E-commerce Startups Faltering in India Now

In my earlier posts on E-commerce valuation Click here and here, I have explained the power of network effect enjoyed by e-commerce companies and the threats to these. As I have mentioned that from the current flood of e-commerce startups in india, very few will survive because most of the times these startups are not adding any value to the service they are offering. Most of the times they are just an ordering platform; one can use them to order something. There is not any differentiation, no value addition.

I have explained earlier also that a business must add some value to a product or a service if it wants to be relevant. Only then it can squeeze some profits on its own. Substitution effect is not always that strong. We are seeing a flood of online startups, better to say them ordering startups like grocery, food delivery, hotel room, restaurant reservation etc. But whether just processing orders is enough to attract crores of venture capital and mostly this free venture capital is burnt on delivering the order as delivery is free. I mean it is ridiculous, you have a business plan like to deliver grocery at people homes and common sense says that people would not mind paying a fee for savings in time, uneasiness and fuel costs, but you are offering this as free just to be competitive. But people will take it as a right.

I mean, if you want to give free it is ok as you are dealing with two parties; suppliers and consumers, but in this two tier platform model, one can only afford to subsidize only one party. You need to have a viable business model. It must be something valuable especially if it is a service. Delivery is too common and very low entry barrier business; you can’t rest assured that by offering free you can hammer your competition. The moment you will try to monetize your platform, others will jump into the race. Kishore Biyani and Reliance is doing the same by waiting on the sidelines of online retail. When Amazon and likes of Flipkarts will try to monetize their services, they will jump in with much better products and logistics.

I am always in a hurry, so I am ordering most of my things over phone only. I normally calls the shop keeper to pack the chicken etc as it can save my time. Then I go to shop and pick everything…I can pay him some money if he can deliver the same at my house. In fact we are paying our Gas cylinder wala for a long time for delivering gas cylinders at our home…so what’s the big deal in it. Local Kirana wala is doing the same for long that too at free of cost.

You wonder how our Kirana wala is doing the same for free always, because he is not subsidizing the both platforms. He is earning money from the “Sale” of kirana items so in order to earn more money from more customers he can afford to offer free.

Our Zomato can also do the same since it has multiple revenue streams; so it can switch to subsidize anyone. Its strength is unique set of huge data and already a large base. Domino’s is getting its 40% business from online and it is doing it for long; delivery is free because it is “earning” from the sale of pizza itself. So by offering free delivery, they are just adding the “value” to its product and they will get their reward in the form of increased sale because last time when I was in Nagpur, I ordered from Domino’s only because of free home delivery otherwise I would not have gone to eat/get pizza at their place. This is Value addition.

Why I am writing all this? Actually just last day I saw some news regarding troubles faced by food delivery startups like Localbanya and these at once reminded me all this. I am just pasting the small bits from the news. Just for sharing.

Source: Economic Times Dtd 09^th Oct 2015:

Localbanya is ‘temporarily’ out of business 

Online grocery startup Localbanya has temporarily halted operations, citing the upgradation of its back end. "We are temporarily suspending services due to maintenance and upgrade purposes," the company said on its website. "No orders will be processed at this time." 

The company rejected speculation that it was strapped for cash and maintained that staff attrition was not unique to it.  Two suppliers of Localbanya said they had been told that there was a shortage of funds. 

"The company is also trying to change the model of sourcing merchandise from large retailers or cash-and-carry players to consumer goods companies directly," said another supplier.

Founders Mehrotra, Rashi Choudhary and Amit Naik have been seeking to raise $15-20 million for the past few months and had plans to raise another $35-40 million by the end of this fiscal. 

Industry executives said several Localbanya employees are looking for jobs with salaries not having been paid for the past two months. Nayan Choudhury is said to have quit as vice president, trading, commercial and operations. This could not be independently verified. 

"Localbanya has been faltering on deliveries in the past few weeks due to paucity of funds. The company is trying to revive with fresh funds," said an executive. The company's Facebook page had several consumer complaints posted recently about orders not delivered. 

Given the low margins in food and grocery retailing, online companies need a constant flow of funds. "Logistics and consumer promotion alone would account for 20 per cent of the total cost for the online grocers. With huge competition in online grocery retailing space, the companies should now look at how to make the business sustainable and generate profit," an industry official said. 

Source: Times of India Dtd 09^th Oct 2015:

Food delivery startups feel the heat

On Monday, when customers tried to access food delivery startup Dazo's app, they were greeted by a message from the company's co-founder and CEO, Shashaank Shekhar Singhal: "We are discontinuing Dazo's curated food ordering platform and thus won't be taking new orders. As a team, we've decided to move over this business and we'll be working on a new product."

This came as a surprise to many, particularly because the company was backed by bigwigs like Google India chief Ranjan Anandan, TaxiForSure co-founder Aprameya Radhakrishna, and former Freecharge chief executive Alok Goel.

But Dazo is not the only food delivery startup that has taken a hit in recent times. The space, which has seen a host of players enter in the past few years, is now witnessing plenty of casualties. SpoonJoy, Bengaluru-based online food service venture that raised $1 million in May, shut down its Delhi operations last week and has started scaling back their operations in Bengaluru. Delhi-based Langhar, an online platform selling home-cooked food, shut operations in February, just two years after it started. Chennai-based OrderSnack closed even before raising their first round of funding.

Investors say the food-tech space is a tricky business. K Ganesh, a promoter at Freshmenu, which delivers fresh food, said that the online food sector is mirroring the offline trend. "While the barriers are low, it is a tough business as people's opinions are whimsical. In food, people get bored easily even if it is good," he said. He added that the execution challenges are high in the business, and aggregator models will always struggle to make enough money.

DSG Consumer Partners, which has invested in ventures like Oyo Rooms, ZipDial and EazyDiner, says it does not invest in startups whose core model is delivery of food. "Very few teams we saw had the full set of skills we think it takes to succeed. Some had a good balance of tech and food but did not understand the details of food related licensing, safety, and traceability issues," said Deepak Shahdadpuri, MD and founder of DSG.

Startup analytics firm Tracxn finds that 31 food-tech startups have so far raised $161.5 million in investments this year, as compared to $66.8 million last year. However, the aggregate funding in both years was hugely influenced by restaurant listing and food delivery venture Zomato, which raised $60 million in 2014 and $110 million in 2015.


Gurgaon-based Bueno, an online food delivery startup offering global cuisines, says it will survive the race because it has a differentiated positioning in the market. Founder Rohan Arora said most food delivery startups do not factor in delivery charges into their business model. "If you're working on a Rs 100 price point for a meal, you have to also factor in Rs 50-60 delivery charges. But many startups don't do it in order to acquire customers," he said.

Shahdadpuri said only two categories of businesses will survive in the end. One, where the startups have a viable business model and understanding of all areas of the value chain. And second, where startups are lucky enough to be funded by VCs with very large pockets so that they are able to fine tune their model despite cash losses.

In this market fall, our E-commerce picks Info Edge and Network 18 are still doing good…they are still around the same levels. So I think we can add more.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)