About two years ago, VS Sudhakar, Hari Menon, Vipul Parekh and VS Ramesh decided to get together to take a crack at selling groceries online. The idea was seeded by serial entrepreneur and angel investor Krishnan Ganesh, who brought in the initial funding for the venture along with Meena Ganesh. The team launched BigBasket in December 2011 and has since established a presence in Bangalore, Hyderabad and Mumbai. It will add two more cities soon and expects revenues at Rs 100 crore revenues by March next year.
Within the overall ecommerce framework, grocery etailing is one of the toughest niches to master. Apart from being faced with the daunting task of altering basic human habits, the matter of dealing with perishable products brings along its own unique complications. For the BigBasket founding team though, ecommerce is a known devil. This was the team that started a company called Fabmart during the 1999-2000 Internet era. The Bangalore-based Fabmart started out selling everything from music to books to groceries online. The experiment, not surprisingly, given India’s abysmal Internet penetration at the time, failed and in 2003 Fabmart rebranded to Fabmall and launched an offline grocery business. The grocery business was subsequently acquired by the Aditya Birla Group, while the online entity acquired and merged with US-based Indiaplaza.
BigBasket CEO Hari Menon spoke to StartupCentral about the challenges of grocery etailing, raising funds from Ascent Capital and when and why the company will raise its Series B round.
Tell us how you got started with BigBasket. Where did the idea come from?
The idea for BigBasket came from Ganesh (Krishnan Ganesh). This was around June-July 2011. Ganesh had met up with my colleague Sudhakar (VS Sudhakar) and suggested that we look at the grocery space. We had spent considerable time in that space earlier and in addition we’d also worked in the Internet space. More importantly, grocery was an area that nobody had attempted at the time from an ecommerce perspective. Ganesh was excited about the opportunity and asked Sudhakar if the erstwhile Fabmall team would be keen to take up the opportunity. Sudhakar reached out to me, Vipul and a couple of others and frankly, it took us very little time to say a quick yes and we were on.
How are the challenges on the online grocery business different from other ecommerce businesses?
Grocery is a pretty complex business from the back-end and supply chain perspective. The complexity is one of the biggest challenges. We deal with close to 8,000-10,000 SKUs. Order sizes are large. Typically at the beginning of the month you have 30-60 items in one order. That makes it very different from typical ecommerce businesses where you normally shift one or two products, it could be a camera or a mobile phone and so on. The back-end is complex because the supply chain is not yet efficient. You deal with a large number of vendors and suppliers and not all of them are organized.
Let’s take one example of complexity — the products themselves. You are dealing with perishables. How much more difficult does that make the business?
Yes, that’s what makes it most difficult, the fact that we deal with a lot of perishables. We have to ensure that we manage our inventory very effectively in perishables and that we deliver those fresh to our customer. Essentially, you know, we’ve done this in the past and so we know what it takes to manage inventory of complex items like that. Things like where do you source from, how early do you source and a lot of these things are just-in-time from a model perspective. Here the benefit that the platform offers is that you can actually do what is called farm-to-home because there is no other place where this product goes and gets sold. So it goes directly from the farmer, there is very little processing that happens at the warehouse, straight to the consumer’s home. There’s no stocking point for these products in a store. But the fact that we have to buy the right quantities, make sure that we don’t have excess stock, make sure that we don’t have dumped stock is really where the challenge and complexity lies.
What is your operating model on the ground at present?
We have two operating models. When we start the business we use what we call the just-in-time model. This means that not just perishables but everything we bring against an order. Because you don’t yet have the volumes for suppliers to supply in bulk and for you to stock in a warehouse. So you consolidate orders for the day, go and buy the products and deliver. When you reach a particular volume, you move from the just-in-time model to what is called the warehouse stocking model. That is where we are as far as Bangalore is concerned. We buy products directly from the supplies, like Unilever and Procter & Gamble, we buy from farmers and mills and stock the products in the warehouse. We stock a certain number of days of sales, depending on the product and sales. We are able to set initial inventory levels and then decide what the re-ordering levels are. So it is all completely automated.
Give us a sense of the infrastructure required for a business like this.
