In the past six months, 24-year old Arjun Singh has cycled through three jobs. As a delivery person for India’s booming ecommerce industry, his focus has shifted from working in a large company to the new wave of hyperlocal ventures. As these startups have slammed on the accelerator, feet-on-the-street like Singh have become a hot commodity. His pay, he claims, has increased 50 per cent in this period. There’s a reason why Singh is in high demand. Risk capital-rich hyperlocal ventures, which see themselves as the next big thing in India’s bustling ecommerce industry, are dependent on riders like Singh making dozens of daily deliveries of food, groceries and even medicines from local neighbourhood stores to residents in the vicinity. While that sounds like a great opportunity to network disconnected stores to potential proximate customers, startups in this space are discovering that, in reality, it takes a lot more to build out this lucrative, but risk-laden industry. Riders like Singh don’t come cheap. If small mom-and-pop retailers can hire a local chhotu for as little as Rs 8,000 a month, professional delivery personnel cost around Rs 20,000 or more per month. Ventures are yet figuring how to deal with this and other niggles. For example, how can an unskilled delivery person choose good fruits or how does he pick the right vegetables remains a vexing challenge, say regular users. According to some estimates, the returns (after delivery) in this space are around 5-10 per cent for groceries and even higher for fresh fruits and vegetables. Typically, hyperlocal startups deliver goods in an hour to 90 minutes. According to one estimate by brokerage Kotak Securities, hyperlocal feet-on-street need to complete 22 to 25 deliveries a day. However, according to multiple industry estimates, no more than 10 to 15 are possible due to delays (traffic, time taken to hop from store to store to fulfil orders) and inevitably returns. Riding a Growth Rocket Despite these headaches, investors have fuelled millions of dollars into these startups and the ventures themselves are riding a growth rocket. According to one estimate from Tracxn, a provider of data on the startup space, some $130 million was invested in 28 rounds in the past six months in this space. Companies themselves are targeting a combination of convenience, range of products and discounts to reel in customers — who seem to be biting. But not everyone is convinced the effort is worth it. UrbanClap raised $12 million in its first round of venture capital funding from SAIF Partners and Accel Partners, but steered clear of this competitive market. Instead, it decided to focus on being a services provider, without shackling itself by locality. “We want to give you a plumber who is a kilometre away, but also a top wedding photographer who may be at the other end of town,” argues Varun Khaitan, a cofounder of the company. The company’s strategy seems to be working. In the first month of operations UrbanClap, founded in November 2014, dealt with barely 50 customers a day. Today, that number has increased to close to 2,500 and the number of professionals it works with has increased from 300 to 5,000. “Hyperlocal ends up being a low-ticket size, infrequently used service… We want Urban-Clap to be a more meaty business.” Investors too are hedging their bets on this industry. While they admit that the long-term potential makes for a tempting investment opportunity, a path to profitability remains hazy. “The primary concern is the ability of these entrepreneurs to build and run large scal a ble businesses,” says Mayank Khanduja, an executive director at SAIF Partners, an early-stage investor. “How will a startup build a distinctive business and brand that isn’t based on discounts and freebies… consolidation is imminent; such a large number of companies just isn’t viable.” Others such as Anand Lunia, a cofounder of India Quotient, an early-stage investment fund, think these hyperlocal ventures need to deliver higher-value products and take a greater ownership of the supply chain to increase their odds of success. Lunia too agrees that getting the consumer to pay up will be a challenge. “Customers will compromise on service and timeliness, but won’t pay a premium for these services,” he contends. Hyperlocal entrepreneurs seem to agree. “The market is getting consolidated for sure,” says Aseem Khare, chief executive and cofounder of Taskbob, a provider of home services based in Mumbai. “The company that is able to provide this service at the largest scale with the highest quality will win this battle.” The fear of consolidation hasn’t stopped companies from thinking big. For example, Grofers, a Gurgaon-based hyperlocal delivery venture, has raised some $45 million in VC funding in just eight months of launching its platform. In that time, it has gone from making 500 orders a day to around 6,000. The founders are in the market for more capital, barely four months after raising their previous round. “We are building more of a logistics business than an ecommerce one,” argues Saurabh Kumar, cofounder of Grofers. “When you have 2,000 delivery people on the street, the challenge is enabling massive scale of deliveries with the best customer experience.” Last year, the firm started their venture as Onen umber, a provider of delivery logistics solutions, and pivoted from B2B to focus on consumers in early 2015. Grofers in fact spent a year building out its back-end before opening its B2C consumer delivery business. “Across groceries, fruits and vegetables, there is a massive gap in terms of convenience, quality