Wee-hour Surprise | Outlook Business
Home  /  Enterprise  /  Big Idea  / Wee-hour Surprise | MAR 30 , 2018

Vishal Koul

Big Idea

Wee-hour Surprise
Milkbasket’s differentiated model makes it stand out in the online grocery business

Shilpa Elizabeth Abraham

Grocery on tap: [L-R] Milkbasket co-founders Yatish Talvadia, Anant Goel and Anurag Jain

It is 10.00 pm. You open the refrigerator to discover you have run out of milk for the next day. And if you are one of those people who can’t function without having coffee first, Gurgaon-based Milkbasket may well be your Santa Claus. There are no sleighs or reindeers, there’s nobody sliding down the chimney, but if you make your wish before midnight (and yes, pay for it), Milkbasket will make sure you get it before you wake up the next day. 

Founded in 2015, the start-up was launched when co-founders Anant Goel, Ashish Goel and Yatish Talvadia realised the universal problem that was last-minute grocery shopping. The trio delved deeper into it, and soon after, their college friend Anurag Jain, too, joined them. Milkbasket claims to be India’s first micro delivery platform for groceries. The app allows a customer to order groceries till midnight and delivers it the next day between 5-7 am. There is no minimum order value and the prepaid orders, are dropped off without any contact between the customer and the delivery personnel.

It was only a few years ago that scores of on-demand grocery start-ups started mushrooming in the hyperlocal segment. The rush was a time-bomb waiting to explode given the unviable cost structure of some of the firms. In January 2016, Grofers withdrew its operations from several cities. Flipkart attempted a ‘nearby’ app, but wound it up in five months. In April, the third biggest start-up in the space, PepperTap, which had raised $51 million from the likes of SAIF Partners and Sequoia, announced its decision to shut shop citing poor unit economics and no sight of profitability in the long term. Abhinay Choudhari, co-founder of BigBasket, notes, “The business model was not viable because they didn’t have inventory of their own. They had to go to stores they had tied up with and pick up the items. So they were basically buying into someone else’s margin, which would come up only to 5-10%. Since their average order size was 400-500 at best, even at 10%, they would only make 50 while delivery costs would be around 60-70. So the more you deliver, the more you lose. No wonder, some guys scaled down, shut or pivoted to our inventory-led model.” 

Arpit Agarwal Principal, Blume Ventures

But Milkbasket sailed through all that without pivoting once. Ask CEO Anant Goel how they have managed to do it and he tells you that the only thing common between Milkbasket and the hyperlocal delivery start-ups were the groceries. The three-year-old start-up, which started with delivering milk and now supplies a range of grocery products, offers no major discounts and has managed to keep delivery costs much lower.

“How much ever you stock up [groceries], there would always be these daily needs,” notes Goel. “Since there is constant demand, we therefore wanted to understand if we could create a better and differentiated supply channel.” Despite the heavy investments made in organised retail, if the mom-and-pop shops still existed, that too without offering any discounts, then it meant something. Besides, it’s unlikely that a customer who needs only a packet of milk and a loaf of bread would go to Big Bazaar or order it via BigBasket. The natural tendency would be to get it from the neighbouring shop. To the team, it seemed more sustainable and they started to work on developing a similar channel that made business sense. 

Nitty gritty
They realised that the average Indian customer has the habit of getting two things delivered in the morning every day — newspaper and milk. It happened in the morning while the customer was sleeping and it was non-intrusive. This ensured more frequency and higher density, which made the model sustainable. “If a newspaper boy delivered the way BigBasket did, it would take around 15 minutes to cover one household and he will never make money,” Goel notes. The team decided to ride on this existing habit and create a non-intrusive early morning drop-off model. 

Abhinay Choudhari Co-founder, BigBasketThen, the question of payments propped up. If the delivery was contactless, the delivery person couldn’t collect cash, hence it had to be a prepaid model. If the customer didn’t get the ordered product or was not satisfied with an item, there would be a refund, no questions asked. They went ahead and launched Milkbasket in 2015. Three years down the line, the start-up serves 10,000 households and completes over 6,000 deliveries everyday around Gurgaon between 5-7 am. 

While a typical retailer works at an operating cost of around 14%, Milkbasket works at 8-9%. Despite there being no minimum order size, the cost per delivery of the start-up stands at 5, thanks to the model which allows it to cover a large number of households in a fixed time slot against the industry average of 60. Drop-off at a household takes an average of 90 seconds, which means the Milkbasket delivery boy can cater to a lot more orders in an hour. 

