time; but even then, it is not likely that the customer behaviour will change to shop only online or only go out,” he says. Incidentally, Zomato had also said that they would re-launch in the cities where they have shut down “when the time is right.” He added that the assortment of products is important in getting the customers’ attention. Grofers is now standardising their inventory, with their merchants ensuring separate stock in every city.

The key to the success of these services, of course, is customers being willing to shop online. Tanutejas Saraswat, CEO and Co-founder at ShopKirana, Indore’s first e-grocery portal, says: “The change of behaviour among customers was difficult to bring about. But since expenses are generally low here, we are able to provide lower prices with no losses.” Curiously, Fresboxx gets orders on their website with payments made in Bangalore for delivery in Hubli. “People who live in metros get it done for their family in Hubli. About 250 orders out of 600 in a month comes in this category,” says Rohan.

But for long-term success, Devangshu says hyperlocal web platforms need to rapidly build critical mass, not only on the consumer side but also in terms of merchant-recruitment. “Both these are expensive and resource-intensive, which few companies can manage together, while also building fulfilment capabilities that are cost-efficient,” he adds.

Marketing strategies: to each one’s own

In hyperlocal services, marketing strategies depends on each city’s consumer behaviour. According to Big Basket Co-founder Hari Menon, it is a matter of convenience vs assortment. He says: “In Tier II cities, people are looking forward to going out – including grocery shopping. The convenience factor does not work there. So what can drive online grocery service is a range of items that they have to go outside the city to buy.” Hari believes that Tier II residents are quite aspirational, and money is not a constraint for them. Big Basket’s express delivery service, which delivers in an hour in Tier I cities, is not available in Tier II cities. Their best performing Tier II city –Mysore- gets 150 orders daily.

Additionally, while the primary mode of marketing in metros is newspaper ads and hoardings, direct interaction with customers would work better in Tier II cities, says Saurabh. For making even the lower income classes comfortable with the idea of buying online, vernacular content will help. In fact, Freshboxx is now building its app, which will be available in Kannada, Hindi, and English.

However, e-commerce’s major attraction –discounts- may not work in grocery and food tech. For instance, in Kerala, customers seldom care about discounts. Shan of Kada says: “They look for the best quality and customer service. Localisation is essential here as the online buzz is not as great as it is in metros.”

For logistics player Parcelled, marketing is not a headache. Puneet says: “Our customers are not comfortable with apps; so our marketing channel is the good old telephone. In addition, we let them choose a convenient time for last mile deliveries and reverse pick up – even on Sundays – in Tier I and Tier II cities.” The best performance among its Tier II cities is in Surat, which boasts of large-scale textile industry.

Funding troubles

The one big trouble bothering all the hyper local startups focused on Tier II cities is the lack of sufficient funding. Kada aims to focus on Tier-II and Tier-III cities, with an initial plan to expand in Kollam, Kochi, Thrissur and Calicut – since these cities require lesser investment and personnel, and then other South Indian states. But despite being the only player in the sector in Kerala, raising series A has been a hard task for them. Shan says: “They need more traction; so we are launching some new deals by March, and building on our tech-side too. Hopefully, they will see the potential then. We already get about 1,800 orders a month.”
Rohan of Freshboxx also says that they are now struggling in a non-responsive market, and hence are outsourcing each order for cost cutting. “We need serious funding to scale up in Tier II and Tier III cities,” he says. Being a pioneer in the field, Rohan hopes, will give them an advantage. “We are the only player here providing fresh, germ-free fruits and vegetables. We have even educated our farmers on this,” he says. He claims that cost of customer acquisition is zero, and 90 per cent are repeat customers.

It is a classic tale of survival of the best, it seems. “Over the last year or so, investors have turned skittish about pouring in funds into businesses that have no demonstrable path-to-profit,” says Devangshu. He adds that most of the current hyperlocal providers won’t survive, unless they change their business models. Customer re-acquisition also cost a lot, he says. “Discounts may not get loyalty – quick, reliable delivery will.”

(Published in Yourstory)

The Economic Times
Mumbai, 2 February 2016

The firm’s accumulated losses stood at nearly Rs 5,320 crore after eight years of operations.

Experts said gestation period in the highly competitive food and grocery retailing could be long and depends on expansion. “Consumers in this segment can be quite fickle and Aditya Birla Retail (ABRL) has been through several iterations in its retail model to make it work,” said Devangshu Dutta, chief executive at retail consultancy Third Eyesight.

“While losses have come down as a percentage of sales, they still have to find balance in terms of store location and margin mix,” he said.

ABRL closed FY15 with 482 ‘More’ branded supermarkets and 16 hypermarkets, covering about 2 million square feet of retail space.

The group entered retail space in 2007 after it acquired Trinethra Retail, which it merged with ABRL two years ago.

