This is why hyperlocal is a tough business
PepperTap, India’s third largest online grocer, is closing its shutters next month, to pivot towards logistics.
The year-old company will retain about 40 of its 200 employees and will let go off the rest.
“It was a very difficult decision to make. We already have significant amount of capital left in the bank. But the path to profitability in the grocery business looked very distant, at least two or three years away,” Navneet Singh, PepperTap CEO and Co-Founder tells Tech In Asia.
Before starting PepperTap in November 2014, Navneet was already running a reverse logistics brand NuvoEx. Reverse logistics involves operations related to returns of goods by customers, including collecting products back from the customers, warehousing, and delivering those to the sellers.
The new business may keep the brand name PepperTap or retain the NuvoEx brand.
“We are still to decide the name of the new logistics business. It will have both forward and reverse logistics play,” Singh adds.
PepperTap raised $51.2 million in funding from a slew of investors such as Innoven Capital, SnapDeal, Sequoia India, SAIF Partners, Ru-Net, Beenext, JAFCO Asia, and others. The company had secured its series B round of funding of $40 million in December.
With Snapdeal’s investment, rumors were doing the rounds that PepperTap might eventually merge with the ecommerce marketplace. Those rumors now lay at rest, with the company shutting its grocery business.
Hyperlocal is a tough business
Navneet tells Tech In Asia that grocery delivery is still a negative gross margin business in India.
“It will be at least two or three years when people especially in tier-two and three towns would ever want to pay a convenience fee for home delivery of grocery.”
“It’s not that the market does not exist or has vanished. It’s just that it would be a much better use of existing capital in the bank to invest in the new logistics business,” he added.
Navneet had earlier blogged that there in several of India’s smaller cities, users sometimes have to wait up to 30 days to receive ecommerce orders.
“This was exciting [as a problem to solve]. With our expertise in running logistics at NuvoEx, we knew how to get ecommerce orders to the closest hub quite easily,” he said. The new business will focus on solving the forward logistics problem. Till recently, PepperTap was claiming to deliver an average of 20,000 orders daily across 17 cities.
Not the first to shut shop
PepperTap is not the first one to shut shop in the grocery retail business in India. In the last 24-36 months, companies such as LocalBanya, Grocerywalk, RationHut, and ShopVeg downed shutters.
Retail is a $500 billion business in the country, and grocery shopping is a big part of it.
However, India is a country where grocery stores, called kirana, are present in almost every neighborhood. Often, these stores have delivery boys who deliver goods bought to your doorstep, free of charge. The local store owner usually takes orders on the phone and even provides you credit and discounts.
Grocery retail chains are finding it difficult to penetrate India’s tier-two and three towns for the same reason. The business operates on wafer thin margins of one percent to two percent. Customers don’t wish to pay a convenience fee which makes each order incur a net loss.
Grocery shopping is also seen as a way to step out of the house after work hours in small town India.
They end up buying online. BigBasket and Grofers are the largest online grocers in India. These startups also face a lot of competition from the local supermarket or chains such as BigBazaar, which offer deep discounting.
It’s for the same reasons that companies such as Grofers and PepperTap wound up operations in tier-two cities to control their burn rates.
“We decided on the list [of cities to halt operations] by looking at the size of our customer base in each city and the pain we would cause to all stakeholders by shutting them down. So, relatively new cities with a small customer base were selected for closure,” Navneet blogged.
However, one of the major reasons for PepperTap to close grocery delivery was to conserve cash.
“Losing cash on every order – no matter how small, how controlled, or how goal-oriented the burn – meant one day we will run out of cash. Perhaps we could slow down the process, but mathematically speaking this was a certainty,” says Navneet.
This post was originally published on Tech in Asia.