and assortment of products,” he adds. “People are dependent on neighbourhood kiranawalas or going themselves to pick up groceries… we are driving a shift in consumer habits.” Companies are also adding another layer of refinement with services — ensuring a carpenter or electrician from the vicinity turns up on time and completes his or her services. Other ventures are delivering food from restaurants around the neighbourhood to your doorstep. These hyperlocal firms then are not just trying to provide access to products and services quickly, but also aiming to keep quality high. For Khare, the hyperlocal space is not new. Before Taskbob, he co-founded a venture that tried to connect like-minded people in a neighbourhood with a startup called Shauuk. While initial traction was significant, the founders discovered that engagement was low and the firm was wound up. This time around, he’s focusing on what he hopes is a more durable space, and on time, quality and price of home services. Since its launch in late December 2014, Taskbob has signed up some 300 service providers across Mumbai. “The problem with this space is not just about discovery [where will I find a good plumber?], but the delivery of these services on time,” Khare argues. “We currently service some 700 orders a day in Mumbai and in 18 months we want to scale this up to 5,000 orders a day and expand our reach to five cities.” Other ventures have plans that are even more ambitious — or foolhardy. PepperTap, a hyperlocal grocer founded in January 2015, already works with 110 stores across nine cities and its chief executive and cofounder Navneet Singh has set an ambitious target for the SAIF Partners and Sequoia Capital-funded venture. “We want to be in 30 cities by the end of the year,” he says. “We deliver 15,000 orders a day and as people get more comfortable ordering off our platform, we expect do get 1,00,000 orders a day by March 2016.” While firms such as Pepper-Tap deliver mostly for free (it charges `50 for orders under `250), the aim is to make consumers not just buy more, but order more often. According to Singh, hyperlocal delivery firms such as PepperTap take previously disconnected local stores and help them both organise their supply chain and bring in additional business of least 10 per cent. “We see hyperlocal grocery delivery as the next logical step in India’s ecommerce evolution,” he adds. In PepperTap’s case, at least, this evolution has been rapid — in January this year it barely logged 50 orders a day. A Two-fold Challenge The challenge for these companies is two-fold. According to industry executives, analysts and investors, hyperlocal ventures typically deal with small-ticket sizes (under `500) and this means there has to be a massive groundswell of orders — a sharp increase in volumes — to justify the small value. While executives claim they have seen a massive spike in order volumes in just months, order value growth has been slower. According to industry estimates, the hyperlocal grocery delivery industry accounts for a third of online orders. The remaining two-thirds comprise planned — and larger value and volume — purchases. For example, at BigBasket, the Bengaluru-based online grocer , the average basket size is 26 items and valued at `1,500, and this amount increases to `2,000-2,500 in cities like Mumbai. With the help of technology and a growing number of warehouses, the company — with some $111 million in funding and another $150 million in the pipeline — can control costs by buying large volumes directly from suppliers and pushing consumers to buy more online. Other financial challenges could slow the white-hot growth of the hyperlocal industry. The economics, for instance, remains a work in progress. It costs at least `40 to make each delivery, say industry executives, and given the rate of storehopping, returns and repeat deliveries, margins in this business are barely 5-8 per cent in the groceries segment and 10-20 per cent in the food space. Even then, there is little room to increase margins. While expanding delivery strength to keep pace with an expected increase in orders is a must, this expansion comes at a cost. What’s also unclear is who picks up the tab; companies such as Instacart in the US — the model for many of these Indian startups — charge a fee to make timely deliveries (the first order is free, then it charges $3.99 for a two-hour delivery and $5.99 for a one-hour delivery when you spend $35 or more). However, Indian companies, locked in a battle for user numbers, can’t charge a delivery fee for fear of losing them to another (cheaper or free) venture. Without discounts abounding, consumer stickiness is limited. In addition, the use of MRP or maximum retail price to peg rates of products sold in India means that companies can’t charge a premium for rapid deliveries. In the case of firms such as 1mg, which make hyperlocal delivery of medicines and medical products, the laws governing them are cloudy, with some industry executives contending the business itself is illegal. Perhaps the biggest stumbling block for hyperlocal ventures is the very businesses they target to bring online. In most cases, these grocers, restaurants and other services have a disorganised technology back-end, an inefficient supply chain and only a passing interest and awareness in technology. “Our delivery is dependent on the restaurant’s delivery mechanism and thirdparty logistic players,” says Harshvardhan Mandad, cofounder of TinyOwl, a food delivery service headquartered in Mumbai. “The number of orders the restaurant delivery person