Why restaurant food delivery is more sustainable than grocery delivery

I’ve ranted a fair bit about both grocery and restaurant delivery on this blog. I’ve criticised the former on grounds that it incurs both inventory and retail transportation costs, and the latter because availability of inventory information is a challenge.

In terms of performance, grocery delivery companies seem to be doing just fine while the restaurant delivery business is getting decimated. Delyver was acquired by BigBasket (a grocery delivery company). JustEat.in was eaten by Foodpanda. Foodpanda, as this Mint story shows, is in deep trouble. TinyOwl had to shut some offices leading to scary scenes. Swiggy is in a way last man standing.

Yet, from a fundamentals perspective, I’m more bullish on the restaurant delivery business than the grocery delivery business, and that has to do with cost structure.

There are two fundamental constraints that drive restaurant capacity – the capacity of the kitchen and the capacity of the seating space. The amount of sales a restaurant can do is the lower of these two capacities. If kitchen capacity is the constraints, there is not much the restaurant can do, apart from perhaps expanding the kitchen or getting rid of some seating space. If seating capacity is the constraint, however, there is easy recourse – delivery.

By delivering food to a customer’s location, the restaurant is swapping cost of providing real estate for the customer to consume the food to the cost of delivery. Apart from the high cost of real estate, seating capacity also results in massive overheads for restaurants, in terms of furniture maintenance, wait staff, cleaning, reservations, etc. Cutting seating space (or even eliminating it altogether, like in places like Veena Stores) can thus save significant overheads for the restaurant.

Thus, a restaurant whose seating capacity determines its overall capacity (and hence sales) will not mind offering a discount on takeaways and deliveries – such sales only affect the company kitchen capacity (currently not a constraint) resulting in lower costs compared to in-house sales. Some of these savings in costs can be used for delivery, while still possibly offering the customer a discount. And restaurant delivery companies such as Swiggy can be used by restaurants to avoid fixed costs on delivery.

Grocery retailers again have a similar pair of constraints – inventory capacity of their shops and counter/checkout capacity for serving customers. If the checkout capacity exceeds inventory capacity, there is not much the shop can do. If the inventory capacity exceeds checkout capacity, attempts should be made to sell without involving the checkout counter.

The problem with services such as Grofers or PepperTap, however, is that their “executives” who pick up the order from the stores need to go through the same checkout process as “normal” customers. In other words, in the current process, the capacity of the retailer is not getting enhanced by means of offering third-party delivery. In other words, there is no direct cost saving for the retailer that can be used to cover for delivery costs. Grocery retail being a lower margin business than restaurants doesn’t help.

One way to get around this is by processing delivery orders in lean times when checkout counters are free, but that prevents “on demand” delivery. Another way is for tighter integration between grocer and shipper (which sidesteps use of scarce checkout counters), but that leads to limited partnerships and shrinks the market.

 

It is interesting that the restaurant delivery market is imploding before the grocery delivery one. Based on economic logic, it should be the other way round!

Restaurants, deliveries and data

Delivery aggregators are moving customer data away from the retailer, who now has less knowledge about his customer. 

Ever since data collection and analysis became cheap (with cloud-based on-demand web servers and MapReduce), there have been attempts to collect as much data as possible and use it to do better business. I must admit to being part of this racket, too, as I try to convince potential clients to hire me so that I can tell them what to do with their data and how.

And one of the more popular areas where people have been trying to use data is in getting to “know their customer”. This is not a particularly new exercise – supermarkets, for example, have been offering loyalty cards so that they can correlate purchases across visits and get to know you better (as part of a consulting assignment, I once sat with my clients looking at a few supermarket bills. It was incredible how much we humans could infer about the customers by looking at those bills).

