Despite the rapid growth of e-commerce in India, Southeast Asia and other emerging markets, the vast majority of retail transactions there still happen offline in small stores that also serve as neighborhood hubs.
The central role these stores play in their communities led GGV Capital to develop what the firm refers to as its mom-and-pop shop investment thesis. This means backing startups that help small retailers digitize operations, tap into better supply chains and serve as delivery points in markets where logistics and online payment infrastructures are still developing. In turn, GGV’s managing partners believe this will lay the groundwork for stronger e-commerce growth.
Companies that GGV has already invested in under this thesis include B2B e-commerce platform Udaan and Telio, bookkeeping app KhataBook and social commerce startup Shihuituan (also called Nice Tuan) in China.
A sociological approach to e-commerce investment
GGV managing partner Hans Tung says the mom-and-pop shop thesis means looking at consumers’ shopping habits across countries and understanding why they are different from a historical and social perspective. During his career, Tung has observed e-commerce develop in markets including the United States, China, Japan, Taiwan, India, Southeast Asia and Latin America. Offline shopping habits, population density, transportation infrastructure and credit card penetration all played a factor in how e-commerce evolved in each of those places.
“You realize e-commerce doesn’t exist in a vacuum. It exists as a substitute for what is happening in the offline world,” he says. “Mobile payment doesn’t happen in a vacuum. It just fulfills the same needs with a different method. It was a substitution for what was happening in the offline world with credit card and debit card penetration.”
In China, e-commerce adoption was accelerated by the rapid development of the country’s transportation infrastructure, including new rails and high-speed rail, which “enabled e-commerce delivery to happen in a way people didn’t think was possible in 2005,” Tung says. But for markets where mobile internet adoption has outpaced the development of transportation networks, GGV says working with small, offline stores is the best way to grow the e-commerce market.
In Southeast Asia and India, small retailers are still the biggest segment of offline retail, larger than chain stores, Tung says, adding that in India alone, there are more than 40 million small retailers. He says the goal of GGV’s investing thesis is to help shops “improve the cost structure, the cost of goods sold and fulfillment and marketing costs. It is about efficiency at these three levels.”
Why e-commerce companies should work with small offline retailers
The startups backed by GGV under its mom-and-pop-shop thesis operate in countries with lower per capita income. For example, GDP per capita in India is slightly under $2,000; in Indonesia, less than $4,000; and in Vietnam, about $2,500 (in comparison, per capita income in the United States is nearly $60,000 and about $9,000 in China).
While online marketplaces like Tokopedia, Lazada and Shoppee tend to target more affluent shoppers in major cities, GGV managing partner Jixun Foo says GDP per capita is an indicator of how much disposable income the average household in each market has, which in turn is reflected in lower average order values.
Fulfilling small orders is much more cost-efficient in countries with a highly efficient delivery infrastructure like China. But in markets like India, Vietnam and Indonesia, logistics are still very fragmented, creating extra friction when it comes to delivering packages and enabling affordable returns for unwanted items.
In many markets, small shops also offer an informal credit system, allowing long-time customers to buy items and pay for them later. “They are more than retailers, they are community centers,” Foo says. “So there is a community trust, and with that trust, there is a certain credit system that they adopt based on a lot of relationships.”
Many e-commerce companies target more affluent customers, but to reach the majority of consumers across emerging markets, startups need to be able to work with small retailers, he adds.
For example, these community relationships are leveraged by social commerce startups like Shihuituan. The Chinese company, which focuses on fresh produce and other farm products, recruits small store owners to serve as the leaders for its group-buying model.
Improving fragmented supply chains and logistic networks
A major challenge for small retailers is working capital, which is needed to acquire new inventory and extend credit to customers. Many also use pen-and-paper ledgers to track inventory, sales and extended credit. One of GGV’s portfolio companies, Indian startup KhataBook, is software created specifically for small shops so they can digitize their bookkeeping, which in turn makes it easier for them to secure financing for working capital.
Foo says this retail tech also allows shop owners to manage SKUs, find better and cheaper inventory and, in turn, sell more products by improving the supply chain.
Other GGV investments, like Udaan, another Indian startup, and Vietnam-based Telio, are business-to-business commerce platforms focused on making supply chains more efficient so small retailers have access to a larger variety of products at lower prices.
“In each of these regions, similar to China in the early days as well, is that you have a brand, a master distributor and then layers of resellers, distributors, sub-distributors and regional distributors in between,” Foo says. “There is a lot of inefficiency in the supply chain today.”
By consolidating the supply chain, platforms like Udaan and Telio make it easier for small retailers to offer more expensive items like electronics and appliances, even if they don’t keep them in stock. They can place orders for their customers and have the items delivered to their stores.
In markets like India and Indonesia, where transportation infrastructure is still developing, small retailers play a crucial role in e-commerce fulfillment, especially where average order value is still relatively low.
“If you’re sending small orders to many different places, it’s just not a very efficient market and you have to turn a lot of money to grow your GMV,” Tung says. “So in those markets, there has to be some kind of demand aggregation and delivery aggregation business model.”
Online sellers leverage the same logistics networks used for inventory to deliver batches of orders to stores for pickup, which also enables customers to pay cash for their purchases, important for markets with low debit or credit card penetration rates (Foo notes that about 80% of e-commerce in Southeast Asia and India is still paid for in cash on delivery).
This system makes fulfilling smaller orders more cost-efficient, in turn reducing the price of goods and ideally leading to more orders and user acquisition.
“It’s kind of obvious that bringing efficiency to these emerging markets in Southeast Asia, Latin America or India, need to go through mom-and-pop shops, which have the aggregate users, drive delivery more efficiently and help them get more volume over time. These are the best ways to make this model more powerful,” Tung says. “We all know that convenience stores and mom-and-pop shops — especially mom-and-pop shops — are where people in a community chat with each other and hang out. People aren’t just buying stuff. It’s also a social network.”