All said and done, across five parts of the “Entrepreneurship and E-commerce” series we tried to unravel the mystery that Indian e-commerce is. We discussed in detail, the various aspects concerning entrepreneurs and e-commerce, touching upon the ideology, the headroom for growth, the investors and funding angle, the need to search for alternative profit centers within the established models and the importance of the government’s role in fostering the right ecosystem for this sector. A joint effort is required to realize the extreme potential that the Indian market offers. Hope the series “Entrepreneurship and E-commerce” is right on the money in this regard.
Entrepreneurship and E-commerce: What does the fox say? Entrepreneurship and E-commerce: Making Money- Lock,Stock and Barrel Entrepreneurship and E-commerce: “The Investor Conundrum”- Leverage or Liability? Entrepreneurship and E-Commerce: How much is taken, how much abides? Entrepreneurship and E-Commerce: End of the Beginning or Beginning of the End?
In this sixth and final issue, we will talk about a startup that, like many others, flattered to deceive. This is exactly what entrepreneurs need to guard against. Right decisions have to be made at the right time, any other pairing of right and wrong spells failure. We’ll try to see the relevance of the previous issues in context with the journey of PepperTap, once touted as the next big thing in the Indian hyperlocal domain, but failed owing to a combination of factors.
Frankly, first I had chosen Tinyowl, to demonstrate how decision making can play an important role in the eventual fate of a startup. TinyOwl’s top brass faltered in critical aspects of management decision making. Their hiring and retrenchment was flawed, unsynchronized. Analytics wasn’t put to as much use in decision making as was desired under the circumstances. Most importantly, they couldn’t determine their core-competency within their business model, the most basic element in the strategy mix of any successful organization. They tried their hand at food listing, dish based food aggregation and area based aggregation, failing subsequently in each of these. Then there were high cash burn issues, ones that plague almost all startups in the Indian e-commerce domain these days.
So why PepperTap then? True, they made mistakes. But it’s what you learn from them that makes the difference. Starting up and entrepreneurship is all about embracing and overcoming the fear of failure. It is okay to fail. An entrepreneur needs to have the vision to realize that his ship is straying, the courage to accept he was wrong somewhere and the passion to not give up, to steer it into the right direction. As PepperTap co-founder Navneet Singh puts it, it is better to realize that you are about to fall off the cliff before reaching the edge, as compared to realizing that after landing in abyss. Though late, PepperTap is making the right moves, trying to correct what was wrong.
But then what about the future of online grocery and hyperlocal startups in India. Last year, they were the buzzword in Indian e-commerce, attracting massive funding, aiming to revolutionize the way Indians bought grocery and other similar items. A few months later, almost all major hyperlocal startups, including those by unicorns Flipkart, Ola and PayTm have shut shop, while many smaller ones are looking to restructure and re-organize. So, how to realize the $19 billion potential that Morgan Stanley predicts for the India hyperlocal and grocery market by 2020? With customers going mobile first and the growth of the on-demand market, hyperlocals were argued to be in the best position to take advantage. But for how long can they afford to lose cash, while continuing to work on paper-thin margins? What should be the sustainable business model in this domain?
The industry players are divided in this regard. While PepperTap operated on a 100% inventory-less model, the only business in this domain to do so, it was within the country’s top three grocery delivery startups. On the other hand, Vipul Parekh, co-founder of Big Basket backs the inventory led model. Later, Grofers also moved to this model. Both recently received a funding of $150 million and $120 million respectively. Then there are others, disrupting within these waves of disruptions. Zip.in, a Hyderabad based hyperlocal startup, works on a managed marketplace model. To be able to command better margins, it first aggregates orders till noon time and then finally purchases and delivers them. So, solutions exist, you just need to dig deep enough to uncover them. In the grocery hyperlocals, the main bottleneck is the supply chain, right from the vendors to the consumers. Whoever optimizes that well, will win the niche itself. The delivery has to be as efficient as possible, to cut the operating costs by as much as possible. The deep discounts need to end. As I said in one of the previous issues, for these to end, someone has to pay. Is the skeptical Indian consumer ready to pay a higher price for convenience? That, friends, is a 19 billion dollar question as far as these hyperlocal startups are concerned.
Now let’s talk about PepperTap. Conceived in Gurgaon’s Galleria in September 2014, PepperTap was operational across 17 cities by October 2015, processing 20,000 orders per day. It was hiring from the top educational institutes of India, and with the possession of sound logistics knowledge and network was the new, confident kid on the block everyone had their eyes upon. With a GMV of less than one million dollars at the start of this fiscal, it aimed at ending the year with a GMV of 250 million dollars.
PepperTap, which aimed to replace visits to the markets with a few taps on your phone, failed as a model. What exactly went wrong?
As Navneet admits, “PepperTap brought too many stores online, too soon.” Managing this large number of sellers was a cumbersome task. Most of the times, the entire catalogue of products available wasn’t being displayed on the site. Thus, they had to lure these small vendors and stores to take up electronic inventory management and billing systems. This had a straight impact on PepperTap’s cash constraints and budgets.
Integrating existing data from larger markets with their own data:
To provide users with real time price and availability figures was a time and cost consuming task. The dataset needed to be updated at least thrice a day. Thus back end analytics was getting heavier and complicated by the day.
Large number of sales and discount schemes:
As is the nature of this industry, PepperTap had to invest aggressively for customer acquisition. They did scale up rapidly, but at the cost of investor cash. The outright discounts kept on increasing, to as high as 70% sometimes.
This cash burn hurts, and sometimes kills businesses. As we have seen on numerous occasions, loyalties need to be based on brands and their USP’s. Discount is not, has never been and can never be your USP.