The recent tradition (after it has become possible to analyse large amounts of data) is to capture “loyalties” across several stores or brands, so that affinities can be tracked across them and customer can be understood better. Given data privacy issues, this has typically been done by third party agents, who then sell back the insights to the companies whose data they collect. An early example of this is Payback, which links activities on your ICICI Bank account with other products (telecom providers, retailers, etc.) to gain superior insights on what you are like.

Nowadays, with cookie farming on the web, this is more common, and you have sites that track your web cookies to figure out correlations between your activities, and thus infer your lifestyle, so that better advertisements can be targeted at you.

In the last two or three years, significant investments have been made by restaurants and retailers to install devices to get to know their customers better. Traditional retailers are being fitted with point-of-sale devices (provision of these devices is a highly fragmented market). Restaurants are trying to introduce loyalty schemes (again a highly fragmented market). This is all an attempt to better get to know the customer. Except that middlemen are ruining it.

I’ve written a fair bit on middleman apps such as Grofers or Swiggy. They are basically delivery apps, which pick up goods for you from a store and deliver it to your place. A useful service, though as I suggest in my posts linked above, probably overvalued. As the share of a restaurant or store’s business goes to such intermediaries, though, there is another threat to the restaurant – lack of customer data.

When Grofers buys my groceries from my nearby store, it is unlikely to tell the store who it is buying for. Similarly when Swiggy buys my food from a restaurant. This means loyalty schemes of these sellers will go for a toss. Of course not offering the same loyalty program to delivery companies is a no-brainer. But what the sellers are also missing out on is the customer data that they would have otherwise captured (had they sold directly to the customer).

A good thing about Grofers or Swiggy is that they’ve hit the market at a time when sellers are yet to fully realise the benefits of capturing customer data, so they may be able to capture such data for cheap, and maybe sell it back to their seller clients. Yet, if you are a retailer who is selling to such aggregators and you value your customer data, make sure you get your pound of flesh from these guys.

Hyperlocal and inventory intelligence

The number of potential learnings from today’s story in Mint (disclosure: I write regularly for that paper) on Foodpanda are immense. I’ll focus on only one of them in this blog post. This is a quote from the beginning of the piece:

 But just as he placed the order, one of the men realized the restaurant had shut down sometime back. In fact, he knew for sure that it had wound up. Then, how come it was still live on Foodpanda? The order had gone through. Foodpanda had accepted it. He wondered and waited.

After about 10 minutes, he received a call. From the Foodpanda call centre. The guy at the other end was apologetic:

“I am sorry, sir, but your order cannot be processed because of a technical issue.”

“What do you mean technical issue?” the man said. “Let me tell you something, the restaurant has shut down. Okay.”

I had a similar issue three Sundays back with Swiggy, which is a competitor of Foodpanda. Relatives had come home and we decided to order in. Someone was craving Bisibelebath, and I logged on to Swiggy. Sure enough, the nearby Vasudev Adigas was listed, it said they had Bisibelebath. And so I ordered.

Only to get a call from my “concierge” ten minutes later saying he was at the restaurant and they hadn’t made Bisibelebath that day. I ended up cancelling the order (to their credit, Swiggy refunded my money the same day), and we had to make do with pulao from a nearby restaurant, and some disappointment on having not got the Bisibelebath.

The cancelled order not only caused inconvenience to us, but also to Swiggy because they had needlessly sent a concierge to deliver an impossible order. All because they didn’t have intelligence on the inventory situation.

All this buildup is to make a simple point – that inventory intelligence is important for on-demand hyperlocal startups. Inventory intelligence is a core feature of startups such as Uber or Ola, where availability of nearby cabs is communicated before a booking is accepted. It is the key feature for something like AirBnb, too.

If you don’t know whether what you promise can be delivered or not, you are not only spending for a futile delivery, but also losing the customer’s trust, and this can mean lost future sales.

Keeping track of inventory is not an easy business. It is one thing for an Uber or AirBnB where each service provider has only one product which is mostly sold through you. It is the reason why someone like Practo is selling appointment booking systems to software – it also helps them keep track of appointment inventory, and raise barriers to entry for someone else who wants the same doctor’s inventory.

