Warehousing, southern markets on Grofers’ to-do list

Earlier this year, online grocer Grofers raised $200 million from SoftBank and other investors. It is planning to spend the money to acquire more customers in the southern market, warehousing development, and in its partners who manufacture the company’s in-house brands. The company, founded by IIT graduates Albinder Dhindsa and Saurabh Kumar in 2013, is also targetting $1 billion in revenue this financial year.

Dhindsa, who is the CEO of Grofers, spoke to Fortune India about the company’s plans to go public in the next two years and other business aspects.

Edited excerpts:

What will you do with the latest funds you raised?

Primarily we’ve been investing in two things. [First is] our warehousing capabilities. We’ve upgraded a lot of our existing facilities, moved into some new larger facilities, and two, we’ve been investing a lot in our own brands.

We’re also doing a lot of warehousing development in the South. The southern belt has been traditionally weak for us. We’ve been investing in customer acquisitions. We are also investing in our manufacturing partners. They are smaller businesses… we’re trying to work with them to figure out how we can help them scale.

Has the consumption slowdown affected your business?

Normally, our growth is muted during Diwali as people don’t spend that much on groceries, but spend more on things like eating out. But this time Diwali was very good for us. We’re not entirely certain but it seems that customers have turned cautious and cut down on discretionary spends like eating out. So our growth has been good. One interesting trend is that—which could be because of multiple factors—we’ve seen a lot of people move to our brand of products because they are budget brands.

Big e-commerce players are also betting big on groceries. What’s your take on the competition and why are so many players entering the segment?

Amazon and Flipkart have been in the segment for some time but our hunch is that they are much smaller than us. I think there is a slow realisation that Indians might cap discretionary spends. If you look at the first wave of e-commerce growth, it was fuelled by things like electronics, [by people] who would upgrade their phones every year. But how many people are there who can afford to do that consistently? But people have to buy groceries. In terms of percentage of our consumer spending, for groceries it is more than 60%. The realisation is that if this is what the wallet share of the customer is, we need to be in this category somehow.

How did you get into the private label space and what is your strategy?

We didn’t get into home brands because of margins. We work with a very large network of local merchants, and when we were studying what are the kind of products that sell online and offline… we were looking at categories… say for example pasta. It’s not sold by the packet in wholesale markets, but loose. In such wholesale markets you measure and buy just that much you need… we wanted to figure out how we could sell such small quantities to customers who can’t afford a full packet. Our private labels or home brands started with the idea of selling such products to customers at that price point in a packet form. It is not a margin play strategy, but a product strategy.

Talking about your offline strategy, you run a programme for smaller merchants. What is the response like and what do you bring to the table for kirana stores?

There are two parts to it: It is not limited to kirana stores; we are working with a lot of offline merchants. It is primarily distribution play for us. The second thing which we do is now we also have 200 offline stores. Since we were already doing the job of local merchants, can we also start selling from those points? The genesis was that typically our bucket size is Rs 1,100. But we realised that in the category, we accounted for only one-third of all customers. Two-thirds still believed in going to their neighbouring store for small-ticket sizes.

We work with 7,000 stores. So we have the distribution—can we also enable a front end there? Rather than only ordering online, you have the option of a front end there. Can we make it better? So this is basically what we do: we provide the assortment at a more aggressive price point. But we are still using the existing infrastructure. We stock and replenish the stock, look at quality control, etc. We also enabled ordering on WhatsApp for smaller stores.

What about the Grofers Service Partners programme?

Grofers Service Partners (GSPs) is not limited to kiranas only—only 20% are kirana stores. The rest could be anything—tailoring shops, beauty parlours, or any local business. Those are basically for distribution purposes. We realised that whether it’s kirana stores or others, if we could make them front-end stores, this use case would also be served.

What are the other markets you are planning to expand to?

While we are already in the South, expansion is primarily in the North. Like in the North, we are very strong in Delhi, then we are spreading to Sonipat, Bhiwadi, Rewari, etc. We are spreading in concentric circles. So if we open in Amritsar, I would do the adjacent cities first.

What about your special sales? What has been the response?

The reason we started doing these was that in 2018 we didn’t spend too much on marketing—we were growing organically—as we didn’t have too much funds. But at the end of 2018 we had the funds, so we had to do some marketing. The idea was since we didn’t do marketing for nearly the whole of 2018, we needed to make a bigger splash… and we wanted to get more customers to try the proposition… so we started the orange bag sales. But sales, from a marketing perspective, they give us a lot of leverage… with high sales in one month, your overall average goes up and you can capitalise on the buzz that you have created.

Do you think the subscription model is the way to go?

That is the way to go. During sales you can create a lot of buzz, but 70% of our volumes is thanks to our members. They buy more—and more frequently. So memberships are the way to go. And we also get more confidence from memberships. From a business point of view, if I know that my 700-750 members will definitely shop this month, then I know that I will have some minimum volumes of key products like flour and sugar.

What about customer stickiness? What does your customer data tell you?

We have monthly use cases. Our retention and use cases are very different from others, as these aren’t discretionary spends. Customers may not come back in 15 days, but they will come back within a month. In that respect we are much closer to food delivery services. Our customers transact twice a month; our members transact 2.3 times a month. Also, stickiness is much higher than other fields. We really don’t have to worry too much about retaining customers.

When you started the company, what were the things you got right and those you got wrong?

The best thing we got right, and it continues to be right, is listening to pretty much everybody—customers, the startup ecosystem, investors, our own egos. [Discontinuing] fresh [perishables] is a great example of that. No one in the ecosystem believed you could build groceries without that; [but] we are the largest grocery player and we are doing it without fresh. Two years ago, when we took that call it was because the customers didn’t want to buy fresh.

We have been wrong about different things. We have been bad at communicating the ‘why’ of a decision. The second is... in the initial part of the journey, we were taking a lot of consecutive bets... to the point where we stopped and said, “No, having a single focus is better.” That is something we did not realise in the beginning. ‘Less is more’ is better in the Indian ecosystem.

What are the challenges at the back end?

We were software guys trying to get into warehousing. We thought we were very agile, we could solve this very, very quickly. Our biggest challenge over there was the size of the land parcel. Our largest facility right now is about 270,000 sq. ft.—that’s the largest that we have been able to get. When you have to put multiple facilities then your costs are high—we have to take a land parcel, build the facility on four floors, build the tech to run these multi-level, densely-packed facilities. Training in India is also a big daily hassle for an operation-heavy business.

What’s your revenue outlook?

We want to go public in the next two years. Short term, we want to hit a $1 billion in revenue by the end of this year. We are about $700 million run rate at this time. For the general market, I think online grocery continues to grow fairly aggressively, I think it will continue to grow a lot more in the lower segment of the society.