Zomato Order meets Grofers' fate; lessons for peers

By Saumya Tewari , afaqs!, New Delhi | In Digital | January 12, 2016
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Shortly after Grofers announced shutting down operations in nine cities, Zomato's food delivery service Zomato Order ceases operations in four. We explore why the online food and grocery delivery segment is a tough terrain to operate in.

Zomato Order, Zomato's food ordering service, has shut operations in four cities including Lucknow, Kochi, Indore, and Coimbatore. The company launched the service in April 2015 and had since expanded to 14 cities across India.

The news came after the heavily-funded hyperlocal grocery delivery app Grofers, which was on a promotional spree, shut shop in nine cities. The company had launched a high-decibel television campaign in November 2015 to attract more consumers.

Zomato Order meets Grofers' fate; lessons for peers

This is not the first time the venture faltered with operations. Earlier, the company had suspended operations in Gurgaon, albeit for few days, owing to logistical problems. Grofers is currently operating in cities such as Mumbai, Delhi NCR, Bengaluru, and Pune.

It raised a $120 million in the last round of funding, led by SoftBank with participation from Tiger Global and Sequoia Capital. The company had raised $10 million from Tiger Global in an earlier round.

Among Grofers' competititors, LocalBanya, which had executed a re-branding exercise in February 2015, shut operations in September. The Mumbai-based e-tailer intended to be present in 12 cities by the end of 2015 and had received around $20 million in funding over two rounds. It also claimed to have close to 300 people in its workforce.

TinyOwl, another food delivery start-up, was also in the news last year for shutting down operations in four cities, and laid off over 100 employees. According to a Medianama report, the online food ordering start-up Foodpanda has laid off 15 per cent of its staff (around 300-500 employees) across verticals to become sustainable and profitable.

We asked industry watchers and key players in the online food delivery and grocery space on the challenges that are faced by those operating in this segment.

K Vaitheeswaran, e-commerce consultant and founder, Indiaplaza

K Vaitheeswaran

The biggest problem these companies face is excessive funding. If a company's focus is on building sustainable business, then it will work hard on innovation and try to make money. But, in the new-age digital businesses, the fundamental objective of the founder is to raise money. As soon as they raise funds, the next objective is to burn it, then try and raise another round. It is a vicious circle. These ventures need to stop this cycle and focus on making money.

The real problem these companies face is the fact that they have a lot of funding. If they didn't have the money, they will think hard to build their business in a steady manner. The fastest way to burn money in India is to open multiple offices across cities, hire people from top institutions and take front-page ad space in leading newspapers. When the funds run out, offices are shut, employees are sacked, and ventures claim to re-engineer their processes.

I feel that at the customer level, there is no genuine value, excessive funding, and there is no pressure on entrepreneurs to build a serious business. For example, food delivery was always done by the restaurants. However, the new-age businesses call themselves 'food tech' companies, but I do not see the tech element in them. Using an app to order food cannot be dubbed as food tech.

Mahesh Murthy, co-founder, Seedfund

Mahesh Murthy

I believe that none of these ventures have been able to find any business sense in what they do. The cost of delivery of the food or grocery and the logistics involved is greater than the margin that can possibly be earned. Most retail margins offered by brands in the restaurants space hover between 5-20 per cent. The order size is typically small and falls between Rs 500-800. Hence, the net income to the company, either Grofers or Zomato Order, is Rs 50-70 which is greater than the cost of the delivery itself. Corporate profits and marketing costs is not being factored in. There is no advantage of scale here. With each store, the ventures also need to place a certain number of motorbikes as well as delivery staff. Therefore, it is essentially an unsustainable model. These ventures have figured out that the funding environment is becoming more realistic and there are no exits. Hence, they have tried to save funds by ceasing operations and focussing on markets where they have a small chance of breaking even. All these, in my mind, are massively loss-making operations.

Pragya Singh, vice-president, Retail at Technopak

Pragya Singh

The year 2015 brought food-tech and hyper-local grocery players into the limelight. The space witnessed high frenzy with several new start-ups, increased investor and media interest, and rapid growth and expansion plans. However, the second half of the year was marked with scepticism about this space.

Most of these players are running on models with low margins (commissions) and high costs which make for poor unit economics. At higher volumes, the business model should improve the unit economics to be sustainable - but that does not happen. Players will need to fine tune and optimise monetisation streams and business models and operations to establish sustainable business.

Reckless expansion by players, driven by paranoia of losing the opportunity to competition, or trying to live up to the aggressive growth committed to their investors, without optimising existing models and understanding new market readiness and adaptations required, is also bound to fail.

It is not easy to differentiate in the market with low margins and having TV ads is not a differentiation anymore. When the entire focus is on topline metrics, little effort and innovation has been put in by players to differentiate either in the mind of the consumers, or even in monetisation strategies - making consumer loyalty low and keeping customer acquisition costs high. Also, some of these players are not really addressing a fundamental gap in the market or value chain - hence, they will find it challenging to scale up and sustain.

Raagaleena Sripada, senior marketing manager, Big Basket

Raagaleena Sripada

New businesses typically face two kinds of marketing challenges on inception. The first is to influence shopping behaviour and the second is to earn customer loyalty. Fruits and vegetables are a completely different ball game where quality perceptions are extremely personal and prices are inconsistent and constantly fluctuating. We have learnt that offering tangible guarantees such as a no questions asked return guarantee on any product reduces the risk perception in customer's minds and makes it easier to induce trial. While there is a tangible cost to these guarantees they go a long way towards customer's perception of dealing with a reliable business. The other lesson that we have learnt is that customer's respond to a well designed product- in the case of grocery delivery this means offering a wide range of products, offering convenient delivery options and providing a consistent user experience.

When it comes to expansion, one may want to think about economies of scale, geographies, capabilities, customer readiness and competition before ramping up expansion plans. The readiness to advertise on mass media is dependent on the stage at which the company is. For instance, it may make more sense to advertise on national TV when one is ready to service multiple cities in the country whereas other channels of advertising maybe more efficient when one is local. Also at a certain point in time mass media with their reach become a more cost efficient medium to acquire new customers than digital or local media. This is typically when addressable audiences are large and geographically spread.

Logistics, operations and customer service are at the heart of any business - whether online or not. That said, most online brands are still in the very nascent stages of their brand life cycle, while a few are hitting a growth phase currently. Therefore, operational excellence with superior customer service become probably more crucial for an online business today, since the customer has no tangible element to lay their trust in. Its the small things such as on time delivery, ordered items being delivered in good quality, customer complaints being resolved speedily - that become crucial in establishing the trust and loyalty.

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