By Shonali Advani
He's literally gone to town with his business. Alphonse Reddy, 33, gave up his five-year-long career in private equity at Delta Partners in April 2011, to build a retail venture based on an innovative model and operate in areas where no e-commerce entrepreneur has stepped before. We are talking about tier III and IV markets that house 60 percent of India’s population. Reddy, who himself hails from one such town, Madanapalle in Andhra Pradesh, is ready to shake things up here with a unique strategy.
The unexplored opportunity
Visiting home during festive holidays was fun, except for the shopping. Due to the absence of malls and exclusive stores, Madanapalle didn’t stock brands of his choice. “These towns have 100 percent mom-and-pop stores, or multi-branded outlets where merchandise is stocked ad hoc with no serious structure to inventory,” says Reddy, Founder and CEO, FabMart, Madanapalle Retail Private Limited, which launched in May 2011. Consumers armed with spending power rely on urban cities for shopping, especially the affluent who seek to differentiate themselves with the latest trends. Alongside, the e-commerce wave hit only metros and tier I towns, and didn’t penetrate these 6,000-odd towns, owing to logistical issues. Retailers here wanted to grow their business but aren’t equipped with the know-how to scale up. “They aren’t eligible for bank loans and aren’t confident to partner with brands directly,” Reddy adds. So when he spoke to his retailer friends in Madanapalle, any kind of brand association seemed like a big deal. Reddy’s idea was born with the primary aim of providing solutions to retailers. Most of them hadn’t used the internet for e-commerce yet.
The Fab model
FabMart’s model is an interesting mix of online and offline. It delivers branded products to customers in towns with a population of 1 lakh each. Always a catalogue model, the only change Reddy’s brought in since inception is upgrading from physical to digital catalogues, pre-loaded for tablets linked to its website. FabMart ties up with retailers who now get added categories of inventory management without the hassle and only pay Rs. 10,000-20,000 to buy the tablet, with pre-loaded credit to kickstart selling, also a strategy to gain their trust. Once orders are placed from FabMart’s catalogue, retailers earn a commission of 2-15 percent on every sale. “Retailers deposit cash to our account and we ship the product back to them,” explains Reddy. For purchases below `500, there’s a shipping fee of `50, and for products above `500, it is delivered free. Today, it has converted 25 of the 100 retailers in its network to digital format in Andhra Pradesh, and is sure of converting 40 in all. It aims to have 750 retailers by December 2012 as it spreads its services to Kerala, Tamil Nadu and Karnataka.
The understanding between retailers and FabMart is straightforward. Fabmart requires 100 percent payment before a product is delivered in five working days. “We don’t interfere in the retailer-customer relation; so the discretion to pay on behalf of his customer before a product is delivered lies with shop owners,” he points out.
FabMart is clear it won’t hold inventory either, owing to costs involved. “We will have to build it organically, and need five category managers which will incur a burn-rate of Rs. 3 lakh a month on salaries,” he mentions. Economics tells him that unless he makes `40-50 lakh in sales, he’s better off avoiding this entire rut. To solve this, FabMart has direct tie-ups with 30-40 brand owners to source merchandise and then a network of 20-30 distributors. If a product is out of stock, they buy it directly from stores and ship it to retailers. His focus is on building volumes. “When I reach 3,000 towns, the relation will be slightly different,” he adds.
The big deal
FabMart’s merchandise is slightly cheaper than offline stores. “We offer no discounts as it only destroys the brand. With discounts, you are throwing away money and value,” affirms Reddy, quite certain he’s not here to play the valuation game. Instead, he’s focused on giving retailers and consumers products which are not available and make money on every transaction. “Choice of merchandise means more to consumers than discounts,” he states. Discounts run by brands themselves are passed on and sometimes it offers package deals, by adding freebies. FabMart’s platform has clearly opened up a new segment for brands with no expertise in penetrating these markets.
“Brands will eventually enter here as there’s so much they can do in tier I and II towns. FabMart has used the correct strategy to pave inroads. It puts power back in the hands of retailers,” says advisor Anand Morzaria, CEO, Pennywise Solutions, a Hyderabad-based IT firm which is also an angel investor since March 2012.
“Even if brands open exclusive stores, it will be difficult to run the show long-term in lieu of supply-chain, logistics, manpower challenges, and getting the right number of customers to be sustainable,” notes Avinash Mohanty, Assistant Vice-President-Commercial, FabMart. For Hemchandra Javeri, mentor and angel investor since July 2012, FabMart’s got something big, if the opportunity is exploited well. “Other portals don’t have the blend between real retailer and e-commerce. Cost of customer acquisition in cities is increasing and they have had to rely on discounting to maintain volumes, putting financial models under strain,” says Javeri, also Co-Founder and Executive Director of PE fund Forum Synergies.
Streamlining its strategies
Before FabMart reached consumers through retailers, it ran a pilot program. They distributed leaflets with a phone number on which consumers could directly order a catalogue. Consumer mindset in these towns works on trust, and the process of selling requires handholding. It decided to form direct alliances with retailers. Initially the sign-up fee was `1,000 which attracted many casual retailers. “Now that it has been raised to Rs. 20,000, we are getting people who believe in the model,” says Reddy. Developing a clean website for tablets for a seamless user experience also required work.
“After partnering with FabMart, my daily sales have increased by Rs. 3000 to Rs. 15,000. I didn’t think of adding inventory as I wasn’t aware about other categories; but they got us interested,” says Mohan Lal, owner of Galaxy Gents Wear, Madanapalle. FabMart initially marketed via newspaper inserts, getting the word to spread faster to generate more walk-ins.
The road ahead
The firm is now ready to go pan-India and is in the process of ramping up its sales force from eight to 40 by year-end. Sufficiently funded for now, Reddy says FabMart may look at raising capital in the next five months. FabMart’s site does attract traffic from metros but that contributes only five percent of the entire business.
Reddy is sure he doesn’t have a value proposition there and will continue to focus on small towns. Javeri foresees challenges around product assortment and supply-chain, as they replicate the model in other states. “At a general level, consumer preferences are similar. However, nuances which will help meet customer aspiration is crucial. They will need some innovative products to attract consumers,” admits Javeri. Hence, an in-depth study of consumers in each outlet catchment is the answer. “We are opening up a platform for brands. It may or may not make sense right away, but they will want to be there someday,” Reddy concludes.
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