Online to offline is the new channel of success for Startups?
Did you know that Lenskart operates over 900 physical stores across India? Did you know that Ola owned and leased out 33,000 vehicles to Ola drivers as at the beginning of 2020? Did you know that Byju’s took over Aakash Education for $1 Bn last year, giving it access to 200 physical tutoring centers?
Do you also sometimes stop sipping your coffee midway and stare blankly outside the window wondering why the world constantly tries to romanticize the idea of online-only models when all these tech companies end up getting into brick-and-mortar themselves?
Well we do… So to stop this bizarre habit of insulting our coffee, we decided to bring some sanity to this thought. Come on let’s take a ride:
Why do Startups maintain an online-only model?
Online-only presence allows Startups to enjoy an asset-light model. By asset-light model we mean a biz. strategy where you convert almost all your fixed costs to variable cost structures such that if you, God forbid, made zero in sales tomorrow, you’d cut down majority of your operating costs also.
Take Swiggy’s model for example- you place an order in their app online with a restaurant partner and then the company sends a delivery person to get the food delivered to you. Swiggy doesn’t own the restaurant or the delivery vehicles. It simply earns a commission for every delivery it makes. Now think of all the startups around you like Flipkart delivering you goods or Paytm giving you loans or Oyo bringing you hotel rooms, basically the entire B2C tech ecosystem, and you’ll realize that all of them started off from the same place: online-only models trying to excel in 2 main things: using tech to optimize supply chain and satisfy untapped consumer need.
Why do they do it? If you’re reading off a management book, it’s because this formula is the easiest way in:
You don’t require a LOT of capital to sign commission-based and profit-sharing contracts.
You don’t need to spend months setting up your factory/warehouse/restaurant/hotel. You can instead convince existing asset owners that your “partnership” will get them more money and they’ll give you the attention.
You can just start writing “we deliver globally” and then build on the capabilities as demand increases.
If you’re asking us, it’s because this formula is the easiest way out:
What if your idea doesn’t work? What if you don’t get enough buyers? What if it’s not lucrative enough? You can simply pull the plug on your app and tell your customers sorry! There are no factories/buildings/warehouses to sell off, just contracts to tear off and employees, albeit condemnable, to lay off.
This brings us to the next question…
Do these Startups always remain online-only?
Evidently not! What we’re now observing is a shift towards an omni-channel (online plus offline) route, or phygital as we like to call them, and a shift away from an asset-superlight model. Let’s discuss some examples:
Lenskart | eyewear marketplace Startup | Founded in 2010
For a good 4-5 years the company acted as an aggregator of established brands and went upto 1,500 daily transactions with this model. It also raised $35Mn (INR 263Cr) in the same period and clocked an annual revenue of $8Mn (INR 60Cr).
However, ever since, it has shifted to an omni-channel model and started to open franchise-based brick-and-mortar stores. To add to this, it started manufacturing under its own brand from 2 factories- one in Delhi and the other in China. Not so much asset-light after all. Today it has over 900 brick-and-mortar stores and is in the process of opening the world’s largest automated eyewear manufacturing facility in India. As of 2019-20, Lenskart recorded 35-40% of its sales from the offline stores.
PepperFry, an online e-comm for furniture, has over 60 experiential stores across 20 cities as of 2020. In the pre-covid era, these stores generated 38% of the overall biz. per Ashish Shah, co-founder and COO of PepperFry.
Similarly, listed company Nykaa, an e-comm for beauty and fashion products, has a network of 84 physical stores across 40 cities.
Ola | Local online cab hailing Startup | Found in 2010
At a global level, Uber always boasted of being the largest cab hailing company globally without owning a single car. Ola was originally built with the same principle back in 2010. In FY 14-15, Ola recorded a Revenue 0f $14Mn (INR 103 Crore) through a network of over 5 Lakh cabs that it did not own. 2015 onwards, Ola started buying cars through a loan, under a program where drivers could lease a car for an initial deposit and then make monthly lease payments with an option to own the vehicle after 3 years. As of the beginning of 2020, the company owns 33,000 cars in its books.
Byju’s | Test prep Edtech Startup | Found in 2011
Interesting fact: Byju’s offered offline classes uptil 2015. By this time, Byju Ravindran was taking live coaching for CAT prep in stadiums with 20K people studying together. Imagine going to a stadium to study!
However, on Aug’15 it finally launched its app and completely shifted online. In a short span of just 6 years, it went from an annual revenue of $6Mn (INR 44Cr) to $306Mn (INR 2,381Cr) in FY 19-20 with 6.5 million annual paid subscriptions.