The challenge is for companies such as Grofers or Swiggy, where each of their sellers have several products. Currently it appears that they are proceeding with “shallow integration”, where they simply have a partnership, but don’t keep track of inventory – and it leads to fiascos like mentioned above.

This is one reason so many people are trying to build billing systems for traditional retailers – currently most of them do their books manually and without technology. While it might still be okay for their business to continue doing that (considering they’ve operated that way for a while now), it makes it impossible for them to share information on inventory. I’m told there is intense competition in this sector, and my money is on a third-party provider of infrastructure who might expose the inventory API to Grofers, PepperTap and any other competitor – for it simply makes no sense for a retailer to get locked in to one delivery company’s infrastructure.

Yet, the problem is easier for the grocery store than it is for the restaurant. For the grocery store, incoming inventory is not hard to track. For a restaurant, it is a problem. Most traditional restaurants are not used to keeping precise track of food that they prepare, and the portion sizes also have some variation in them. And while this might seem like a small problem, the difference between one plate of kesari bhath and zero plates of kesari bhaths is real.

Chew on it!

Grofers, BigBasket and the Lack of Systems Thinking

Last week I wrote this post about why Grofers is not a sustainable and scalable business. The basic point was that goods they sell undergo both high inventory cost (having been stored in a retail store) and high transport cost (delivery).

The most common response to the post was that my claim was wrong because “Grofers doesn’t store any inventory but only delivers”. And it was not unintelligent people who said this – I counted at least three IIM graduates who made this claim on Twitter (ok if that statement gives the impression that I think that all IIM graduates are intelligent, so be it. I don’t disagree).

While their claim is correct, that Grofers doesn’t store any inventory but only delivers, the problem with their line of attack is that they are looking at it from a very localised perspective and not looking at the bigger picture.

A similar problem can be seen in this post on TechCrunch announcing BigBasket’s latest round of funding. Relevant section here (hat tip: Rohin Dharmakumar):

Challenges faced by BigBasket include the grocery industry’s low margins, the cost of adding new delivery staff, and the fact that it carries its own inventory. This allows BigBasket to offer a large selection, but also means it has more overhead than hyperlocal services that partner with existing merchants and needs to more time to prepare before expanding into new cities. (emphasis added)

Catherine Shu, who wrote that piece, might be right in claiming that Bigbasket carries its own inventory. But she is wrong in claiming that it is a problem, for Bigbasket is in a completely different business compared to those hyperlocal services, and in my opinion in a superior business. The carrying of inventory is a feature rather than a bug.

What the twitter comments on my post on Grofers and this piece on BigBasket illustrate is the lack of “systems thinking”. People are great at looking at localised problems, and localised “point solutions” to these local problems. What is not so intuitive is to look at a particular problem as part of a bigger picture and in a more holistic fashion.

Grofers itself may not carry inventory, but the goods it ships would have been part of inventory of some retailer. So while Grofers may not directly incur this high inventory cost, someone along the chain (the retailer in this case) does, and that means there is less money for Grofers to play around with and make a margin.

BigBasket, on the other hand, carries its own inventory and this inventory is aggregated at a much higher than retail level. This implies that the inventory costs for BigBasket are significantly lower than any retailer (since aggregation leads to lower inventory costs). And this inventory cost thus saved can help BigBasket make higher margins. It also allows them to serve the “long tail” to the customer cheaply, something Grofers may not be able to do if no shops in the customer’s vicinity stock such products.

The problem with localised thinking is that it leads to localised solutions, and local optimisation. Optimising locally at different points in a chain makes it harder to optimise at a system level.

How Long Tail affects pricing

My late mother never shopped for fruits and vegetables in the Gandhi Bazaar market. She found that the market was in general consistently overpriced, and if we look at the items that she would buy, it is still the case. For “normal” stuff, you are better off going to nearby “downmarkets” like the one at NR Colony, or even Jayanagar Fourth Block.