A year ago, the group restructured its retail business by carving out the apparelmaking Madura Fashion and Lifestyle division from Aditya Birla Nuvo Ltd (ABNL) and merging it with listed loss-making Pantaloon Fashion and Retail Ltd. This created the country’s largest branded apparel company by sales and number of stores. While it was widely speculated that Birla would bring its loss-making supermarket format ‘More’ under the new entity, the company said it had no such plans. Unlike food and grocery retailing that operates on wafer-thin margins, apparel retailing is a lucrative business with margins as high as 30%.

However, ABRL is gradually reducing its store-level profitability. Loss before interest, tax, depreciation and amortisation at Rs 163.96 crore during FY15 was 30% less than the previous year.

Ruchi Sally, director at retail consultancy Elargir Solutions, pointed out that several of ‘More’ stores “are in small towns where being profitable takes a bit longer”. Also, the market in top cities are highly competitive with D’Mart, Reliance and Future Group holding most of the market share, she said.

Retail baron Kishore Biyani’s Future Group last year merged its retail business with Bharti Retail to create one of the biggest supermarket chains with Rs 15,000 crore turnover. Mukesh Ambani’s Reliance Retail had reported profit before depreciation interest and taxes of Rs 784 crore last fiscal on revenues of Rs 17,640 crore.

(Published in The Economic Times)

Madhav Chanchani, The Times of India
Bengaluru, 28 June 2016

If traditional retailers weren’t so busy creating digital avatars to take on their new-age rivals, they might have noticed online stores gaining a firm foothold in their territory, one store at a time.

Some of India’s largest online stores including baby products retailer Firstcry, eyewear brand Lenskart and furniture marketplace Pepperfry are beginning to see significant contributions to revenue and bottomline from their physical stores.

“We get significant revenues from our offline business and we are already EBITDA-positive (profitable from core operations) collectively,” said Supam Maheshwari, chief executive of Firstcry, declining to disclose specific numbers. Firstcry was among the earliest online retailers to open offline stores in 2012.

Encouraged, online retailers are preparing to rapidly expand their offline presence in the coming years, opening a new front against traditional brick-and-mortar stores that are struggling to wrest similar success online. India’s largest business groups including Reliance Industries and Aditya Birla have launched online apparel stores in the past year, and Tata Group’s jewellery and watches brand Titan Company is acquiring online jeweller Caratlane.

Firstcry and Lenskart have opened hundreds of stores through franchisees, boosting their sales. The physical stores of companies like Caratlane and online lingerie retailer Zivame function more like showrooms, tending to be smaller than those of their brick-and-mortar peers as they keep limited products and use a central inventory.

More importantly, building a physical presence helps these retailers tap those millions of customers who are still uncomfortable shopping online. Take, for instance, a Firstcry customer who recently posted on the company’s website that ‘Aloe Veda Castor Oil’ was not available at its Ernakulam, Kaloor franchisee in Kerala.

She urged Firstcry to make it available at that store so she could purchase it as “I don’t like online shopping.” To capture these customers, Firstcry plans to ramp up its offline presence to 700 stores in 3-4 years from about 170 now.

“We have seen that offline customers are also transacting online and vice-versa, so joint cohorts are much higher,” said CEO Maheshwari. Cohorts is repeat customer purchase, which helps measure if a company is making a profit on each acquired customer, a metric closely watched by investors.

Firstcry’s offline network is already bigger than its competitor Mahindra Retail’s Babyoye, which was known as Mom & Me before Mahindra group acquired online baby products retailer Babyoye in 2015. Babyoye, which runs 115 owned stores, has announced plans to open new stores through the franchisee route like Firstcry.

Mom & Me made revenue of Rs 210.5 crore and net loss of Rs 118.9 crore in fiscal year 2015, according to Mahindra & Mahindra’s annual report. Firstcry reported revenue of .Rs 118 crore and loss of .Rs 63 crore for the same year. As for Pepperfry, which plans to double its store count to 16 this year, “offline stores are the best marketing channel we have started,” said CEO Ambareesh Murty. “It helps us provide that reassurance to customers that we are a specialised player and translates to trust in the brand.” Also, customers walking into physical stores tend to purchase more often than online buyers and at a higher average price, he said.

Pepperfry opens stores based on customer purchase data of the previous 24 months, which helps it zero in on pin codes with high customer density. By opening stores in such areas, it is also able to drive supplychain efficiencies as more orders from an area translate into lower average cost of delivery.

“These players are already established leaders in online space. The question they are addressing is how do you redefine the market to grow be-cause only 5% of Indian customers have bought online,” said TCM Sundaram, managing director at IDG Ventures India, an investor in Lenskart, Firstcry and Zivame.

Online shoppers in India are expected to increase from 50 million to 150 million by 2020, according to a recent report by Google and AT Kearney, adding that not having an omni-channel presence in categories like consumer electronics, home furniture and personal care could cause retailers “to lose out on 20-30% of potential buyers.” Experts spout the adage that retailers need to be where the customers are rather than choose one basket.

“The retail business is not divided in black-or-white between old-world physical retailers and the upstart online kids – at least the consumer doesn’t think so,” said Devangshu Dutta, CEO at retail consultancy firm Third Eyesight.

