The Hype of Hyperlocal Business

This is going to get a bit theoretical. Just hold on.

Every year in the month of August, Gartner comes out with the Hype Cycle for Emerging Technologies report. Hype Cycle is an interesting representation of evolution of technology developed by Gartner. 

Fig: Hype Cycle (src: https://en. wikipedia.org/wiki/Hype_cycle)

 According to Gartner, technologies which survive, go through 5 stages of evolution before it attains maturity and acceptance in the market. Each technology goes through a phase of birth (Technology Trigger), heightened excitement (Peak of Inflated Expectationt), disappointment with the expectation mismatch (Trough of Disillusionment), rebirth due to technological improvements (Slope of enlightenment) and eventual acceptance of technology (Plateau of Productivity).

A look at Gartner’s 2015 Hype Cycle report gives an interesting view of the technology that is talked about these days. Internet of Things, Wearables, Machine Learning, Consumer 3D Printing etc are right on top of the Peak of Inflated Expectations. These technologies have a few years before they attain ubiquity.

Although Hype Cycle is not an exact science, it helps us make sense of the semi-demise of technologies and their eventual success. Since it is an inaccurate science, to begin with, I am going to take the liberty of extending the hypothesis of Hype Cycle to understand and predict (oh yeah!) the future of a technology driven business model – Hyperlocal.

In an August article by Yourstory titled For Dummies: they whys and the whats of hyperlocal e-commerce platforms, Hyperlocal is defined as “… (online) platform to enable  local offline services from anywhere, anytime”. Thus for this discussion I am going to include products (food, grocery, pharmacy, alcohol etc) and services (handyman, maid etc) delivery businesses of India. 

What was the technology trigger that caused the widespread proliferation of Hyperlocal businesses? There were three major trends that were the technology trigger:

1. Large penetration of smart phones with availability of cheap devices
2. Widespread adoption of mobile internet with the prices of 2G, 3G and 4G coming down
3. Mainstream acceptance of ecommerce with the efforts of ecommerce biggies

Since the beginning of 2015, Hyperlocal businesses have got a high amount of attention. It saw a large number of startups mushrooming across verticals such as food (Tinyowl, Swiggy, Spoonjoy etc), grocery (Grofers, Peppertap, Zopnow etc), services (UrbanClap, Taskbob, Housejoy etc). They have been supported by enthusiastic investors who provided unprecedented access to large sums of capital at such early stage.  They have also seen good traction from the early adopters.

Here lies the problem. These firms have been highly subsidizing their services to attract traction. And now with the ghost of Unit Economics looming large on these startups, the real cost of offering these services is giving sleepless nights to the founders and investors alike. The cost of offering hyperlocal services can be broadly divided into two parts:

• Access - Enable the customers to explore, select and purchase products and services from the convenience of their home
• Product/Service Delivery - Dispatch the products and services at the customer’s home

The three ‘technology triggers’ mentioned above solved only the Access part of the problem.  Today’s customer can shop for products and services from multiple businesses through their mobile apps without moving their bum off the couch. Hyperlocal businesses are able to provide access at a low variable cost. Product/Service delivery is the reason why these hyperlocal businesses are bleeding cash. Most of these companies have their own fleet of bikers or are paying large sums per delivery to other service providers.

To understand this better, let’s take a detour. Let’s travel to the other part of the world. San Francisco based Instacart is one of the hottest startups in Silicon Valley.  It is a Hyperlocal grocery delivery startup which was last valued at $2 billion. They have solved the Product/Service Delivery part of the hyperlocal delivery by doing the following:

• Charging delivery fee – Consumers in the US, unlike in India, are willing to pay an extra sum to get items delivered to their home. Instacart has been able to set and justify a dollar value to the convenience that their home delivery offers. On the other hand Indian consumers are trained to avail free delivery services. This reluctance of paying delivery charges are faced by ecommerce companies in India as well.
• Markup the prices of goods – India has the concept of MRP (Maximum Retail Prices) which becomes the de-facto selling price of goods in India. A small pack of Parle-G costs Rs 5 anywhere you go and the customers have these prices memorized. On the other hand, US doesn’t require manufacturers to mention a specific price tag on their products. This gives retailers the flexibility of deciding their own price. The products sold on Instacart are priced higher than in store retail prices. This allows Instacart to bake delivery prices into the product price.  A move like this in India is going to be highly unpopular.
• Tipping – Instacart delivery personnel, called ‘shoppers’, receive healthy tips from the customers. Tipping culture is yet to fly in India.

For the above reasons, it is clear that Instacart is better placed at managing the costs of Product/Service delivery.  The low margin nature of grocery retail business in India leaves little room for the Hyperlocal businesses to play with.

All this is fine, but where is the Hyperlocal Business on the Hype Cycle, you ask? Well, it’s right on the top of Hype Cycle.

The way I see it, Hyperlocal businesss will go down the trough of disillusionment when these cash bleeding businesses eventually move the burden of delivery costs to their end customers.  

But this will not be the end of the Hyperlocal business model.  

The following innovations (among many others) will help the best players in the hyperlocal business to survive and eventually make hyperlocal sustainable:

• Map technologies – Companies will have to come up with sophisticated algorithms to suggest the shortest routes between stores, customers and the delivery boys. Companies with the best map technologies will have considerable cost advantage over other players. For this very reason, look out for Uber and Ola in the hyperlocal space.
• Controlling larger parts of supply chain – Hyperlocal businesses need to extract cost advantages by sourcing at scale and controlling the entire supply chain from the producers to the end consumers. Big Basket, with its inventory led model, is better poised to handle this.
• Predictive pooled delivery – Hyperlocal businesses need to increase the basket size per delivery so that the delivery costs are offset by margins of a high transaction. This can be achieved by moving the customers to a subscription model. This will allow companies to pool multiple orders for a single delivery and also result in higher Life Time Value (LTV) per customer.

Companies which have the best technology solutions will survive the slide down the trough of disillusionment.