So why is the Gandhi Bazaar market overpriced? The answer lies in the long tail. In the book of the same name, Chris Anderson talks about products that are not the most popular, but which has a niche demand. In that he talks about companies such as Amazon or Netflix which are successful not because they do a better job of selling the “bestsellers” but because they are able to service well the “long tail” – items that are not found elsewhere thanks to the high cost of selling.

In other words, it is a liquidity story. If the neighbourhood kirana, for example, wants to sell olives, his costs are going to be high as the rate at which he sells olive bottles is going to be so low that his inventory costs are going to increase, and the risks of ageing and spoilage of inventory also goes up. And he has to spend that much more manpower and effort in managing this extra item, so he decides to not sell this item at all (he will have to charge such a high premium to sell such goods that it doesn’t make sense for the customer to buy it).

Yesterday I bought an “imam pasand” mango in Gandhi Bazaar. Now, this is not one of the “standard” mango varieties that are available in Bangalore. In fact, I had never in my life eaten this variety of mango until yesterday, for the simple reason that it is not generally available in Bangalore. The fruit stall in Gandhi Bazaar, however, stocked it. A neighbouring fruit stall was where I used to source the Dashehri mangoes (common in North India but rare in Bangalore) a couple of mango seasons back. Avocados, which are generally hard to find in “traditional” retailers in Bangalore were also available in every fruit stall in Gandhi Bazaar, as were other not-so-common fruits.

So why did my mother find Gandhi Bazaar expensive? The answer is that the fruit sellers at Gandhi Bazaar stock the “long tail” because of which their general costs of inventory are high compared to competitors who don’t. Thanks to the range, they will have a large number of customers who come to them to buy specifically these “long tail” items. And while they are at it (buying the long tail items), they also end up buying some “normal” items. Customers who come seeking the long tail are usually those that are willing to pay a premium, and thus the shops in Gandhi Bazaar are able to charge a premium for the non long tail items also.

 

Thus, if you purely look at rates of “common” items, Gandhi Bazaar, a market which offers the “long tail” will always be more expensive than other markets. Anecdotally, along with the Imam Pasand yesterday, I also bought a kilo of “vanilla” Raspuri mangoes, at the rate of Rs. 100 per kg. At the shop down the road, Raspuri was available for Rs. 90 per kg. The shop down the road, however, doesn’t stock Imam Pasand, which means that the price of Imam Pasand in that shop is infinity.

So if you are only looking to buy Raspuri, you are better off going to the shop down the road. If you either want only Imam Pasand, or both Imam Pasand and Raspuri, though, you should go to Gandhi Bazaar! In other words, the “range” that the fruit seller in Gandhi Bazaar offers implies that he can get away without discounting. Theoretically speaking, though, we can say that the fruit seller in Gandhi Bazaar actually discounts on the long tail items by the sheer act of stocking them (thus dropping their price from infinity to a finite number), and he is using this discount to sell his “normal” goods at “full price”. Ruminate on it, while I go off to devour a mango!

 

Ashirwad Retail

This is a blog post I had written on 12th June 2007 and for some reason not published! Was cleaning up my drafts today and found this, and thought it would be good to publish just to show how I thought 7 years back! 

This evening I accompanied my mother to this store called Ashirwad Departmental Stores in Basavanagudi (near South End Circle). If you would ask me to describe the store I might probably call it a family-owned supermarket. And in my opinion, that store is easily the best department store I’ve seen in terms of customer service. And I believe this particular model might end up being the big success story in Indian retail.

