Co-Founder and CEO of Bigbasket.com, Hari Menon, talks to Progressive Grocer about his company’s strategy to multiply its sales four-fold over the next year, plans to expand its footprint across the country with profitable growth and differentiated products, and its dream to sell organic products at normal prices…
What do you think are the competitive advantages that Bigbasket has over physical retailers?
We are launching a whole range of private labels. We have our own staples called Bigbasket Popular and Bigbasket Royal. We also have our own range of fresh produce called Fresho. Th is includes fruits, vegetables, organic and meat. We also have our own bakery that provides a whole range of products like pavs and breads, which are additive-free and chemical-free. These are also baked to order.
Then we have our own coffee brand, which is 100 per cent coffee and chicory-free. We get roasted beans from coffee estates in Chikmanglur and we have them ground to order from our own warehouse.
We have also started creating ready-to-cook recipe kits. At the moment we have around 35 kits, which help one to cook gourmet and international cuisines for portions sufficient for two to six people. We have called this product category the Happy Chef Brand from Chef Kraft. We plan to roll out these new product ranges across the country in the next three to six months.
There is a big difference when shopping online as compared to shopping at a physical store. We know our customers better. As soon as a customer purchases something online, we know what they have shopped for and how much they shopped for earlier. So we understand a customer’s profile when they are surfing through our pages. In fact, we go a step ahead by giving the customers what they like based on their shopping history on our site. We use analytics extensively. We can even predict what the customer’s next order would be based on that individual’s shopping history.
What have been your observations about the customer buying pattern on Bigbasket?
From the way we look at this business, the customer buying pattern reveals itself in three different ways.
The first is by way of a planned list, which is about things that a consumer buys once a month, usually staples. As a majority of such orders is very large, they are delivered in four-wheelers.
The second buying pattern is observed in the top-up list, which comprises items such as dairy, bread and other shortlife products that need to be bought more than once a week and which get delivered in two-wheelers. I would like to mention that we actually control the inventory ourselves and we do not go to a store. This way we meet all the norms discussed earlier and are also able to retain the margin since we buy directly from suppliers.
The third buying trend concerns customers buying from specialty stores, which are usually neighbourhood stores that a customer would swear by. It could be their favourite meat store or sweets store.
We plan to tie up with more such stores and bring them online through what we call a speciality store marketplace. So when a customer comes from within a particular pincode, then he will be able to see only the stores that are within that area. These deliveries require a two-wheeler team. About 70 per cent of the orders that come to us from a customer usually belong to the planned list, about 25 per cent constitute the top-up list and about 5 per cent of the orders are related to specialty stores. Working with the stores over a period of time also gives us an understanding of the availability of products in a store.
Tell us about your organic section?
We want to create an organic revolution. In the next two to three years, we want to sell only organic and at the same price as other fruits and vegetables sell. Noticing the growth in organic trends, currently around 15-20 per cent of our customers prefer organic products. The main reason why organic is so expensive is the shortage of supply. We end up increasing the price as there is a 20-45 per cent premium.
Organic is expensive for farmers but they are farmers who are not using pesticides, which should actually bring down cost of the produce. There are thousands of farmers in the country who do not have certification for their products but do not use pesticides. Th ere are also several activists in the country who practise and promote ethical farming. We plan to invest in setting up our collection centres, start a registration process for farmers cultivating organic produce and eventually start buying their produce. We will help the farmer to get his produce certified. It is our dream that one day we will be able to sell certified organic products in large numbers and at fair prices.
What is your projection for growth?
We are now at a $100 million run rate. We have grown from Rs.55 crore in August last year to Rs. 200 crore by the month of March 2016. So we grew four times during this period. With the expansion plan of new product categories, we are doing a monthly turnover of Rs.200 crore with monthly sales multiplying every quarter.
How fast is your inventory turn?
We carry typically 10 days of inventory and in a month we turn that around four to five times.
The online grocery business is challenging. Capital requirements, delivery costs, fulfillment costs are all high. Customer spend can be lower because of less impulse buying. Profitability therefore remains a major concern for online players. What do you think is the way forward for online grocery players to capture profitability and be financially viable?