It is not necessarily very infrastructure-heavy. One of the things that we invest heavily in is technology. The only area where we have infrastructure is essentially is in warehouses. Currently we are in a 10,000 square feet warehouse and we are moving into a 26,000 square feet warehouse in the next couple of months. In the warehouse we have equipment that helps us pick products against an order. It is all completely automated. We use handheld devices that allows the picker to choose the right product. On the delivery side we have vehicles but again these are not infrastructure-heavy because we lease them or you can outsource the entire fleet.
What’s the scale and size of the company at present?
We are operating out of three cities now. This is a very city-specific business. One big difference, coming back to your root question, is that grocery as a business needs to done city by city. I cannot ship rice bags and perishables across cities. In other ecommerce models you can stock centrally and ship out to the rest of the country. So we have Bangalore, Mumbai and Hyderabad. Each city will have a warehouse and each city will have what we call hubs. The goods in the warehouse go to the hubs and from there to customers. Hubs are where our delivery vehicles are kept. We split cities into zones. For instance, Bangalore has four zones and each zone will have a hub. All orders go to the hub from where it is distributed. We’ve used technology to get the routing done automatically and GPS devices track the vehicles. We do close to 2,000 orders a day on peak weekends and 1,500-1,600 orders a day on week days. Our average order size is Rs 1,300 per order. We are currently running at close to Rs 5 crore on a monthly basis. This year, in financial year 2013-2014, our turnover would be Rs 100 crore.
You raised an angel round from Krishnan and Meena Ganesh. Then you raised $10 million from Ascent Capital. Why did you pick Ascent?
We started our fundraising exercise somewhere around January 2012. This was post the initial funding that we (the founders) and Ganesh and Meena had put in. We met a couple of venture capital firms. Ascent happened faster. Raj Kondur was with Ascent. We’ve known Raj from his ChrysCapital days (Kondur co-founded ChrysCapital, earlier known as Chrysalis Capital with Ashish Dhawan in 199-2000) and he was an early investor in our earlier venture Fabmart. He knew us as a team, there was interest in the company and the terms were good, so things moved a little faster.
Were venture capitalists sceptical about grocery as an online business model?
Yes, absolutely. That was one of the challenges we faced initially when we started talking to venture capitalists. The first question they would ask us was why and see what happened to Webvan (US-based online grocery store Webvan lost a reported $800 million-plus in venture capital and IPO proceeds before shutting down in 2001). Post Webvan there has not been much that has happened in that space for a while. Investor were happy to look at grocery because we still have successful models. Tesco.com is one of the best stories in the space. Of course now one of the things that has made a big difference in the investor community is the interest and excitement that Amazon is showing in the space (Amazon is launching AmazonFresh, using the expertise of former Webvan officials Doug Herrington, Peter Ham, Mick Mountz and Mark Mastandrea). But yes, there has been a lot of scepticism about the space because there have been more failures than successes in the past.
What’s coming up from BigBasket in the next 12 months?
The next thing that will happen is that Bangalore breaks even in the next few months. That’s a big milestone for us. After that Hyderabad and Mumbai will move into the warehouse model. They are in the just-in-time model right now. Then in the quarter of January-March 2014 we will move into Delhi and Chennai. Starting March 2014 we will start work on our Series B round of fundraising which will help us go to 10 more cities. That’s the plan.
How much will you raise in the Series B round?
We have not firmed up those numbers yet.
How do you size up the competition? There are quite a few new entrants.
There are but they are mostly regional players. I expect the space to hot up very soon. I am hoping that more players will enter the market because I am a strong believer of the fact that markets open up when there are more players. Otherwise the onus is on one or two players to build the market.
This is your second outing with ecommerce. Share some of your key takeaways from the first and present experience.
The important takeaway is that all the founders are gray! The big difference is that there is a very large population on the Internet today. What took us 3-4 years last time from a sheer revenue perspective, we managed to do this time in seven months. In 1999 when we started Fabmart we used to use dial-up lines which used to hang up. Bandwidth was a serious issue and people were not comfortable at all buying online because they worried about whether payment gateways were secure. Today smart phones and smart devices allow you to use the Internet on the go. We’ve just launched our Android app. All this has made a huge difference.