Being a stand-alone store, Ashirwad may not have the supply chain efficiencies that chains such as Big Bazaar claim to have. It may not offer the discounts that say a Subhiksha offers. It may not be airconditioned and have the perfect lighting like yet another of the larger retailers. However, I believe it makes up for all this, and more

What Ashirwad so nicely achieves is in combining the good points of both organized and unorganized retail while trying to eliminate the drawbacks of both. To elaborate, one usually associates family run ‘kirana’ stores with inconvenient formats (you need to ask the shopkeeper for everything you need), lack of facility for bill payment for credit cards (i hear this is changing now), old or non-moving stock, the lack of a “shopping experience” and so forth.

Organized retail usually loses out on factors such as incompetent staff and store managers, ignorance of staff about store layout, bureaucracy, rules and most importantly the “impersonal” feeling. There are also quality issues that people (such as my mother) raise about the store-branded goods (mostly groceries) that are available at the supermarkets.

A family run supermarket tackles them all. The thing with Ashirwad is that the guy at the billing counter (there is just one, and there are no huge queues) is one of the owners of the store, and the store P&L has a direct impact on his life. He reports to no one, and hence has to offer no explanations. This solves a large number of problems – starting from billing time to allowing people to selling without a bill. Also, I noticed one thing that two people do the billing simultaneously (one looks at the items and packs them, while the other keys in the codes) speeds up the billing process by a huge amount.

Then, there is the format itself. It is a supermarket “help yourself” format, but there are staff all around (and they really know the store) in order to help you out if you can’t locate something. The level of intrusion, in my opinion, is just right. In fact, there are enough staff in the store so if you can’t, or don’t want to, go around the store to fetch things for yourself, the staff will do it for you, converting the store into a regular kirana. And you can browse all day if you want, and the staff won’t bother you, and it becomes a supermarket!

The most important thing that sets Ashirwad apart from the other supermarkets is that “personal” feeling. It being a family-run store, the staff are also fairly permanent (this perhaps explains their knowledge of the store layout – something sorely lacking in current “organized retail”) and if you visit the store a couple of times you become a “regular customer” and get the associated benefits. The same staff being there always also helps in case you want to return defective goods (another major hassle at supermarkets) or go to claim some unclaimed discount. Oh, and by the way, Ashirwad delivers.

The most important thing that sets Ashirwad apart from the other family run stores is it’s size and format. The shopping experience is sorely missing in the kiranas, and the fact that you need a shopkeeper to serve you also increases service time. They accept both credit card and meal pass coupons without a fuss, and most of the stock looks fresh. The in-store brands (in groceries) are also supposed to be of good quality.

However, what really struck me about Ashirwad, and I see that as a clear sign of financial strength, is the range of inventory. One way stores like Subhiksha save on expenses is by stocking only the really fast moving of FMCGs, thus saving on inventory carrying costs. Which means that every visit to a Subhiksha has to be followed by a visit to some other store to get what you didn’t get at Subhiksha (which is a lot). The range of goods (talkign about biscuits and tea and cosmetics here) I saw at Subhiksha seemed much larger than that I’ve seen at Food World, or maybe even Big Bazaar. I’m really impressed.

Now that I’ve praised the Ashirwad model so much, the question is regarding its scalability. Is it possible for me to open a thousand Ashirwads, and hope to give the Big Bazaars and Reliance Retails a run for their money? The answer, I think, is no and yes.

One of the key things that make Ashirwad what it is is that it is a standalone store, and it is a family that runs it. As I talked earlier, a large number of benefits of kirana stores are also seen in Ashirwad purely because the guy at the cash counter owns a share of the P & L, and that he has full control of the store. I opening a thousand such stores would imply employing store managers, and staff, and doing everything top down. Doesn’t fit into the concept at all.

So is there some hope in this? What if I can link up with a thousand such kiranas and make money out of that? I need not open a thousand Ashirwads myself. What I need to do is to convert a thousand existing kiranas into Ashirwads. And get a share of their profits (or maybe a fixed fee) while they function like a thousand independent Ashirwads – with all the associated benefits, and owning their own P&Ls.

