After spending more than a decade disrupting the neighborhood stores in the U.S. and several other markets, Amazon and Walmart are employing an unusual strategy in India to face off this competitor: Friending them.
Walmart and Amazon, both of which face restrictions from New Delhi on what all they could do in India, have partnered with tens of thousands of neighborhood stores in the world’s second-largest internet market this year to leverage the vast presence of these mom and pop stores.
In June this year, at the height of the pandemic, Amazon announced “Smart Stores.” Through this India-specific program, for instance, Amazon is providing physical stores with software to maintain a digital log of the inventory they have in the shop and supplying them with a QR code.
When consumers walk to the store and scan this QR code with the Amazon app, they see everything the shop has to offer, in addition to any discounts and past reviews from customers. They can select the items and pay for it using Amazon Pay. Amazon Pay in India supports a range of payments services, including the popular UPI, and debit and credit cards.
The world’s largest e-commerce giant also maintains partnerships that allow it to turn tens of thousands of neighborhood stores as its delivery point for customers — and sometimes even rely on them for inventory.
India has over 60 million small businesses that dot the thousands of cities, towns and villages across the country. These mom and pop stores offer all kinds of items, are family run, and pay low wages and little to no rent.
This has enabled them to operate at an economics that is better than most — if not all — of their digital counterparts, and their scale allows them to offer unmatched fast delivery.
Krishna Shah, a New Delhi-based doctor, on paper is one of the perfect customers of e-commerce services. She lives in an urban city, uses digital payments apps and her earnings put her in the top 5% income level in the country. Yet, when she needed to buy food for her cats and needed it as soon as possible, she realized the major giants would take hours, if not longer. She ended up placing a call to a neighborhood store, which delivered the item within 10 minutes.
That neighborhood store, which employs fewer than half a dozen people, was competing with over a dozen giants and heavily funded startups including Grofers and BigBasket — and it won.
At stake is India’s retail market, which is estimated to be worth $1.3 trillion by 2025, from about $700 billion last year, according to Boston Consulting Group and the Retailers’ Association India. E-commerce, by several estimates, accounts for just 3% of the retail market in the country.
If that figure wasn’t small enough already, consider this: Some of the biggest customers of Flipkart and Amazon are these small retail stores. An executive with direct knowledge of the matter told TechCrunch that during some sales, as high as 40% of all smartphone units are bought by physical stores. The idea is, the executive said, to buy the devices at a discounted price, sit on them for a few days and when Amazon and Flipkart are done with their sales, sell the same phones at their standard prices.
Sujeet Kumar, co-founder of Udaan, a Bangalore-based startup that works with merchants, said that even as smartphones and the internet have reached all corners of India, e-commerce hasn’t been able to disrupt the retail market.
“The problem is that it is very difficult for e-commerce companies to build a supply chain and distribution network that is more efficient than those established by neighborhood stores. These mom and pop stores operate on an insanely different kind of cost economics. E-commerce companies are not able to match it,” he said.
So instead of trying to beat them, giants such as Walmart’s Flipkart and Amazon are now finding new ways to work with them. “What other choice is there?”
The mom and pop stores, popularly referred to as “kirana” in India, have also attracted a wave of startups in recent years that are helping digitize various aspects of their businesses from bookkeeping, to how they collect money from their customers, and solve their working capital challenges.
Bangalore-based KhataBook is helping millions of businesses digitize their bookkeeping. The startup, which has raised $87 million, this year also launched an app that allows mom and pop stores to go online. Instamojo, which is also based in Bangalore, has made it simple for businesses to collect money online.
New-Delhi-based Pine Labs and several banks offer point-of-sale devices to the merchants, who are otherwise accustomed to collecting their payments in paper bills. These companies are using these smart point-of-sale devices to deliver a range of additional services to the small shops.
As these startups and major giants enter the new year, they will face several additional challenges, some of which have gotten bigger this year. The young startups, who are facing more competition from an ever-growing list of tech rivals, have yet to figure out how they monetize their services. Giants, as well as BigBasket and Grofers will confront, among other things, India’s richest man.
Ambani and Facebook
It was a big year for Mukesh Ambani, who runs Reliance Industries, the most valuable firm in the country.
He spent the first half of the year raising an eye-catching $20 billion at the height of a pandemic for his telecom and digital empire Jio Platforms. He spent the other half collecting over $6 billion for his retail empire, Reliance Retail.
Reliance Retail is the largest retail chain in India, where it serves more than 3.5 million customers each week through its nearly 10,000 physical stores in more than 6,500 cities and towns in the country.
The retail chain last year entered the e-commerce space with JioMart through a joint venture with Jio Platforms. By midyear, JioMart had an established presence in over 200 Indian cities and towns. On top of this, Reliance Retail has a partnership with Facebook for WhatsApp integration. Facebook, which invested $5.7 billion in Jio Platforms earlier this year, has said that it will explore various ways to work with Reliance to digitize the nation’s mom and pop stores, as well as other small- and medium-sized businesses.