Value Proposition Offered:
PepperTap quickly gained traction in the on-demand hyperlocal market due to its “two hour delivery promise”. However, fulfilling it meant building a huge buffer capacity within the supply chain, be it in logistics or the daily operations. Given the fact that they were operational across 17 cities, this increased the cash burn manifold.
In the words of the co-founder, the core competency of PepperTap has always been “optimization of delivery fleets, routes and general logistics”. You don’t blame a company for building businesses based upon its core-competencies. But what you do blame them for is scaling up too fast and too far, to such an extent that you later have to scale down. Because this is something that directly impacts the company, in more than one ways.
Pessimistic Investor Attitude:
This scaling down is exactly what hurts the company financially. Imagine all the costs involved in setting up business at a location, make losses in it, then realize that it is no longer sustainable and then having to wrap it up. All this based on borrowed money? This clearly dents the image of the company. Who in his senses would want to put their money into something such as this? If this money is invested correctly in the right decisions, it might just prove to be the difference between success and failure.
Make no mistake. PepperTap had already undergone successful funding rounds. A $1 million seed funding by Sequoia Capital, followed by a $10 million Series A funding backed by Sequoia Capital and SAIF Partners and a $40 million Series B backing in September 2015 by Snapdeal, Sequoia, SAIF and other new entrants implied a total risk capital of $51 million. PepperTap even went on to acquire Jiffstore, a struggling hyperlocal delivery startup, based out of Bangalore.
Upon realizing that PepperTap was headed for implosion, the path of most startups treading the dangerous line of deep cash burns, the management decided to halt operations in the relatively newer cities with a small customer base.
And it provided positive results, for everyone to see. The value of the average sale doubled and the customer retention rate increased four times, the advantage of selecting the correct market to transact in.
However, as investors’ confidence stayed low and the number of orders fell down to less than 1000 per month owing to news about previous closures in Mumbai, Kolkata and Chennai, the management has now decided to bid adieu to the hyperlocal grocery business altogether and realign themselves as an out and out e-commerce logistics service provider. A wise decision, maybe? Let us see how.
1. Too soon for the hyperlocals in India?
One thing that keeps nagging my mind is the thought that “Is it too soon for these hyperlocals in India?” In my opinion these are ahead of their time. The Indian e-commerce consumer is still addicted to discounts. No discounts imply no business. With paper-thin margins to operate upon, the hyperlocal setups cannot expect to get their rightful due just yet. Even the delivery networks are highly fragmented. On one hand, there’s same day delivery for certain Tier II and III cities, while on the other, delivery takes up to two-three weeks in certain other cities.
Look at Amazon for instance. Having achieved huge capacity and deep penetration, it is now that they are entering into grocery delivery services after putting a lot of thought and planning into it. Hence, both the market and the businesses need to evolve to create a sustainable hyperlocal ecosystem.
2. It is perfectly okay to recognize defeat
When TinyOwl was forced to end operations, remember all the hue and cry behind it. One of the co-founders even ended up taken hostage within his office by the employees. Even though it may raise some eyebrows, Navneet Singh took an intelligent, brave and commendable step in coming out with an open letter to all the stakeholders, describing their journey, the reasons for failure, and most importantly their future strategy. He gives a clear and (hopefully) transparent explanation of all that transpired. This, I feel, is an indication of the maturity that is now starting to show within the Indian startup domain. Failure should be acceptable, but more importantly it shouldn’t be looked down upon.
3. Tough times call for tough decisions
PepperTap still has investor capital in its accounts. But is it feasible to continue to burn it and then realize that doomsday is here? No. It’s better to save that capital and invest it into a business that at least has a possibility of providing returns. Right calls have to be made at the right time. It is always easy to keep hoping for things to improve in the future. What’s tough is to shut down what you have been doing for the past one and a half years and focus on something new, which actually isn’t that new in this case.
4. The down side: flawed HR policies?
PepperTap’s organizational strength was around 200. According to Navneet, 50 will be retained for the logistics business, while 150 will be laid off. Although he assured that their compensation packages will be determined transparently and fairly, it’s usually the rehabilitation part which takes the maximum toll on a laid off employee. These startups usually hire the best minds from India’s elite schools, be it for technical or managerial roles. Imagine the plight of an MBA graduate barely months into his job, for whom sky is the limit, being told that he is going to be laid off. The mere psychological impact is huge, leave aside his financial status. Not only PepperTap, with many startups like Zomato going for large scale lay-offs, their HR policies need to be realigned to protect the interests of the employees.
So, is the decision right?
PepperTap was the hyperlocal arm of Nuvo Logistics, a reverse logistics firm, which also owns and operates NuvoEx, which caters exclusively to e-commerce players. In January 2016, Nuvo Logistics reported a revenue of INR 19.5 crores (up from INR 61 lakhs last year), with a profit of INR 87 lakhs, as compared to a loss of 41 lakhs in the previous year. A 1000 strong team, and all this into just the second year of operations. This includes the contribution of PepperTap as well.
For the same year, Grofers posted a revenue of INR 86 lakhs with a losses of INR 4 crores. Baffling, to say the least.
This is in line with what we discussed in our issue “lock, stock and barrel”- logistics is one of the main profit centers within e-commerce that need to be exploited. For the past one year, the people involved with Nuvo have been “busy in designing and testing in order to develop a robust last-mile delivery network”, according to Navneet.
Thus, co-founders Navneet Singh and Milind Sharma are back to their basics, trying to build a business based upon their organization’s core-competency, which is last mile delivery. If they survive this fall, perhaps they will, then who knows what’s next in this VUCA world. Maybe they’ll get a second shot at it, when the Indian e-commerce ecosystem is much more accommodating for these hyperlocal startups. They just have to nail it, when the beckoning finally comes. Till then, hyperlocals needs to listen to the bell and recognize for whom it tolls.
Featured Image Courtesy: PepperTap