After struggling with rising costs, Sequoia-backed PepperTap pivots from grocery deliveries to e-commerce logistics

Times are getting tougher for food delivery startups in India. Over the weekend, PepperTap—which has raised more than $50 million from backers including Sequoia Capital and SAIF Partners—announced that it will shut its grocery delivery business and switch to e-commerce logistics.

Snapdeal, one of India’s largest online marketplaces, is also an investor and strategic investor in PepperTap.

The Economic Times reported that 150 workers will be laid off. TechCrunch has contacted PepperTap for more information.

In a detailed post-mortem on PepperTap’s blog, founder and CEO Navneet Singh wrote that PepperTap will focus on building an e-commerce logistics for smaller Indian cities instead. That’s an industry Singh is already familiar with—before launching PepperTap, he started Nuvo Ex, which manages supply chains for some of the country’s largest online retailers.

Singh claims that by October 2015—about a year after its launch—PepperTap was one of the top three grocery delivery services in India with 20,000 orders fulfilled daily, and that it was “the only business in town to be operating on a 100 percent inventory-less model.”

But the company faced a cornucopia of competitors that ranged from other well-funded startups like Grofers to relative veterans like Bigbasket, which has operated since 2011 but raised $150 million last month to expand and speed up deliveries.

PepperTap was forced to walk away from food deliveries after facing three major problems. The first one was the difficulty of integrating PepperTap’s app with existing inventory management systems at their retail partners. Some small stores needed to install software for the first time, while data from larger partners had to be updated at least three times a day.

Secondly, the company had to offer deep discounts to build customer loyalty.

“This was not hugely problematic—we had money in the bank and investors were on board with this plan,” Singh wrote in his post–but then PepperTap also had to ensure that its logistics network was always ready to fulfill its promise of two-hour deliveries, even when orders were slow.

“Compounded with the necessity for discounts, this meant that the cash we were burning on every single order was increasing rather quickly with no immediate end in sight,” Singh explained.

PepperTap first cut operations in a few cities before finally deciding to abandon grocery deliveries in favor of e-commerce logistics.

Heavy spending for very little return (at least in the near term) is not just a problem for PepperTap. Other food delivery startups in India coping with similar issues include Foodpanda, TinyOwl, Grofers, and Zomato. In the United States, companies with similar business models—even those with plush funding like Instacart—are feeling the pressure of tight margins.

PepperTap will now switch gears to solve a major headache for Indian e-commerce companies—ensuring timely shipments to smaller cities that aren’t covered by major logistics providers. Singh claimed that an order sometimes take up to 30 days to deliver to those places, which the technology PepperTap developed while handling grocery orders can potentially shorten.

“We began to test some of these ideas at Nuvo earlier this year and the results were exciting enough for us to pitch to our existing investors as an alternative way to use the capital we have already raised,” he wrote.

To be sure, there are already many startups focused on last-mile deliveries, like Delhivery, Ecom Express, and Blue Dart, and all of them face financial and technical challenges as they scale up to cover the entire country. The growth rate of India’s e-commerce market, however, and the willingness of its largest players (including Snapdeal) to invest heavily on their logistic networks mean that it is likely a much more sustainable industry than on-demand consumer food delivery.