Now if this format is such a clear winner, why is it not being replicated? Why are there not already a thousand Ashirwads out there? Looking at the various players, the people best placed to convert to this format are the kirana owners. Why are they not doing it, when it is such a winner? I believe the main, and maybe only, reason is that they don’t NEED TO. They don’t see any benefits in remodeling their store, and offering things they are not offering right now, and are hence not spending in this direction. They believe they are making enough money in the present format and there is no need ot change.

In the introduction to this piece, I actually mentioned a couple of drawbacks that Ashirwad suffers vis-a-vis organized retail. I mentioned reduction in supply chain costs. And I also mentioned discounts. Is there a way in which we could work with say fifty Ashirwad-like stores in a large city such as Bangalore and help them save costs? Is there something we can do that can save costs for all these guys (and significnatly so that a part of it can be passed on to the customer) and also make a profit for ourselves?

What kind of model can we use for this? How can we save the costs for the stores? What revenue sharing model do we use, and how do we make money? Who invests in teh store remodeling, us or them? Why will the stores partner us? Will their revenues increase so much by joining with us that they can pay us a part of that? All these questions still need to be answered. And once I do that, I need to approach someone with loads of money in order ot implement it.

Offline marketing of online services

Using snail-mail for marketing is an effective strategy for it grabs more of your attention. But messages need to be more personalised to have effect.

This came in the mail yesterday. If you are an old-timer like me, you will recognise it as an “inland letter card”. The edges are frayed because it had been so long since I’d received one such card that I’ve forgotten how to open them.

bigbasket

You will notice that this inland letter came from Bigbasket, the online grocery shopping firm. At first look, it is bizarre that an e-commerce firm is using snail mail for its marketing. On second thoughts, though, it isn’t that bizarre!

The thing with online modes of communication such as email or SMS is that the cost of sending a message is low, very close to zero. What this leads marketers to do is to bombard you with messages. For example, I bought something from Jabong a couple of weeks back and they’ve since sent me at least an SMS a day. I promptly delete them without reading. On my email, I’ve been unsubscribing wherever possible from promotional lists from which I get messages – for they are too frequent and too “vanilla” (it’s bizarre that even marketers who know much about me refuse to use that information in their communication).

In short, there is too much clutter in online (email/SMS) marketing, and the chances of any promotion really standing out and getting the user’s attention is minuscule.

Sending snail-mail, on the other hand, is expensive. It costs you to buy the paper, print out the letters and then you pay for postage. This means that with the advent of cheaper means of communication, most marketers have moved away from it. What that has done is that you get much lesser snail-mail than you used to a few years ago. Which means that the amount of attention you devote to each snail-mail is actually more!

So with snail-mail being the more expensive form of marketing, it is actually more effective for marketers because it draws your attention! (You can think of it as a multi-player prisoner’s dilemma where the marketer wants to maximise her claim on your attention (relative to her costs), and can do so by either using email or snail-mail. The optimal solution, I believe, is a kind of “mixed strategy” – mostly email, but the odd snail-mail here!)

So an online sales company reaching out to you by snail mail is not that bizarre after all. If only they had customised the mail to put my name on it (not hard to do at all), and made it seem like a personal letter, it would have been even more effective!

There have been two occasions in the last five years when I’ve actually responded to upsell campaigns. One was by Airtel who called and offered me a 3G data plan for almost the same price as what I was then paying for my 2G plan. I had been intending to upgrade and I took it.

The other was by Tata Sky, who sent me a beautifully crafted personalised letter printed on thick A4 paper, indicating I was a “premium subscriber” and asking if I wanted to upgrade to Tata Sky+ HD, and giving me a number of a dedicated call center who I had to call to upgrade. It is likely that had it been email I might have discarded it (or if I were using today’s Inbox, marked it as “Done”). Snail mail drew more attention, and the personalisation made me feel good. And I upgraded.