One would say Byju's couldn’t have made a better decision to have shifted online and yet in 2021, it dished out close to $1Bn to buy a 33-year-old chain of physical coaching centers- Aakash Education Services. Aakash has a network of 200 physical tutoring centers preparing 2.5Lakh students annually for entry to top medical and engineering colleges. Why offline again? As Byju Raveendran likes to put it,
“The future of education will blend offline and online experiences.”
To add to this, in Feb this year, Byju’s announced that it has set aside $200Mn (INR 1,500Cr) to open another 500 Byju’s tech-enabled tuition centers in the next 2 years. Each of these will have a capacity of 2-4K students.
Similarly, Unacademy, another edtech unicorn, opened its first brick-and-mortar experiential store in Delhi in Mar’22.
BharatPe | Fintech Startup | Found in 2018
BharatPe started operations with a simple QR code that could be scanned to make payment from any payment app like PhonePe, GPay or Paytm. In the last quarter of 2019, BharatPe began issuing short-term loans to merchants by tying up with NBFCs. By the end of FY 21, BharatPe had disbursed $205Mn (INR 1,600 Crore) to 1.8Lakh Merchants, booking a net annual revenue of $90Mn (INR 700 Crore).
The big news: In the beginning of FY 21-22, BharatPe won a bid along with Centrum Financial Services to takeover PMC Bank for $230Mn (INR 1,800 Crore), which has a network of about a 100 brick-and-mortar bank branches in West India. Not so much online anymore!
BigBasket | e-comm grocery startup | Found in 2011
BigBasket started off with a just-in-time inventory model, buying groceries from the local market, only after receiving an order from a consumer on its app. However, after the initial POC, it quickly pivoted to an inventory-led model where it purchased in bulk directly from producers of FMCG goods and farmers and stored them in large procurement centers situated at strategic locations. With this model between 2013 and 2021, it went from an annual revenue of $32Mn (INR 250Cr) to $834Mn (INR 6,500Cr).
In 2021, the company announced that it will now open 200 brick-and-mortar stores over the next 2 years under the brand name “Fresho”. As the CEO, Hari Menon put it,
“...This is very strategic in nature as a large portion of customers still want offline shopping for groceries and fresh supplies…”
All this is alright but are they really doing it right?
Let’s see what Amazon USA has been up to: The concept of e-commerce started in the US in 1990s. However, even 20 years later, the e-commerce segment owned a mere 10% of the entire retail industry. So, 2015 onwards, Amazon USA started venturing offline by opening bookstores. In 2017 the company bought Whole Foods Market for $13.4Bn giving it access to 460 brick-and-mortar grocery stores in North America. And that’s the same reason Amazon is fighting tooth-and-nail for FutureRetail and its Big Bazaar network in India. Read more on this here.
Okay so PHYGITAL is indeed a better business strategy. But how is it really helping the Startups?
Giving the consumers a power of choice
There are people who love the convenience of shopping/experiencing online and yet there are others who cannot do without the touch and feel. An omni-channel presence gives them the power of choice.
For example, BigBasket is exploring a click-and-pick model where consumers can add grocery to the online cart and then go and pick them up from the nearest Fresho store, allowing consumers to verify quality of grocery, save on delivery cost and reduce some worthwhile carbon footprint.
Building a sustainable brand image
An online only presence means if the consumer decides to step out, she’s stepping into a world where the Startup doesn’t exist at all. So, the perception of the brand is never solidified in the mind. An omni-channel presence makes a valid bid for long term consumer loyalty.
Endless Aisle Strategy
When the online-only players expand to offline channels, they carry the tech with them to stand out from existing players. For example, if a consumer is not satisfied with the local shop’s collection, they can interact with digital touchpoints inside the store to explore unlimited options. Similarly, if a commodity runs out of stock, a consumer can still sell the product by ordering a home delivery for them directly from the online portal.
Creating sustained barriers to entry
Anyone can make an app. Ok slight rectification. Any smart techie can make an app. Which means an online-only business has perennial threat of competitor invasion. The new guy just has to offer better rates to the asset owner. But when you start owning tangible assets with an exclusive right to use them, that’s when you start creating sustained barriers to entry.
For example, Ola started purchasing and leasing out cars when it realized that cab drivers were registering in all cab hailing apps for better price discovery. Having their own cars allowed them to have more control over how they are used.
Enjoying better margins
When the Startup is just an aggregator, it only earns commission. Owning assets implies backward integration in the supply chain which allows the Startup opportunity for cost optimization to increase gross margins.
For example, before buying PMC Bank, BharatPe used to facilitate loans from other NBFCs and earn just a commission on that. But after acquisition it can now start lending through PMC Bank, thereby allowing it to earn a better margin on the loans disbursed.
All this makes us wonder whether an online-only presence is more of a mere entry strategy rather than a complete way of business. What do you think? Share your thoughts in the comments below.
This article is a part of the April'22 edition of our Startup Newsletter. Here's the complete publication: