For a four-year-old, FirstCry is rather precocious. It started off at a dead run, not bothering with the crawling and toddling stages. Launched in November 2010, the online retailer specialising in baby-care and kids’ products lost no time in adapting the omnichannel model (then called the hybrid model) to add an offline flavour to its online presence. Supam Maheshwari and Amitava Saha, co-founders of Pune-based BrainBees Solutions—the company that runs FirstCry—decided to run counter to the standard e-retailing model or the more conventional route of starting offline and moving online. The intriguing backflip—from online to offline—seems to have paid off. Now a handful of e-commerce sites, such as Myntra, Zivame, CaratLane, and FabFurnish, dealing in popular fashion, lifestyle, home décor, and furniture, have gone the FirstCry way.

The contrarian approach is all the more intriguing because when FirstCry launched, it was in an environment of tremendous hype around e-commerce. By the end of 2010, India’s consumer-facing e-commerce market was growing at a whopping 49.1%, and reached a market size of $9.9 billion (Rs 62,538 crore) the next year. If ever there was a good time to launch a niche e-retail company, this was it. But within seven months, Maheshwari and Saha decided to branch out into brick-and-mortar.

“Online is convenient,” agree the co-founders, but in niche segments, the sweet spot often lies elsewhere. “Convenience is one thing but going out with the family and shopping for kids is something [entirely] different,” says Maheshwari, BrainBees’ chief executive.

Also, most customers take time to adapt to technology and the slow growth of online retail is disappointing. Retail in India is a $500 billion industry, according to retail consultant Technopak. Organised retail accounts for 8%, while digital is a mere speck at 0.5%. Now, look at the segment itself. Estimated at $100 million in 2014, the online market size of baby-care products is pegged to be $500 million by 2017, according to Nitin Bawankule, industry director for e-commerce, classifieds, and entertainment at Google India. It currently accounts for less than 2% of the $5 billion baby-care products market.

A FirstCry store in Pune; revenue from stores has grown 100%. 
A FirstCry store in Pune; revenue from stores has grown 100%. 

“Clearly, the opportunity outside e-commerce is huge,” says Maheshwari. FirstCry’s first franchise store was opened in Bharuch, Gujarat, in June 2011. Today, the company operates 107 franchises across 85 cities (of which only 31 are tier I locations).

While revenue grew at a compound annual rate of over 80% in the three years ending March 2014, offline revenue clocked 100%-plus CAGR, albeit on a smaller base. Close to 40% of the online transactions are via mobile, and Maheshwari says they plan to take this to over 50% in the next six months and over 60% in a year.

Most e-commerce players know by now that physical showrooms pay off, not just by drawing sales (more than 90% of organised retail business takes place offline) but by syncing online data with offline experiences and marketing strategies. Omnichannel has become the latest buzzword as industry research suggests that customers opting for multichannel shopping spend 3.5 times more than other shoppers. Today’s “connected” shoppers like to walk into a store that already knows their preferences by analysing their online shopping data, allows them the try-before-you-buy ritual, and lets them leverage the benefits of online shopping on the spot—be it price comparison or inventory search.

Evolving to hybrid from pure-play e-commerce has not been easy for FirstCry. Back in 2011, SAIF Partners, a Bangalore-headquartered early-stage investor with more than half-a-dozen investments in its kitty, was looking for a sustainable vertical play in e-commerce, and had zoomed in on baby-care products as a niche with sound growth potential. FirstCry had just been launched, but Mukul Arora, vice president at SAIF

Partners, was finding it impossible to reach its founders. In desperation, he tried the customer care number he found on the FirstCry website. It turned out to be Saha’s mobile, and talks began.

That was about the time FirstCry was laying the foundation of its omnichannel model. SAIF was not at all keen on this. “Being investors in pure-play e-commerce, it was not something they wanted to focus on,” says Maheshwari. Arora recalls: “Maheshwari was bullish about the wide space offline offered, but it was not part of our investment strategy. The supply chain for international and local brands was not robust enough for apparel and fast-moving consumer goods [barring diapers], which online players could clinch,” he says. “Plus, we saw a lot of repeat customers, which means the customer life-time value (business derived by a company from its relationship with a customer over the years) would be greater than the customer acquisition cost.”

SAIF’s concerns were valid. Going offline means owning the first few stores before appointing franchisees. “We were not comfortable with blocking that kind of capital,” says Arora. “At the time, there were four or five tough contenders online and we wanted FirstCry to stay focussed on the digital business alone,” he adds.

Key contenders in this space include Mumbai-based Hit The Mark, which runs flash sales site Hopscotch.in, and Mahindra Retail-owned Mom & Me (part of the $16.5 billion Mahindra Group), one of the largest chains for moms and kids. The retailer recently acquired online player Babyoye.com, and is reportedly integrating its entire e-commerce business. It also plans to open 50 franchise stores this fiscal. Hopscotch has recently raised $11 million in a second round of funding.

In this environment, SAIF was very clear when it invested $4 million in FirstCry in April 2011. “We are okay as long as you devote least time to the offline venture,” Maheshwari was told. As offline scaled up, the ‘mix’ made sense and the investor’s anxiety reduced with every passing quarter. Moreover, a sizeable number of offline customers have gone online and existing franchisees have come back to open new stores, thus driving overall growth.

When IDG Ventures India, along with SAIF, led a second round of funding for $14 million in February 2012, the ambiguity around the hybrid strategy was diminishing. According to IDG’s founder and managing director, Manik Arora, baby products could be the next big thing after fashion. (IDG was an early investor in Myntra.) Then Vertex Venture Management, the venture capital arm of Singapore’s Temasek, came on board as it claims to be a strong advocate of offline-to-online play and vice versa. Back in 2012, Vertex invested in Meilele.com, the largest online furniture seller in China (by transaction volume), which also runs 250-plus offline stores. Says Ajay Lakhotia, investment director of Vertex, “India is a touch-and-feel market and the demarcation between offline and online is not going to stay for long. Plus, offline has a strong branding proposition, an opportunity not to be missed.”

The latest round of $36 million came in two tranches: While Valiant Capital, along with three existing investors, put in $26 million this February, New Enterprise Associates (NEA) invested $10 million in April. NEA had earlier invested in Diapers.com, a U.S.-based online retailer (the company was sold to Amazon in 2010), and its experience in the segment makes it enthusiastic about FirstCry. Ben Mathias, partner and executive director at NEA India, believes that the company will hold ground against big horizontal players due to “a combination of brands, uniqueness of offerings, and the stickiness resulting from its social networking site, World of Moms” (more on that later). True omnichannel experience from a specialist player helps build strong brand loyalty in a buyer’s mind, he says, thus lowering customer-acquisition cost and adding to the stickiness.

The participation of Valiant, a $2.7 billion hedge fund, has raised a few eyebrows, though. When an elite investor like that funds a startup, and at a stage when conventional growth investors are the ideal choice, does it signify that the business has matured? Aashish Bhinde, executive director and head of digital and technology practice at Mumbai-based Avendus Capital—BrainBees’ investment banker for a long time—has a different take. Some hedge funds have allocations reserved for private investments, ranging up to 20%, and Valiant Capital is one of them. There are precedents of hedge funds making private equity-like investments and they can stay invested for five years and above.

So far, investors seem happy with FirstCry’s performance in a tough business. In the fiscal ended March 2014, Mahindra Retail posted a net loss of Rs 114 crore against Rs 206 crore in revenues. While the purchase of stock in trade amounted to Rs 104 crore, the rental outgo for the year was Rs 55 crore (52.8% of purchase of stock in trade and 26.7% of revenue). Other expenses, including rent of real estate for its stores, totalled up to Rs 127.5 crore, which was 1.23 times of the money spent on the goods purchased for trade.

FirstCry won’t reveal financials but claims that it has managed its finances better with efficient, happy synergy of online and offline. For one, the company puts data analytics to good use in order to drive offline traffic. Based on store pin codes, online customers in the vicinity are sent mailers about upcoming stores, while customer behaviour data is shared with franchisees to help them stock popular products.

Meanwhile, the offline advantage is helping it fight big players online. Companies like Amazon India and Flipkart dictate the pricing by sourcing volumes, but do not push the niche segments upfront. “Suppliers work with larger players to achieve volumes, but they take us more seriously [both for sales and brand building],” says Maheshwari. And that claim seems to hold good. For Gurgaon-based Omega Designs, a family-owned business which owns kids’ apparel brand Nauti Nati, FirstCry was one of its first partners when the company decided to tie up with online retailers two years ago. According to Shantanu Dugar, Nauti Nati’s founder and chief executive, the company has grown over five times in volume offtake since its tie-up with FirstCry.

Ensuring price parity across online and offline is perhaps the strongest weapon in the company’s arsenal. Deep discounts offered online and the consequent showrooming (checking out products in stores but buying online to get the price advantage) have disrupted offline retail to a large extent. But sitting at his office in Pune, a confident Maheshwari tells me the pricing won’t vary, be it online or in-store. With a smartphone in hand, it’s easy to check things out in a store. FirstCry makes comparison shopping easier by providing a 32-inch Internet-enabled touchscreen kiosk at most stores, where customers can check online prices. For the store-owner, the kiosk doubles as an endless aisle for customers. Subject to store size, a franchisee can only offer up to 2,000 pieces (called SKUs or stock-keeping units in the trade) in-store, while FirstCry sells over 90,000 pieces online. With a kiosk in place, a customer can choose any product from the online inventory and get it home-delivered without paying shipping costs.

“We are witnessing up to 10% incremental customer conversions where kiosks are integrated,” says Maheshwari. The only catch: According to some store owners, FirstCry gives only a 10% margin on kiosk transactions (the figure is 20% for products sold off the shelf, in case they are priced lower online) and it may take some time for a franchisee to recover the Rs 50,000 that the company charges for kiosk installation.