For JioMart, Reliance Retail is working with retail shops, giving them a digital point-of-sale machine to make it easier for them to accept money electronically. It is also allowing these shops to buy their inventory from Reliance Retail, and then using their physical presence as delivery points.
In a report to clients last month, Goldman Sachs analysts estimated that Reliance will become the largest player in online grocery within three years. Earlier this year, Reliance Retail said JioMart had processed over 400,000 orders in a day, a figure that is already bigger than what BigBasket and Grofers process after spending hundreds of millions of dollars over the years.
“Most grocery-only online platforms such as Grofers are restricted to the top 30 cities in India, with Grofers mentioning that 75% of its sales come from the top 4-5 cities. We note that the supply chain in grocery is difficult to execute (the need for investment in logistics and storage infrastructure), and margins are relatively low. In addition, the presence of a competitive small store (kirana) network makes it all the more difficult for online platforms to make economics work. [ … ] This is where we think platforms such as JioMart will likely have an advantage,” the analysts wrote, adding the possibility that JioMart’s collaboration with WhatsApp may help the Indian firm turn itself into a super-app.
In a recent report to clients, analysts at Bank of America envisioned a much bigger collaboration between Facebook and Reliance in the coming years. Though neither of the companies appear to be in a rush to monetize their user base, the analysts said that over time the companies could charge a take-rate for every transaction on JioMart via WhatsApp. They could also collaborate on focused advertising between FB/Instagram and Reliance Retail brands.
“Reliance Industries Limited could help Facebook better monetize its marketplace with more feet-on-street. In our scenario analysis we estimate overall India Facebook revenue could be c. $7.5 billion by 2024. While this is small for Facebook, it opens up commerce/payment opportunities for Reliance Industries Limited beyond India,” they wrote in the report, which was obtained by TechCrunch. Right on cue, Ambani announced this month that several of Jio’s services, once proven in India, could be expanded overseas.
MUMBAI, INDIA — FEBRUARY 24: Microsoft CEO Satya Nadella with Mukesh Ambani, Chairman and MD of Reliance Industries, during the Microsoft Future Decoded Summit at St Regis, on February 24, 2020 in Mumbai, India. Image Credits: Anshuman Poyrekar/Hindustan Times via Getty Images
An industry executive told TechCrunch that while it’s commendable that JioMart has already hit milestones like 400,000 orders a day, this volume of orders from 200 cities is still very low and underscores just how early the Indian firm is in its deployment.
Rightly so, many early JioMart customers have also complained that JioMart takes much longer than Grofers, BigBasket, Amazon and Flipkart to deliver products, and its customer care service is currently not up to par, either.
Even so, the industry executive said that it’s clear which direction Reliance is moving and it’s only a matter of time before it becomes the biggest headache for Amazon and Walmart in India.
It already appears that Amazon is feeling the heat. Weeks after Reliance Retail announced that it was buying several businesses of Future Group, India’s second-largest retail chain, for $3.4 billion, Amazon went to court to block the deal.
Last year, Amazon bought a stake in one of Future Group’s holding companies. The e-commerce giant, which is currently fighting with Future Retail in an Indian court, has alleged that the Indian firm engaged in insider trading and violated contracts. Amazon has argued that its contract with Future Coupons, one of Future Group’s holding companies, prohibited the Indian group from selling its assets to a competing firm like Reliance Retail. (The Competition Commission of India last month approved the deal between Future Group and Reliance Retail.)
This tension between Amazon and Reliance Retail comes at a point when the American firm was reportedly in talks to invest as much as $20 billion in the Indian firm, according to Bloomberg.
How the relationship between the two firms changes next year will be interesting to watch. Amazon has to date invested more than $6.5 billion in its India operations. In the meantime, Flipkart is preparing for an IPO next year and is working to improve its finances.
Stepping aside from the giants, there are several startups that are vying for the attention of mom and pop stores — and solving some unique challenges.
KhataBook, which is just 18 months old, is trying to solve a challenge that shops in India have been facing for decades. Most of them still use thick paper notebooks for bookkeeping. “So these shopkeepers jot down what they are selling, and also maintain a list on it on how many customers owe them money,” said Ravish Naresh, co-founder and chief executive of KhataBook, in an interview with TechCrunch.
One of the conveniences of buying items from a neighborhood store in India is that if you’re a regular customer, you do not have to worry about clearing your bills on the same day. “Merchants use the same notebooks to keep track of who all owe them money. Usually, at the end of the day, they tally everything they have sold. And at the end of the week or month, they check with their customers and begin to clear dues,” said Naresh.
An issue with this workflow is that some customers don’t pay on time and so they might not clear their dues for quarters. Why does the shopkeeper then keep selling items to such customers? That’s just one of the strange ways relationships work in India and perhaps a story for another day. (As a side note, most of these shops that are beginning to digitize are doing so because the kids in the family are more tech-savvy and they are persuading their parents to give digital solutions a try. Naresh, like many other founders, credits Reliance Jio for this. More about this here.)
“Most of these businesses don’t die because of low margins, they die because their cash is stuck with customers,” he said.