Some online retailers agree. “The idea is to create an eyewear brand, and channels keep changing. We want a store in 372 towns in India that have a population of over 50,000,” said Peyush Bansal, CEO, Lenskart.

The company has 200 stores from where customers can book products and pick up later from the store or get these home delivered. The company charges a franchisee fee and pays a commission to store owners on each sale, while it manages the inventory and customer experience. It plans to expand to 400 stores by the end of the year. Lenskart, with annualised revenue of about Rs 300 crore, is targeting Rs 2,500 crore revenue in the next four years. Bansal expects the physical stores to contribute about half the revenue in the next two years. Lenskart competes with Titan’s eyewear business, which earned net revenue of Rs 372 crore in fiscal 2016 from its 404 stores.

(Published in The Times of India)

Sapna Agarwal, MINT

Mumbai, 21 January 2016

Mahindra Retail, a part of the $16.9 billion Mahindra Group, will sell products of US kidswear firm Carter’s Inc. in its chain of BabyOye stores across India and online, the company said on Wednesday.

This will be Atlanta-based Carter’s third attempt at establishing itself in the Indian kidswear market.

Mahindra Retail plans to open 40 so-called shop-in-shop BabyOye stores—where a brand owner or retailer takes space in another retailer’s store—in 15 cities across India in 2016.

In the past, the OshKosh B’gosh kidswear brand, which Carter acquired globally in 2005, tried to make inroads in the Indian markets, first in the 1990s and then in 2008.

“With OshKosh B’gosh it had adopted a premium positioning which did not work in India as kidswear is a competitive segment with well entrenched local players,” said Devangshu Dutta, chief executive officer, Third Eyesight, a retail consultancy firm. According to him, getting the pricing and product right is important in this segment.

Now, Mahindra Retail and Carter’s have entered into a buy and sell arrangement. However, the two companies are looking at partnering beyond the agreement to create the look and feel of the Carter’s retail experience in India, said Prakash Wakankar, chief executive officer, Mahindra Retail.

Also with this partnership Carter’s is hoping to make the brand accessible to India. “We don’t anticipate any pricing discrepancy. We plan to make the brand accessible and have great value offering,” said Keving Corning, Carter’s executive vice-president (international). He did not rule out the possibility of bringing OshKosh B’gosh back to the Indian market in the future.

The Carter’s range will start at Rs.600 and go up to Rs.2,500 and will be available for the just born to 24-month-old toddlers in the brick and mortar stores. Online the company will have products for up to seven-year-olds.

(Published in Mint)

Sagar Malviya, The Economic Times
Mumbai, 19 January 2016

Fabindia Overseas has crossed Rs 1,000-crore sales mark to become the largest retail apparel brand in the country, significantly ahead of nearest rivals Zara and Levi’s India.
During 2014-15, the ethnic wear firm posted a 12% rise in consolidated sales at Rs 1,148 crore with 36% increase in profit before exceptional items at Rs 112 crore. Its domestic business grew 25% to touch Rs 767 crore ahead of largest fast-fashion brand Zara that clocked sales of Rs 720 crore during the same period.
"Customers are moving to one of two responses to retail. Either they are responding to products as commodities, or investing in curated products and experiences. We will continue to focus on the quality of our design and curation," said William Bissell, managing director at Fabindia, which runs more than 205 stores in India. The company also attributes its success to a policy of no discounting and instead build a sustainable cash flow.
Founded in 1960 by Bissell’s father John Bissell to market craft traditions of India, Fabindia started out as a company exporting home furnishings. The first retail store was opened in Greater Kailash, New Delhi, 15 years later. In mid 1990s, William Bissell took over the company.

The company added the non-textile range in 2000, while organic foods and personal care products were launched nearly a decade ago. Experts said the brand, which has expanded its portfolio over the years, has been finding acceptance among younger consumers since the last decade, a new development in a category earlier largely restricted to older buyers.
"The brand has been consistent to its core and they have been adding newer categories to remain relevant and also earn higher margins," said Devangshu Dutta, chief executive at retail consultancy Third Eyesight. "The challenge is to continue the momentum since their sourcing is dependent on thousands of craftsmen instead of a few large manufacturing units."
Ethnic wear, a segment still mostly fed by the unorganised segment, has been growing at an average of more than 10% a year over the last decade.

Leading department chains such as Shoppers Stop, Lifestyle and Westside are increasing the width of their private label range and offer contemporary styling in the ethnic space, fuelling growth. The ethnic wear segment is also seeing a lot of aggressive expansion from newer players both in online and brick-and-mortar space, something that could hurt Fabindia’s growth prospect going forward. For instance, Kolkata based Manyavar, which had just one store till 2008, has more than 400 stores across the country now and is expanding its portfolio from wedding and special occasions to everyday clothing.

Fabindia, in comparison, opened eight stores last fiscal and has added 14 doors in the current financial year. ET, last month, reported that the private equity arm of Louis Vuitton Moet Hennessy (LVMH), plans to sell its 8% stake in Fabindia.

(Published in The Economic Times)