Today, the average ticket size of transaction at our Bigbasket store is Rs.1,500. Initially, people tend to experiment with a lesser number of items, and then slowly increase the value of their orders. So the cost does not go up. In fact, as your volumes keep building up, prices actually keep coming down and this is true across the board. As consumers keep buying more, the buying cost also keeps coming down. Business increases, your orders go up, and cost of delivery comes down. Cost of delivery also comes down as order density in a city keeps increasing. That’s when your delivery vans start to travel shorter distances.
Initially, a retailer would start with a lesser number of vans because he would start with a lesser number of orders, which would be spread out across the city. This means the van would actually travel a longer distance. When the density of orders increases, the number of vans also increases. When this happens, the distance travelled by the van for per order delivery decreases. So then costs also come down.
In online grocery, volume is the key to success but none of the online grocery player has a reach beyond Class A cities. How do you see this problem and what is Bigbasket doing to address this?
It is not possible to go further from tier 2 cities. Going beyond 300 km also means that we have to set up our own warehouse. The economics of setting up a warehouse in a small town is difficult.
Within the online grocery space, the hyperlocal model is gaining traction and posing a threat to established online players. How do you view this growing trend?
This is a new phenomenon. The hyper-local business is where orders are bought from a neighbourhood store and delivered to the customer, usually on two wheelers and within two hours. So hyper-local is focused only on short-life items, which falls under the top-up list of orders delivered by two-wheelers. We are not into the hyper-local model. We had evaluated this a year ago and realised that from an economic viability perspective it did not work for us.
The main reasons are that first when a consumer picks up items from a store, the profit margin that a retailer makes is lower as compared to what we make. As we actually buy directly from our suppliers and companies, we get to keep the entire margin that is available in the chain. That margin gap from a large format retailer could be around 21-23 per cent from a gross margin perspective.
For smaller stores or chains, or single stores, gross margin rate would be in the 15-18 per cent range. For small kirana stores, it would be in the 10-15 per cent range. A consumer would end up buying from any of these three in the hyper-local model. But these stores will not give you the entire margin as they will need to keep some margin for themselves. So here the margin gets split between what the store has to keep and the hyper-local operator. In a hyper-local model, the delivery person will approach any of the large, medium or small format stores where the margin gets split between the store owner and hyper local operator. So a big retailer would off er only 4-5 per cent from the 21-23 per cent margin and that 5 per cent does not meet the costs of hyper-local model.
The second reason is that we believe the hyperlocal method affects quality. The delivery person does not know much about fruits and vegetables and will pick up what is readily available at the store.
In Bigbasket business model, we have specialised people who manage the entire fruit and vegetable category and they are the people from agricultural communities. They are people who have been in this business for a long time and understand the entire process as far as quality of fruits and vegetables is concerned. Th ey know how to buy, where to buy, where to get the freshest stock and their seasonal availability.
Availability of the items is the third factor. When a customer orders for 10 items, he expects you to deliver all of them. If the delivery is for nine items, the customer will have to go to another store to get that one item. Another thing is that one would not know the inventory of a store and would end up travelling a bit further to another store to check for product availability and if necessary to a third store. Here, the hyper-local is losing time and cost of delivery also shoots up.
But look at the rash of e-com start-ups, in the F&G space. Is it a case of irrational exuberance outrunning economic reality?
The supply chain is a very complex business. Most of the businesses that are coming into the market are playing hyper-local and prefer to play in the small immediate requirement space. order to play in a larger space they will require warehouses. Only when they understand the supply chain will they be able to run a full fledged grocery business. Most of them are into the delivery business, where they pick a few items and provide an effective delivery. They do not have private labels and have no concept of organic, etc.
What do you feel about the Omnichannel revolution currently underway and how will it reshape the retail landscape and redefine consumer expectations?
Physical retailers will eventually go online. We are online players and we do not have physical stores. If you think that you have inventory in the physical stores and you can just capitalise on that to deliver online, then it will not work. Th is is because stores are designed with inventory that are meant for that particular catchment and they will fail to get new customers. One also has to learn about the last mile of business, and it has to be set up as a separate base.
Today, customers want everything – they want the advantages of digital, such as broad selection, rich product information, customer reviews and tips. But they also want the advantages of physical stores, such as personal service, the ability to touch products, and, above all, look at shopping as an event and an experience. I am sure online merchants are taking note of this shift. In this context, how are online retailers like Bigbasket preparing and planning to gear up for the future?
