B2B e-commerce startup Udaan to tap $100-bn opportunity in small-town India

Udaan is expanding into building a digital trade ecosystem and aims to have 10% of the total transactions worth $1 trillion on its platform in the next few years

Five year ago, former top Flipkart executives and friends Amod Malviya, Sujeet Kumar, and Vaibhav Gupta started business-to-business e-commerce start-up Udaan. Malviya, Kumar, and Gupta, who are all engineers from the country’s top Indian Institute of Technology (IITs), hail from small towns in states of Uttar Pradesh and Bihar, where, growing up, they didn’t have access to supermarkets, and had to travel to the nearest big city for large purchases. In just 5 years, under their leadership, Udaan has built the capacity for taking the small retailers in Bharat (tier-2 and tier-3 cities and rural India) into the digital ecosystem to benefit from the e-commerce scale

Bengaluru-based Udaan is now eyeing to tap a $100 billion opportunity in the next few years. The aim is to have 10% of the total transactions ($1 trillion) on the Udaan platform in the next few years. Most of this growth would come from Bharat. This is because about 70% of the country’s population resides there and they are catered to by small kirana and retail shops

“This is a $1 trillion market,” said Sujeet Kumar, co-founder, Udaan, in an interview. “Our vision is that we would do transactions worth  $100 billion in the next 7-8 years.”

Udaan is planning to increase warehousing capacity five-fold to 50 million sq.ft in the next few years to meet the infrastructure required for achieving these business objectives.

Another Udaan co-founder Vaibhav Gupta said the firm is expanding into building a digital trade ecosystem. It includes offerings such as commerce marketplace and lending and logistics platform. This ecosystem would transition offline unorganized trade to a future digital economy. 

“In 10 years, if we can run 10% of trade in India, then you have created something powerful,” said Gupta. “This can really impact the economy and society of the country.”

Indeed, about 90-95% of the country’s population depends upon neighborhood stores and retail stores for their everyday consumption. This includes grocery, medicines, vegetables, and garments. This got highlighted during the pandemic when these stores became the lifeline of the country. Bharat is actually fuelling Udaan’s business during the pandemic.

For Udaan, there is an increased digital adoption among small businesses and kiranas. This year the firm is targeting 80-100% growth over the previous year. Udaan’s daily food business volume has already crossed 8000 tonnes, making it the largest grocery placer in the country. There was an over 50% increase in the number of buyers in the food category during the past several months. 

“The pandemic has given more confidence and accelerated the reliance of retailers on Udaan,” said Kumar.

Also, pharma became the fastest growing business for the company. The segment witnessed five-fold growth since its launch, one-and-a-half years ago. Besides that, nearly 15 million ‘Covid Safety Essentials’ catering to over 23,000 orders from over 400 sellers across 5,000 pin codes were sold on Udaan, during the second wave of the pandemic. The e-commerce platform witnessed a five-fold surge in the demand for items like protective masks, face shields, and PPE suits.

“During the pandemic, we launched an app for people to locate stores for covid related essential medicines,” said Kumar. 

Realising the importance of e-commerce amid pandemic, this year Udaan attracted $280 million in additional financing from its existing and new investors including Lightspeed, Yuri Milner’s DST Global, and Tencent, at a valuation of over $3.1 billion. The funding is helping Udaan to strengthen its supply chain and logistics capability and serve small businesses across the country, through UdaanExpress. However, booming online retail sales show that smaller cities and rural areas of the country are now a key market not only for Udaan, but e-commerce giants such as Amazon, Flipkart, Reliance’s JioMart and Tata as well. Despite having a first-mover advantage, analysts said Udaan is expected to see serious competition from these players in the business-to-business e-commerce space.

However, Kumar said Udaan’s understanding, execution, and scale, is much bigger than other players. He said that Udaan’s capabilities are more suited to the requirements of the retailers and smaller brands that are lacking distribution in the country.

“We are meeting millions of retailers on the ground and we don’t see much presence of anybody (e-commerce firms) else,” said Kumar.

For Udaan, there are now high repeat purchases by buyers on its platform. About 90% of the average B2B buyer shops 10-12 times a month on Udaan compared to 2-3 times per month in the case of a business-to-consumer platform.

The firm has crossed over 3 million registered users. Over 1.7 million retailers, chemists, kirana shops, HoReCa (hotel, restaurant and cafe) and farmers are doing over 4.5 million transactions per month. Over 30,000 sellers are actively engaged on the Udaan app to trade digitally 24X7 at their convenience. More than 5 lakh products are curated across 2500 brands that are available on the platform. Udaan delivers around 1.75 lakh orders daily (both food and non-food category).

Gupta said what also differentiates the firm is the ability to reach directly to the source of products such as farm fields and garment factories. It is also building quality sourcing, selection, and buying on the platform. It is focusing on the mass market of India. This results in bringing down the cost for the retailers. For instance, Gupta said about 80% of the retailers in this mass market won’t buy footwear worth Rs 2000, but they would rather purchase local products at one-tenth of that price.

 “At Flipkart, we were more attuned to branded categories,” said Gupta.

Indeed, the company witnessed a spurt in demand for local products in 2020. It saw a huge surge in business across its food, lifestyle, electronics, and pharma categories amid the pandemic. These categories together accounted for over 1500 sellers from across India, primarily Bharat registering a sales turnover of more than Rs 1 crore each on the Udaan platform during last year.

“The second covid wave was much deeper,” said Gupta. “But we were fundamentally more resilient as a company, unlike the first wave.”

What helped in this resilience are the processes created in the last 5 years. After testing the business model, Udaan built scale and created logistics and lending capabilities such as UdaanExpress and UdaanCapital. It has built an extensive supply chain and logistics network with daily delivery covering over 900 cities and 12,000 pin codes – through UdaanExpress. This includes one of the largest logistics networks, having 200 warehouses, over 10 mn sq ft space.

UdaanCapital also has grown 30 times in AUM (assets under management) and 40 times in credit lines over the last 2 years. Gupta said the credit rotation for UdaanCapital was faster than pre-covid times as other channels dried up for the retailers.

Udaan said it has seen overall business growth of 900 times in GMV (gross merchandise value) over the last 4 years.

The firm is now focusing on institution building. This includes long-term capability building and customer relationship management. It is also scaling up hiring and increasing focus on creating the right culture. The other aspects include organizing the unorganized (unbranded) food market and sourcing capabilities. It is also focusing on repeat purchases and targeting an increased share of the wallet of kirana stores.