We Want To Scale Up Profitably: Hari Menon, CEO, BigBasket.com

For the founding team of BigBasket.com, a grocery e-tailer based in Bangalore, this is the second innings in e-commerce. The team of five – VS Sudhakar, Hari Menon, Vipul Parekh, VS Ramesh and Abhinay Choudhari – had earlier launched Fabmart.com (backed by ChrysCapital), selling music, books, toys, jewellery and finally, groceries. But the grocery business later became pure play retail, was hived off and merged with Trinethra, did raise funding from India Value Fund and was ultimately sold to the Aditya Birla Group. The online business finally became Indiaplaza.com, an online shopping mall, and the five founders still remain shareholders.

However, in September 2011, they got together to launch the grocery e-tailing business BigBasket.com, roping in TutorVista's K. Ganesh and Meena Ganesh as angel investors. The firm has also raised $10 million from Ascent Capital, which marks the first institutional investment in this space and the largest series A round of funding in an e-commerce firm.

BigBasket.com plans to add products like organic foods, pesticide-free fruits and vegetables, exotic cheese and frozen foods to its inventory, and also wants to feature international brands. The company will also introduce private labels across categories, which will help it spread brand awareness and increase margins.

BigBasket.com plans to scale profitably and sees margins improving as it moves across the value chain. "At the peak level, when you are buying directly from companies, this category will run at a margin of 20-23 per cent," said co-founder and CEO Hari Menon in an interview with VCCircle. Till recently, Menon was the CEO of IndiaSkills, a joint venture between Manipal Education and UK's City & Guilds. Here are the excerpts:

What has changed since you started Fabmall in 1999?

One fundamental change is how users have adapted to the Internet as a medium for shopping. The fear associated with online shopping has reduced considerably and in this category, a lot of sales happen through cash on delivery (COD) and Sodexho coupons. Also, people today are much more focused on profitability. Earlier, they focused more on topline and market valuation, driven by an exit perspective. Scaling profitably is critical, though, and that's how a player approaches a business today, as compared to 1999. Plus, we are a lot more networked now, being in this business for the past 8-9 years.

How are you sourcing products across categories?

Right now, we are dealing in four broad categories. First is staples (rice, dal, spices, etc.) and within a month of starting operations, we have moved to private label. We currently source these from the mandis to one of our suppliers who cleans and packages those. From mandis, we will move further down the supply chain to the mills, and that is how your margins keep rising.

One category, which will be a big differentiator for BigBasket.com, is fruits and vegetables. But it will be very difficult to crack. We have a farm-to-home concept where we intend to get the produce directly from the farms, without the intermediaries. Typically, the produce stays at least 24 hours in a store when you see it deteriorating. Right now, we are working with Safal but over a period of time, we will build our network of farming bodies and that will help us ship directly to buyers.

Another growing category is frozen meat and dairy products. Then there is FMCG foods and non-foods (toiletries and personal care). Right now, we deal with the distributors in these categories, but over the time, we will move up the value chain. Currently, we are working closely with Metro Cash & Carry. But once we start building our volume, we will approach these players directly. In fact, we will start approaching the top 8-10 suppliers within the next 6-8 months.

We will also introduce private labels in categories like jams and pickles, but that will be one year down the line.

But what about the delivery model?

The entire last mile is owned by BigBasket.com. We have our own fleet of 50 vans, which are being commissioned for delivery. We follow a hub-and-spoke model where all the goods are bought and stocked in a warehouse (it will be built as the company moves into direct purchase in the next 6-8 months). The warehouse will then supply to the hubs. We have three in Bangalore – in Whitefield, Kanakpura and Yashwantpur – and they cover the entire city. From there, the delivery executives (called customer experience managers) deliver the goods in four time slots – 7 am-9 am, 11 am-1:30 pm, 3 pm-5 pm and 7 pm-10 pm.

The funding we have raised will help us expand into four other cities by December 2012. In the next few months, we will crack the Bangalore model – so that we can replicate it in other cities (which are yet to be decided).

How is the traction on the site? What's your average billing?

We have launched the site on December 5; so it's been a little over three months. At present, we average a little over 300 orders a day and the average value per order is around Rs 1,200, compared to Rs 300-400 for a physical store. This is because customers come to us for monthly purchase, which is a very sticky category. Customers visit us at least twice a month and we expect that to increase with the rise of fruits and vegetables sales. As per the last count we have had, about 3,500 customers have shopped here at least once.

You said that when you started Fabmall, you looked at it as a retail business. Do you feel the same about BigBasket.com?

This is a business which is much more retail and physical than any other e-commerce business because we have to operate warehouses, maintain hubs and a supply chain, and will eventually deal with more than 250 vendors and carry 7,000 SKUs (stock-keeping units). So if you don't have the retail ingrained and think that you just need e-commerce and technology, you'll be dead. You need to understand supply chain really well to run this business.

How long a runway does the series A round give you?

This round should last us for three years. The whole concept is to scale up profitably. We want to expand to new cities and that's why the capital is required. From an operational perspective, we don't need much capital.