KhataBook’s free eponymous Android app is allowing about 9 million shops in India to digitize their accounting and reconciliation. Moreover, customers get reminders to clear their dues. “This automated process has allowed these shops to unlock their cash flow,” he said.
Naresh estimates that KhataBook has already captured 20% of the addressable market with its current offering. Now the startup is beginning to explore other ways it could help these businesses. In the last two months, among other things, KhataBook has launched an app to help shops go online and expand their exposure, and another app that is allowing shops to digitize how they pay their staff. Next month, the startup plans to launch an offering to help these shopkeepers digitize their invoices with businesses they engage with (for instance, suppliers from whom they buy inventory) and how they file taxes. “The plan is to digitize all the workflows these shopkeepers rely on,” he said.
Udaan is tackling a whole set of different challenges these merchants face. The startup operates an eponymous marketplace for businesses to buy their inventory. It is enabling merchants, who previously had to travel to other cities to stock up their inventory and then complain endlessly that they did not get good deals, to choose from a much wider selection of items and then get those items delivered at a frequency that is most suitable to them.
Founded by three former Flipkart employees, the startup claims to already command about 75% of the business-to-business e-commerce market in India and is now working to expand to dozens of smaller cities and towns across the country, said Kumar.
He explained the painstakingly long effort that goes into a startup like his wishing to expand to newer cities, underscoring precisely why e-commerce firms are struggling to beat neighborhood stores.
“There are many cities that are similar. But when you move to smaller cities, you have to build a whole new supply chain network based on the kind of demand and service merchants in such places require,” he said.
“For instance, a pharmacy store merchant in a place like Patna (the capital city of East India state Bihar) currently travels to Lucknow (a large city in northern India) once a week to secure his supplies. Unlike merchants in places like Delhi, who secure supplies several times a week, our supplier in Patna isn’t really longing for more frequent doses of supplies. Instead, he would rather have us offer him a larger catalog of medicines.”
“So that’s what we are working toward. We are offering him a larger selection of medicines to choose from, and deliver him this supply once or twice a week. This influences the mode of transportation we are using to deliver supplies to the merchant. So when we build a supply chain network, we take into consideration exactly what our new merchant customers want from us,” he said.
Udaan, which works with over 2,500 brands including Coca-Cola, PepsiCo, Colgate, Apple, HP, Reebok and Haldiram’s and offers a selection of over 500,000 products, also provides tens of thousands of merchants access to working capital.
“That’s the paramount challenge these shopkeepers grapple with every day. Sometimes they buy more inventory than they are able to sell and they get stuck,” said Kumar. These shops rarely have any savings, so it is very common for merchants to be absolutely reliant on using the funds they secure from selling their existing inventory to buy new stock.
Since Udaan, which was last valued at about $2.5 billion and has raised $900 million, already caters to these merchants, it is able to grant them working capital ahead of time using its data signals. This allows merchants to smoothly work through their inventory cycle.
Online lending has boomed in India in recent years, but very few companies are today attempting to cater to small- and medium-sized businesses. “The unaddressed SME credit demand in India is ~US$300-$350 billion, with more than 90% of current demand being met by banks. A typical digital SME lender focusses on Rs1-5 million ($13,575 to $67,875) ticket size with no collateral, average tenure ~12-18 months, and with some ecosystem anchor,” analysts at Bank of America wrote.
“At the outset, the annualized yields of 25%-30% look high but are not very burdensome to borrowers given the short tenures involved. While growth potential in theory is high, despite much higher yields, we don’t find their economics to be much superior to banks even in a steady state. Overall, steady state ROE (return on equity) for an average digital SME lender is unlikely to be much more than 18% levels — not meaningfully higher than a big private bank. Very few lending fintechs are able to keep their churn low, maintain good book quality, show steady growth and leverage tech to scale growth without increasing costs,” they explained.
That’s one of the bright spots in India today. The market remains big, and much of it is yet to be tapped. From lending opportunities to the supply chain, the landscape is ripe for disruption.
But some existing industry players worry that as Ambani and the like make major moves, and as more startups join the pool, it’s going to be very difficult for many of these firms who focused on growth before Reliance’s interest in the market and the pandemic to improve their finances as investors begin to get worried. And some startups might suffer a lot.
Most startups operating in this space today are making losses. KhataBook’s Naresh said he believes that we will see some consolidation soon enough. Last month, Reliance Retail bought furniture and decor platform Urban Ladder for $24.4 million in a fire sale. The startup had raised over $115 million before getting acquired.
SoftBank-backed Paytm, which has raised over $3 billion to date, has lost the lead it once enjoyed in the digital payments market to Google and PhonePe in recent years. Moreover the startup has expanded in various categories, including some that serve small businesses. It is not a leader in any of the additional categories in which it has expanded.
And last, according to various local media reports, steel-to-salt giant Tata Group may soon become the latest entrant in this space. The conglomerate is reportedly plotting a super-app strategy to offer customers a range of services. It is in talks to buy BigBasket among many other startups, reports say.