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[Startup of the day] How GrocerMax figures out the right unit economics in online grocery retailing

Jai Vardhan
10th Sep 2016
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Expansion may be one of the top priorities for venture-funded startups across business categories, but in the case of exploring scale, it isn’t necessarily a good idea. Food tech and hyperlocal startups that forayed into various cities but shut shop when they failed to make an impact are perfect examples of this.

Gaurav and Radhakrishnan (from L to R)
Gaurav and Radhakrishnan (from L to R)

Grofers, PepperTap (no more operational), Localbanya, and Roadrunnr (now Runnr) are some of the startups that have suffered due to flawed expansion strategies. Learning from their mistakes, Gurgaon-based GrocerMax, a hybrid online grocery procurement platform, made a conscious decision to hold off from venturing into multiple cities until it had the right model and unit economics figured out. Gaurav Juneja, Co-founder and CEO, GrocerMax says:

Our first priority was to get the model right and create strong value proposition for customers.

In the last 18 months, the company claims to have found the holy grail — the ability of the backend to work at scale. Founded by Gaurav and K Radhakrishnan, GrocerMax is a hybrid platform for procuring grocery and vegetables. To remain asset-light, it keeps only 10 percent inventory, sourcing the rest from supermarkets and provisional stores in real time.

The backstory

Gaurav and Radhakrishnan both worked at Reliance Retail during 2007–08, albeit in different teams. Radha was leading the value format, while Gaurav was part of the category team. “We interacted briefly on topics where category and format overlapped. However, once I moved on from Reliance Retail, we lost touch,” says Gaurav.

Six years passed, and Gaurav had a window seat on an early morning flight in July 2013. “I reached my row busy on a call and jumped over this gentleman to get to my seat. Soon, I realised that the gentleman sitting in the aisle seat was Radhakrishnan,” says Gaurav. The duo spent the entire flight catching up and discussing retail, FDI, etc.

The chance encounter led to a series of meetings where they found common ground around the online grocery space and how it could be a game changer. “We were both passionate about being part of this ‘new’ way of retailing and came together to set up GrocerMax,” says Gaurav.

Gaurav has over 15 years of operational and financial experience across organisations like Reliance Retail, Li & Fung, Lehman Brothers, and Bryan Garnier & Co. Radhakrishnan is a veteran in the retail vertical and has had leadership roles across top retailers including Reliance, Future Group, and Parry Agro.

The company did a beta launch in February 2015, and currently claims to clock 350 orders on a daily basis with an average bill value of Rs 1,300.

How GrocerMax is figuring unit economics out

Irrespective of the channel — offline or online — food and grocery businesses have to demonstrate a wide assortment (without carrying high inventory), sharp pricing, and timeliness of delivery. The biggest challenge common to most such businesses has been the implementation of a disruptive hybrid model. So far, entrepreneurs largely see only two ways of retailing grocery — inventory-led and pure-play marketplace.

In the inventory-led model, the entire catalogue is in stock, making it extremely asset-heavy. On the other hand, the marketplace model keeps no stock and involves buying from retailers in real time. The marketplace model has bottlenecks like limited catalogue and serious issues around fill rate and consistency. Radhakrishnan says,

We have changed the narrative by building a disruptive real-time marketplace model which is essentially a hybrid of both inventory and marketplace.

GrocerMax offers 8,000 SKUs, 800 of which are kept in stock, with the remaining 7,200 procured in real time through wholesalers, cash and carry stores and wholesale FnV market. The entire model is built on a proprietary platform, which enables the company to run an errorless, paperless supply chain at scale. He adds,

Our Opex and Capex is 10 percent of the asset-heavy infra of inventory-led player. We agree that unit economics is one of the most important elements in judging the model. A transaction is the atomic unit for the retail business and it is important that it is profitable. This is the key avenue which generates revenue and margin.

The company claims to snap up 16 percent (exclusive of marketing expense) gross margin in inventory-led products and five percent in products sourced from retailers. Because of the hybrid model (inventory plus marketplace), GrocerMax claims to make money on every order after delivery expenses and marketing discounts. Gaurav claims,

Considering the above metrics, every distribution centre can turn profitable for us at the 500-daily-orders mark.

Funding, future roadmap, and competition

So far, GrocerMax has raised about $2.5 million risk capital from reputed family offices and HNIs. Over the next 24–36 months, the company will focus on the top six urban/metro markets in the first phase of expansion.

grocermax

“These markets offer scope to build a Rs 1,000-crore business and an opportunity to build a profitable business for each of the cities. By the time business is set up in these markets, the tier II cities would have matured and would be ripe for entering. Also, by then, as a platform, we would be very strong and mature around all key functions and ready to roll out in other markets at a much faster pace,” concludes Gaurav.

Currently, the company competes with the likes of Bigbasket, Milkbasket, ZopNow, and SoftBank-funded Grofers. While Bigbasket is pure-play inventory-led play, Grofers has been trying to build hybrid models leveraging both models. Working out unit economics and ensuring consistency of experience are challenging tasks, as is made obvious by the number of online grocery retailers that have shut down in the last 12 months. At present, the grocery retail war is largely being waged between two players — Grofers and Bigbasket — but GrocerMax could come out swinging in the long run.

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