Still, new-gen entrepreneurs, such as Pune-based Vrinda Patnekar, a qualified chartered accountant and first-time entrepreneur, favour kiosk integration. The mother of a 3-year-old daughter, she was initially a loyal customer and finally opened a store at Bavdhan last November. Patnekar feels an interactive kiosk is the right medium for technology-savvy walk-in customers. “Of course, it’s not a big attraction for people who use their mobiles or tablets to shop,” she says. “But it’s a great way to push slow-moving, high-value products without locking up capital in buying them.”

FirstCry has adopted a wholesale cash-and-carry model for its offline business, where a franchise pays upfront for the merchandise. And the incremental volume the company sources for its stores adds mass to its online requirements. It also means better bargaining power in terms of credit, logistics, and so on.

Take apparel, one of the most profitable categories across e-commerce, where the average markup on manufacturing cost is 2.5 times. So, for a dress costing Rs 400, the maximum retail price could be Rs 1,000 on a brand’s captive e-commerce platform. Advertising and marketing costs are 5% to 15% of MRP (Rs 50 to Rs 150), and fulfilment cost is around 5% (Rs 50). So the gross margin is still Rs 400. But in case of business-to-business (B2B) sales, the cost plus margins see trade and cash discounts, which vary upwards of 20%. So, the dress with an MRP of Rs 1,000 costs the buyer Rs 800. The logistics costs in B2B transactions are much lower, around 2% of the merchandise cost. There is no cost of reverse logistics in the offline model, the processing cost is marginalised owing to scale on logistics cost, and there are no packaging, cash on delivery, and payment gateway costs, leading to a saving of Rs 200 to Rs 250 on the MRP.

“All these help to have uniform pricing across online and offline,” explains Maheshwari. He does not divulge actual numbers for business reasons, but affirms that the volume game also ensures that a franchisee has decent margins to earn.

Allahabad-based Neetesh Bhatia, an IT professional by training and one of the first 10 franchisees of FirstCry, has managed to break even in a little less than three years and is looking for bigger space to grow his business further. Bhatia calls the price parity a game changer as “customers who used to buy at lower prices online have now converted to offline, and the conversion is a bonus for us”.

Private labels are also woven into the startup’s scheme of things, keeping in mind price-sensitive customers. BabyHug, FirstCry’s private label, focusses on categories across apparel, footwear, and cloth nappies. But Maheshwari does not push BabyHug where existing brands can scale up. “We just try to fill the gaps,” he says. In less than two years, FirstCry has seen more than a quarter of its revenue coming from private-label products, which the CEO intends to increase to 50% over the next three years. Depending on the category, the incremental margin can vary up to 25%, but Maheshwari claims that his goal is to go beyond margins. “We want to help parents find good products,” he says.

Arora of IDG says it’s a smart move as a category leader like FirstCry would amass market intelligence and float private labels across lucrative and unserved segments to increase gross margins. But according to a Delhi-based venture capitalist, growing private labels is a longer-term journey and a difficult proposition for an online retailer looking to build its own brand. “It’s tricky when your vendors fear cannibalisation,” he says. Vendors, on their part, see the risk, but also believe that their expertise around design, brand equity, and manufacturing prowess will be difficult to catch up with. “It is not that easy to be successful in a volume-led business like ours,” says a Mumbai-based kids’ apparel supplier who didn’t want to
be named.

Content and community play is another growth driver, says IDG’s Arora. IDG had earlier invested in the U.S.-based BabyCenter, the largest content provider for expecting mothers, and subsequently learnt that this niche wins customer loyalty by supporting would-be parents in the most crucial phase of their lives. Drawing from that, FirstCry has launched World of Moms, an online community where moms can share their experience. As the number of subscribers swells, the platform will help FirstCry reach out to new customers. A classifieds section will ensure additional revenue, but Maheshwari thinks monetisation will happen later. “Over 18 months, the platform could help us save more than 10% of our marketing spend,” he says.

Partner brands also benefit from a direct-to-parents programme called FirstCry Box. Introduced in June 2013, the company has tied up with 7,000 hospitals across 60 cities, where nurses deliver customised boxes to new mothers. FirstCry has reached out to more than half-a-million parents and Maheshwari aims to get in touch with a million by June this year. Every box is bar-coded and contains coupons, which help track conversions up to second purchase. “Brands are happy to sample their products in a controlled fashion and also get to monitor the conversion,” says Maheshwari.

The customer acquisition cost under the programme is nearly a tenth of what its costs to air a TV campaign, largely due to successful microtargeting. Interestingly, the customer-acquisition cost for e-commerce at large has gone down by 75% over the past three years, and a zero-sum game like this one (where partners provide the contents of the boxes and also share distribution costs) will reduce it further.t doesn’t mean FirstCry is skimping on its marketing and branding expenditure. The company is likely to rope in Bollywood superstar Amitabh Bachchan as brand ambassador. “It’s a dream,” says Maheshwari. An investor in the know confirms that a formal announcement could be coming up soon.

Can FirstCry build a national brand of significant scale by leveraging its online-offline strategy? There are global precedents like Mielele, U.S.-based garment retailers Indochino and Bonobos, and eyewear maker Warby Parker. Even Amazon is trying it out on an experimental basis. FirstCry’s experience shows there’s enough headroom for growth in India. Now to keep those babies happy.