You cannot have the benefit of touch and feel as well as be online. A customer will have to go to a store where he can touch and feel the product. He can then select his product and tell the retailer to home deliver the product. Today online is a huge business because customers have graduated. At Bigbasket, we also send trials to a customer’s home so that one is able to get the feel of a product.
Over a period of time when there is a huge trust built with a brand, people will go for it. Another thing about us is that we sell unique products like chemical-free bread for health conscious consumers. Such unique products are not available at most physical stores.
Also, we are more focused on the differentiating brands. We do not want to create the same product that another company makes. In the next three years, we want Bigbasket to become one of the top three players in food and grocery in the country. Th is is our stated goal by 2019. Our focus is obsessively on the ground floor business.
Considering the fact that global online players like Amazon have entered the F&G space in India, what are your plans to make Bigbasket more business and technology efficient and acquire a bigger market share?
One of the beliefs that I have is that when there is more competition then markets open faster and business tends to grow faster. When there is only one player, the whole onus of building the market is on that one player. When many players come, there is an increase in market size. Grocery is the biggest and largest market in the country and it is so the world over. Th e retail market size in India is about $500 billion. Out of this, $350 billion is grocery. So due to sheer size of the market, there is a need for more people and players to enter this business. Just a handful of players will not be able to address the needs and demands of this market. So when more people come, the more people you will find getting familiar with online retail and more people will move online.
Buying grocery tends to be a monthly chore and is nowhere close to how people experience shopping for fashion. People often send their maids or drivers to pick up their grocery. In fact, customers remember the layout of a physical retail store as it helps them to pick up what they need very quickly. Some customers even leave their shopping bags at the local store and have the shopkeeper deliver it to their homes. So we have an online list that captures what the shopper buys and we call it a smart basket.
The smart basket categorises what a customer buys frequently and throws those items to the customer again the moment they start shopping. So a customer can quickly add those products to their list. This is one of the reasons why customers stick to one particular e-commerce portal for shopping as it can be cumbersome to buy a regular list of goods from different sites.
What are the challenges that Bigbasket faces as an online retailer?
The one challenge that we have learned to face is that month on month we have found it crucial to hire more people. Especially the blue collar teams keep drying out near the warehouses. People who migrate to the city find it very expensive to get accommodation, so we have now started providing housing. We have to keep innovating because every month our business will be growing. We are growing at 20-25 per cent month on month and we will need to add that many number of people to grow. It is the blue collar workers who are directly proportionate to our company’s growth.
The second challenge is to retain employees. We find a lot of people drop out at the training level. We do provide a basic soft skills training for the delivery person as he becomes our main touch point to a customer. We invest heavily in training because getting our delivery person to smile and look happy is also one of the key elements in the online business. The delivery person also has a delivery app that he uses on his phone. Bigbasket does not use plastic, apart from laser perforated packing material meant for fruits and vegetables. About 50 per cent of our transactions are through cash on delivery and the rest is through the pre-paid mode, by card. We also have a cardon-delivery service, which enables you to swipe your debit or credit card at your address when the product is delivered.
How do you inspire your suppliers to push the boundaries of price-value-quality equation?
The farming community is one community with which we plan to work very closely. We are setting up collection centres, which will help us to work closely with farmers. This way we get a better price, and we don’t have to go through multiple channels and all the middle men. Also, the price that farmers get for their produce would be far better if they deal with us directly at the collection centre.
Tell us about your expansion plans?
Currently, we off er online grocery in cities like Bengaluru, Mumbai, Delhi, Chennai, Hyderabad, Mysore and Pune. Now we plan to expand to eight more tier-1 cities and to 50 tier-2 cities. The first such expansion was carried out a little over a month ago when we began operations in Mysore. The way we have worked out our expansion plan is that our tier-2 model will be 300 km from the tier-1 city. So we began with Mysore, which is about 140 km away from Bengaluru. Mysore will be equipped with a warehouse, which will stock all the fast-moving items only. We stock 15,000 SKUs in our main warehouse, of which close to 3,000-4,000 are fast moving.
About 20 per cent of such products contribute to 80 per cent of our sales and this is what we will stock in the Mysore warehouse. None of the products will be bought from Mysore – they will be bought from Bengaluru and replenished on a daily basis. Here, we will do same-day delivery. Th e great thing about our operations in Mysore is that we are offering the Mysore customer a choice of 15,000 SKUs, which is probably something he or she would never have experienced before.