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The death of hyperlocal delivery startups: What went wrong?

The hyperlocal delivery segment, which was a must have for every institutional investor till almost a year ago has now gone under the radar due to poor unit economics and blurry sight of a near profitability.

October 29, 2016 / 12:32 PM IST

Priyanka SahayMoneycontrol

Barely four months after hyperlocal delivery startup Roadrunnr announced its transition into food ordering and delivery platform, another funded startup Opinio has suspended its operations. In April, online grocery start-up PepperTap which had raised over USD 50 million too shut its services amid lack of funding.

Roadrunnr acquired food-tech start-up Tinyowl in June, following an infamous brawl at the latter's office due to lack of funds and non-payment to the staff. Fund crunch was obvious at Roadrunnr too, which was reported to be in conversation with investment firm DST Global to raise around Rs 300 crore. To be sure, that funding did not see, light of the day.

Opinio on the other hand, has suspended operations, according to two people privy to the development. One of them said that there's a plan to pivot the business model.

Not just the speciality startups, but even the e-commerce firms such as Flipkart and Paytm who experimented with the hyperlocal space, in this case, grocery, had to shut them down soon.

The hyperlocal delivery segment, which until a year ago was a hot favourite with institutional investors, is no longer in fashion due to poor unit economics and low visibility of profits in near-term.

A total of USD 125.57 million has been invested in the hyperlocal delivery sector in 2016 (YTD) in India. The following table shows the YoY investment in this space:

A total of 72 startups has shut shops in hyperlocal delivery space till date.

Data source: TracxnWhat went wrong in hyperlocal?

Broadly, hyperlocal delivery can be segmented into the following sectors -- business to business logistics, groceries and food. Depending on the business model, startups charge their merchants commissions or an upfront delivery fee.

The money charged by startups barely made for the cost of the delivery. Many of them also rang the death knell by topping it up by offering discounts and free deliveries to partner merchants with an aim to acquire them, early on.

The startups are also to be blamed for lack of technological vision that could have added value to the customers and enhance overall experience.

"The hyperlocal delivery support industry suddenly saw startups mushrooming sometime early last year. Many of them had the mind-set of a manpower firm. What was required was differentiating technology which could eventually lead to efficiencies, cost reduction, and improve customer experience," said Sreedhar Prasad, Partner, e-commerce, consultancy firm, KPMG.

The lack of value-add, led to zero stickiness and the competition conceded to be a pricing game.

On an average, the cost of delivering a product comes to around Rs 50-60.

In most of the cases, the startups were charging merchants a commission on the cost of the products being delivered, especially in the food segment. The commissions would be to the tune of 8 to 10 percent.  In India, the average ticket size of food-ordering is around Rs 300-400, which is way below USD 20 (over Rs 1,300) in the US.

"The problem is unit value, which I don't think will change in our country substantially. I don't think we will have very high ticket purchase all the time. India is a volume game, we are going to have a lot of low ticket purchases," said PN Sudarshan, senior director at Deloitte India.Status of large e-commerce and ride-hailing companies that started off their hyperlocal delivery divisions:Data source: Tracxn

Is there a scope for correction?

Technology is the only thing that can bring about a differentiation in the offerings of different firms and help the segment grow.

"The technology should not only be for the macro level, in terms of enabling the orders but also in micro level, in terms of say, routing of delivery or delivering on time," said Sudarshan.

"There is definitely a requirement of hyperlocal delivery in an urban sprawl like ours where people take time to commute or even park vehicles. Everything is a challenge and hyperlocal delivery resolves a lot of issues therefore the acceptance level will be significant," he added stating that though there is a decline in the investment leading to the shutdowns, the market will correct soon. 

The funding in hyperlocal so far

According to Tracxn, a startup data tracker, Sequoia Capital has been the biggest investor in the space with investments across 16 startups, it has been followed by Accel Partners (11), SAIF Partners (9), Blume Ventures (8) and Nexus Venture Partners (7).

As per Tracxn, while the sector saw USD 430 million investment in 2015, it has reduced to barely USD 125 million in 2016, so far. Out of this, a little less than USD 60 million was raised by food delivery firm Swiggy alone, leaving little for the rest of the firms.

Snapdeal founders-backed Shadowfax which last raised USD 8.5 million Fidelity's proprietary investment arm, Eight Roads Ventures has also been in the market for at least six months to raise funds.

The company however says that the current focus is to drive profitability and look for city expansion. The company is also doing intra-city delivery for e-commerce merchants, besides on-demand delivery for restaurants.

Rival Grab, one of the few firms in the business to business hyperlocal delivery space, was able to raise funding this year said that the blood-bath was largely caused due to competitors burning cash to garner volumes with deep discounting approach.

"Grab has fought through the hyper competitive phase and emerged with positive unit economics. With limited on-demand logistics players now, we are expecting improved revenue realization and a larger market share," said Nishant Vora, co-founder, Grab.

Grab raised Rs 13.34 crore from United Arab Emirates-based logistics firm Aramex Ventures Llc, in July.

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