In theory, all of this seems ideal. BigBasket gets recurring customers, can increase the AOV of BBdaily by offering a wider inventory, and increase margins on these orders by pushing their private label offerings. In addition, says Chowdhri, high-frequency usage on subscription models makes it possible to take care of the marketing cost, or even the cost of acquisition of that particular customer. But as with most things too good to be true, there’s a catch. A few of them, actually.
How are the competitors being differentiated?
Apart from establishing a USP to differentiate from competitors, the glaring problem with subscription models that no one wants to talk about is predicting demand. Grocery delivery startups usually stock their inventory depending on the demand pattern of its customers.
Since BigBasket customers shop 3-4 times a month, the pattern is clear and well laid out. But with subscriptions, where orders are placed almost every day, some experts feel that the maze of putting together supply for high-frequency demand is almost impossible.
The offline subscription market is a good guide as to what works and what might not. “The only grocery product that has worked offline on subscriptions is milk. Even if you look at eggs, it has never become a subscription-based business in the offline world,” says the founder of a grocery delivery startup, who spoke on condition of anonymity. According to him, the only sustainable subscription model (apart from groceries) right now is newspapers.
The reason milk and newspapers work so well, he explains, is because they are standard daily consumable products. “Since customers have already selected what they want, you can clearly lay out the supply required,” he says. BigBasket, with its plans of increasing the scope of BBdaily, is likely to find this out the hard way.
The unpredictability of human behavior
The founder quoted above adds that his startup ran a pilot subscription service for 3-4 months. It was shuttered because of the unpredictability of demand. He figured that although the customer knew what she wanted on a daily basis, she never knew the quantity required. “This means you need to give the quantity control to the customer, and the moment you start taking extra input from the customer the convenience goes away.”
But far from worry about the unpredictability of human behavior, BigBasket thinks it can influence it. Change it, even. One way in which they intend to do this is through their fresh produce, directly sourced from the farm to the customer’s doorsteps in less than two days. “Today, customers tend to order [fresh produce for] 2-3 days or maybe a week, depending on demand.
People usually buy vegetables for a week and stuff it in the fridge. By the end of the week, you’re using really old veggies. We want to try and change that behavior by delivering fresh vegetables and fruits early each morning for that day’s consumption,“ says Varghese.
But even if it manages to influence customer behavior, there are still serious limitations to the micro-delivery play. “The problem is that subscriptions can only be pushed in high-density areas where people are already accustomed to buying groceries daily,” says Stellaris Venture’s Chowdhri.
This limits the potential of the model. And, in addition to this, daily essentials are also low-margin products. Which raises the question: How do you become a very large player by delivering to a limited number of cities with such low margins?
Role of the grocery manufacturers
The answer may lie in BigBasket’s ambitions. At present, the company encapsulates four different business models. A core grocery retail business, which procures and stocks some 30,000 SKUs from grocery manufacturers and retail brands, a private label business which sources raw materials directly from farmers and suppliers, a subscription-based morning delivery unit, and a vending machine pilot.
Each is a contributor to the company’s overall health, but the company is ultimately not dependent on anyone for its survival.
To that end, while the micro-delivery space is the be-all and end-all for their competitors, it is merely an additional revenue stream for BigBasket. One that may turn out extremely lucrative in the long run, but isn’t critical to the company. At least for now.