Hari Menon is an ecommerce veteran. He set up one of India’s first ecommerce portals, Fabmart, in 1999. BigBasket is his second ecommerce venture. Tata Digital last year bought 64% in BigBasket.
In this Twitter Spaces conversation, held on March 31, 2022, Menon talks about the use cases for app-based grocery delivery and for quick commerce; the unit economics of the business and why BigBasket won’t get into it; what the Tata Digital businesses can learn from it; and can the quick commerce model scale to Tier 2 cities.
Key takeaways
FF Twitter poll
1. Does superfast delivery of food and grocery improve your life in any way?
51% said it was useless; 22.2% said they use it because it’s there; 20% said they loved it.
2. What’s your biggest concern about superfast delivery?
61.9% raised concerns over driver safety and the traffic chaos
3. Where is the pressure coming from to expand fast deliveries?
45.8% said VCs, 33% said founders; and only 16.7% said customers.
Use cases for the online grocery and quick commerce
The way BigBasket (BB) looks at this [fast grocery] is that it will be 15-20% of a customer’s monthly basket—which is not small at all.
The use cases for the grocery business and for quick commerce.
-
The full stack BB business, with 50,000 SKUs—with typical delivery in 3-4 hours same day or the next day, depending on the configuration of your basket. If it has long-tail items, then delivery by evening or next day. If the items are in the dark store, then delivery between 3-6 hours. This is 80-85% of BB’s business.
-
BB’s subscription business—lots of people want to order and forget about it; it’s about convenience and not speed of delivery. Milk is the most subscribed item in our home; the second is newspapers. BB’s subscription business is driven by milk delivery and has a few other items around it (tender coconut, fruits, vegetables, dairy, bread, eggs etc). This has about 3,500-4,000 SKUs. This is 13-14% of BB’s business.
-
BB Now—this serves three strong use cases:
-
Unplanned buyers—say, someone who comes home at night and then decides what to eat (most people plan their groceries at the start of the month; or they add to the cart over the week and order over the weekend, to build the basket for free delivery.)
-
Emergency—a bulb fuses and you need a replacement immediately; or you need something quickly for guests.
-
Impulse buys—meat is one of them. People typically decide in the morning that they want to eat meat. Here too the use case is not delivery in 10-15 minute, but delivery in 60-90 minutes.
-
-
There’s BB Express too, with more SKUs, but that delivers in one hour.
-
Where one buys from is based on convenience.
-
Customers don’t want onions and potatoes in 10 minutes. They are ok waiting for 45-60 minutes depending on whether it is their monthly/weekly buy or an emergency buy. For monthly/weekly buy customers are OK waiting till the end of the day.
What explains the VC money flowing into quick commerce?
-
A lot of this money starts flowing in because things happen outside. Europe started this whole wave—not the US or China. China took off on social commerce and not on quick commerce.
-
In many European markets you don't have large ecommerce players. They have omni channel players and those who deliver out of their store, but few focused online players. Quick commerce suddenly became the online play and investors started putting in money. But this too is now slowing down.
-
So some of these waves outside get carried into India.
“I would never set up a standalone business which is only quick commerce, if it’s going to serve only 10-15% of the market.”
-
10-15% is not small, but as a standalone business, it doesn’t make sense.
-
I will also not do a 10-minute delivery. People are doing 10-minute delivery in a 1.5-km radius. There are so many customers outside that radius and are happy to get delivery in about 25-30 minutes. If I increase the radius to 3 km, I have a larger number of customers coming into that [dark] store—and I break-even faster.
The balance between cost and what the customer is willing to pay
-
For unit economics to work, three parts have to work together:
-
last mile delivery at low cost;
-
gross margins, which depend on the price you are selling the product at; and
-
your ability to charge for delivery.
-
-
The quick commerce business drives a fairly low average order value of about Rs 400. To increase that you have to increase the range and have larger store sizes. To have larger store sizes, you have to service a larger area. And when you service a larger area, the time to deliver keeps increasing.
-
On the other side, customers are value conscious and don't want to pay for delivery. BB has never given free delivery. We do free delivery for customer acquisition, but if you continue doing that, you’ll never make money.
-
Customers are willing to pay the price because they see value in the service for those use cases.
-
Of course, VCs are investing for the long term. Though they are not comfortable with losses for the long term. The business works only when you give deep discounts. These questions come up faster now.
-
Delivering ice cream at night is a classic use case for quick commerce. That is the emergency buy/top-up use case, and also the impulse buy use case. They might do it at a discount because it’s a small part of their business.
BB’s breakthroughs in process and technology to make quick commerce work
-
BB acquired vision technology for its physical stores that are unmanned. The technology allows you to put stuff in your basket and the machine identifies what’s in the basket.
-
When an order is ready, the technology identifies the delivery boy who picks it up—it creates a faster, more efficient way to hand over the delivery.
-
We now want a super app—with all our apps in one app. [This super app is specific to BB; Hari says, the Tata Neu is a “real” super app, with a collection of brands under the Tata Digital umbrella.]
The experiment with BB’s vending machines in residential complexes in Bangalore and Mumbai
-
It works well in apartment complexes with minimum 300 apartments and in corporate offices. It satisfies the emergency and impulse buys well.
-
It makes less money.
On 10-minute deliveries for groceries
-
A small set of orders get delivered in 10 minutes and it depends on proximity to the dark store.
-
If you have to make 100% of your deliveries in 10 minutes, then your radius has to be less than 500 metres. And therefore you need many more dark stores. And if you are serving only 500 metres then you will have x number of customers and so the dark store has to be smaller. But with a smaller dark store your ability to carry a range of products reduces.
-
So delivering all orders in 10 minutes is possible, but it’s crazy. It will not make money.
-
The key is what does the customer want? These things will evolve and customers and businesses will figure out their sweet spot.
On scale: Will quick commerce work in Tier 2 and Tier 3 towns
-
In Tier 2 towns, there’s no question of BB delivering in 10-20 minutes; BB will do a 30-45 minutes service so that we need to set up fewer dark stores. Because what you need to make quick commerce work is density. You need a larger number of orders to come in and for that, in Tier 2 towns, you need to serve a larger area.
The impact on delivery agents
-
Everyone in this business needs to be very responsible about [the safety] of delivery agents.
-
BB has never passed on any penalty to a delivery boy, nor is he incentivised for fast delivery. Instead BB equips them with enough technology and products to deliver on time.
-
BB commits to a customer basis what is reasonable time to deliver, with a buffer.
BB’s customer pickups
-
The Fresho stores: You can order on the app; the warehouse delivers to the store; and customers can pick up the next day.
-
These stores are unmanned.
What other Tata Digital companies can learn from quick commerce
-
Move to a dark store model, instead of a central warehouse model. This is true for 1mg, Croma, Tata Cliq and BigBasket.
-
Look at common last mile delivery partners.
-
Common warehousing, going forward.
