How to survive and scale in hyperlocal e-commerce

"Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning." - Albert Einstein 

Lately, the hyperlocal space has been at the epicentre of fierce competition, dreadful consolidation, rampant layoffs, defunct startups, serious scrutiny and criticism. VCs and investors have declared this space both capital- and operation-intensive, and difficult to scale.

To create a sustainable business in the hyperlocal marketplace, it is important to realise that this is a long-tail business (grocery/food is just a hook) and you have to get the numbers right. Unit economics, unit economics, unit economics are the new vogue these days. Investors like to talk about burn rate, runaway, transactions, average selling price and margins. And they are pretty important!

In a single-vertical hyperlocal e-commerce, average selling price varies from Rs 400 to Rs 700, margin from 5 per cent to 15 per cent, delivery cost from Rs 20 to Rs 80, user acquisition cost from Rs 300 to Rs 500 with other overheads consuming two to three per cent of the pie.

It's simple math that these numbers don't add up to a positive transaction, irrespective of how much you "scale". In fact, the labour costs (supply chain and logistics) grow exponentially and not linearly with the transactions. On top of this there's an issue about the ownership of an order, which impacts consumer experience in a significant way.

Our vision of hyperlocal has always been about capturing transactions which happen in proximity of the consumer and the merchant (in various scenarios and use cases) and which fits in with our mission - to empower local commerce .The most critical number that we track is not transactions but Merchant Density (market density as well as merchant density inside a market).

India has retail density of 11 shops per 1,000 people, highest in the world. Ninety-five per cent of them are mom-and-pop shops catering to local demand (about 70-80 per cent of retail commerce happens within 5 km). This means, on average, there are 3-5 lakh merchants in each metro or top-tier city.

This is awesome amount of coverage and distribution network even in the tail categories let alone the head categories of grocery, food and pharma, and the good thing about this is that supply mostly sits just 10 minutes away from the consumer. Creating a new hyperlocal supply chain is costly not just in terms of capital requirements, but also counter intuitive in terms of competing with the already established network which is totally entrepreneurial in nature.

So you can't create a sustainable hyperlocal business without incorporating a significant chunk of these local stores in your business and operational model. Higher merchant density translates to more variety, lower prices, speedy fulfillment, better margin, low-cost marketing and overall healthy unit economics. For us, "scaling" translates to exponential merchant acquisition one market at a time. Anybody can grow transactions but not all scale.

While others were chasing "traction" and "transactions" and burning money, we were focusing and investing on right business fundamentals - merchant density and product market fit. Amazon CEO Jeff Bezos has said, "When you have something that you know is true, even for the long term, you can afford to put a lot of energy into it." In the end, it's about finding the right "scale" model which should make your unit economics better at scale and not worsen them. Many hyperlocal plays have perished for not getting this right.

So, by the end of this month, folks in Gurgaon can start ordering groceries from need stores within the societies and apartments, pay by credit cards, debit cards, online wallets and earn cashback on each transaction. Beat that! When everyone's chips are down, we are very bullish. And by the end of this year, we expect to be in Delhi NCR operating in nine categories including fashion.

To materialize and fulfill any dream requires lot of perspiration and a healthy burn. And what this has taught us is -- every revenue earn is every funding close and not every revenue stream needs "scale" to be significant. In retrospect, vision is more important than the product and revenue streams.

Our strategy to be the BFFs of the merchant has enabled us to create a business model with multiple revenue streams, where marketplace becomes a flagship, bread and butter of the business, and other product lines piggyback on it to add to the bottom line. This paradigm has enabled us to create an alternate revenue channel to fund our monthly burn within the same operational setup to carry forward our vision.

Even though we have David vs Goliath competition in hyperlocal, our platform is a Ferrari that is going to hand over the game to us.

Gajinder Singh and Ram Singla are founders of PayMango a hyperlocal 2.0 platform for local commerce.