But a customer could still depend on the hyperlocal players for groceries and get it delivered in the early morning slot, so why would a customer choose Milkbasket over more familiar brands such as Grofers or BigBasket? “Grofers co-founder Albinder Dhindsa is one of our customers,” Goel retorts. “If you are just looking at groceries as a segment then everybody competes with each other, from mom-and-pop shops to Big Bazaar to BigBasket, after all there are 20,000 SKUs. But how we execute is very different from what BigBasket or Grofers does,” says Goel.

“Milkbasket is different from regular e-commerce companies in the sense that they are not mimicking a pre-existent behaviour online, but using technology to create an entirely new behaviour that was hitherto not possible. Hence, they create unseen amounts of stickiness,” says Arpit Agarwal, principal, Blume Ventures. He remembers how during the process of evaluation, some of their portfolio founders who were Gurgaon-based, couldn’t stop raving about Milkbasket. “We saw that the team was thinking through all the right decisions and building the right tools with a strong focus on economics,” Agarwal says. The start-up now logs a monthly turnover of 3 crore. Though its average ticket size is around 180, Milkbasket looks at the monthly household spend with it as a metric and it comes to around 3,700. According to the founders, 70% of its customers have come through word of mouth. The start-up does all of its order processing from midnight in their warehouse where their orders are packed and ready to go.

Starting with an initial investment of 50 lakh by the founders, the start-up raised about $500,000 from EVC Ventures and some Chinese investors in April 2016. When the start-up ran into some difficulty in raising additional funds, it was a shot in the arm when 45 of its customers pitched in as investors and pooled in a sum of 2 crore. In August 2017, EVC Ventures sold its stake to Blume Ventures who invested its first round with Lenovo Capital. In January 2018, Milkbasket raised a Pre-Series A round of $3 million from Unilever Ventures, Blume Ventures and Lenovo Capital. Milkbasket is only Unilever Ventures’ second investment in India after consumer analytics firm Peel-Works.

Challenge ahead
The start-up is planning to hire around 2,000 people to serve upto 50,000 orders daily by next year. That’s a staggering number but that doesn’t bother Goel though. “We are in a physical business. I think it’s a misnomer when you see being capital-intensive as something detrimental to the business. I think what is more important is capital efficiency. My manpower cost is 2 per day per order delivery,” he says. The company is now looking at raising a Series-A round and plans to go into more cities such as Pune, Bengaluru and Hyderabad by 2019. Most of the hyperlocal online grocery start-ups such as Grofers and PepperTap have faltered while expanding their operations, as they struggled to replicate their success in multiple cities. What’s helped Milkbasket is that they have managed to keep delivery costs at a fraction of the industry average by catering to housing complexes that allows them to make 6,000 deliveries in two hours. As it expands into newer cities it will have to ensure that its manpower costs remain at the same level. And that’s going to be a challenge given their ambitious plan to increase their daily deliveries by almost nine-fold in a year’s time. The team is well-aware that they have a quite a task at hand. “We think about sustainability first and not about how many cities we are present in. I don’t want to be unsustainable and shut down later,” says Goel.

In the case of Milkbasket, Choudhari feels there could be some hurdles as they try to improve their unit economics. “The average order value (AOV) number is very crucial. For instance, if you have an AOV of 200 and your margin is around 10%, then you have only 20 to manage everything. That is the challenge in this model,” he points out. “Given the unit level economics and order size, I get the way [Milkbasket] is able to manage costs currently. They are targeting only large complexes and are able to drop orders in real quick time. This is fine as long as you are delivering milk and just one or two items. But with bigger order sizes, the challenge of delivering in real quick time without any pilferage or damage increases. The customer himself would want to receive it. Then your delivery time would get challenged,” he adds. BigBasket, which has a monthly revenue of 200 crore, currently works at an average order value of 1,500 and its cost per delivery stands at 5% of the order size. 

According to Goel, Milkbasket is already starting to see bigger order sizes and delivering them via the drop-off model has not been a challenge so far. “As long as you can retain the trust of customers, it wouldn’t be a problem,” he says. It is still early days to say whether Milkbasket will beat the odds with their fixed-time no-contact delivery model. The road ahead is definitely a challenging one but Goel and team are determined to take it one step at a time.

Here's your chance to read the latest issue of Outlook Business for free! Download the Outlook ​Magazines app now. Available on Play Store and App Store
On Stands Now