does per day depends on the orders… If a restaurant has a poor delivery mechanism, it directly impacts the consumer and the ordering ecosystem get blamed.” TinyOwl has been on a tear since its founding in March 2014. “What we did in a whole month then, we do in a day now… We have well over 10,000 restaurants in six major cities,” adds Mandad. “Profitability in categories like food and medicine is higher since these have high recurring revenue.” But that doesn’t mean profits come easy. Hyperlocal ventures are reduced to some amount of guesswork when they try to bring these stores onto their platforms and to the apps being used by their customers. Consumers, then, are beginning to fret. “The convenience of using these services and apps is offset by poor quality of order delivery… I either get the wrong products or the quality is so poor I need to ask for a refund or return,” says Rajesh Pai, a software engineer in Bengaluru who uses two or three services. “Inevitably, I end up having to walk down to my local store and buy groceries in a rush.” With this kind of customer sentiment, hyperlocal ventures seem to have their task cut out. Different Takes Not everyone thinks the road ahead is so rocky. The founders of Swiggy, the Bengaluru-based food delivery firm, for example, believe that they have the right recipe to crack this market. By the end of this year, the company expects to hire some 12,000 feet -on – the – street and the founders spent much of August on the road, meeting investors for a new round of funding. “Food lends itself perfectly for delivery in 30 minutes,” contends Swiggy’s chief executive and cofounder Sriharsha Majety. “We are the largest food delivery company in the country…we reach 1,700 restaurants in seven cities, with people ordering as often as eight times a month off our app.” Even a company as well funded as Swiggy is not getting ahead of itself in this hyperlocal race. “We don’t want to work with everyone out there…we can add 10-45 per cent incremental business for these restaurants and we pick only places with a strong technology infrastructure to add to our platform.” Ambitious plans like these have emboldened other entrepreneurs to enter an already crowded and competitive market. In Mumbai, Debadutta Upadhyaya and her cofounders at Timesaverz spent a year fine tuning their business model before getting off the ground earlier this year. Since then, the firm that raised $2.5 million from Unilazer Ventures is scrapping hard to be noticed in a crowded market for home services — some 67 startups according to one estimate. “We get around 200 requests a day and provide 56 different home services in seven markets,” she says. “Around 80 per cent of our customers are working couples and for them quality and accountability of home services is a major challenge.” This is a difficult market to be in for Upadhyaya and Timesaverz. “We have around 10,000 customers, but to truly build a scalable and profitable business, we need to have at least a million on our platform,” she admits. As companies race to build out scale in the hyperlocal space, the weaker ones will fade away, as funding and orders dry up. The first round of consolidation is well and truly underway as some cash-starved ventures go belly up and larger ecommerce ventures and investors circle to pick off others. “This is a low-margin business and the scale has to be massive to make sense and build a profitable venture ,” says Grofer’s Kumar. “There is going to be a sharp round of consolidation and people will feel the pinch as funds dry up.” Some of India’s largest internet ventures have also crashed the hyperlocal party, giving startups more reason to worry. Over the past four years, Hari Menon has built BigBasket into India’s largest online grocer, delivering around 7,000 deliveries daily across eight cities. Even as he charts a bold plan to expand to 50 cities by March 2016, he’s rethinking the way BigBasket will do business. While he remains a sceptic of the standalone hyperlocal market, he thinks it may provide a useful addition to BigBasket’s business. In June 2015, the company acquired Delyver as the wellfuelled grocer made a move to address the emergency and quickly perishable products such as bread and eggs. Now, he’s set to cash in. “We are adding a one-hour delivery capability by creating ‘dark’ stores [small inventory stocking points housing 1,000-1,500 stock keeping units] across eight cities,” says Menon. “We want to have 60 such locations to enable this delivery.” While these emergency purchases account for 33-35 per cent of online grocery purchases, BigBasket wants to try to control the entire monthly purchase cycle of its consumers. Even as BigBasket is busy rolling out this new model of delivery, another ecommerce biggie, Zomato, too showed its intent to make inroads into this market, albeit in the food delivery arena, by making investments in Grab and Pickingo. Some 500 restaurants a week will be added to this service, which will go up against the likes of Swiggy and TinyOwl. As talk of a clearout grows, companies are racing to raise money to stay competitive while simultaneously getting prudent with their cash in hand. According to multiple industry executives, their future expansion will be more measured as they preserve capital for what promises to be an all-out brawl. “We will not go after an all-out relentless approach to growth,” says Pepper-Tap’s chief executive Singh. “We are going after breadth and not depth across the country…growth can’t come at the cost of service and in this cutthroat market, only the fittest will survive.”