udaan tops duopolistic Kirana e-commerce market in India: CLSA report

The platform has a 60% share in this space, with Reliance Jiomart being the only other dominant player

udaan, which had a short stint as a pure-play marketplace model initially, has quickly pivoted to a Kirana e-commerce model and is now a leader in the space, says an analyst report by CLSA Ltd, the capital markets and investment group.

The report said e-commerce opportunities in India will be under five models. These include B2C models (good part is with Amazon and Flipkart), Kirana model (udaan and Jiomart), community group buying model (udaan pioneered), social live commerce for long-tail garment (WhatsApp and Facebook), O2O model on leveraging offline assets. Of the five models, udaan is actively pursuing two models, the Kirana model and the community group buying model.

“We expect disruption in distribution channel through ‘Kirana digitisation’, expansion in e-commerce share, the emergence of eB2B and mega distributors like Jio Mart,” said the CLSA report. “In Kirana e-commerce, udaan is the dominant player. With Reliance Jiomart, it’s almost like duopoly market.”

The report said udaan has 60 per cent market share in the Kirana e-commerce space. The report said the adoption of Kirana e-commerce has heightened during the pandemic, reflected in the 6x revenue growth for Bengaluru-based udaan in FY21 (Rs 59 billion). With capabilities in place, the company is eyeing scaling-up, which will aid profitability. At its current scale, it has a 5.5 per cent gross margin (potential for 8-10 per cent) and it is breakeven at the contribution level. The company is aiming for steady 50 per cent growth, with the adoption of Kirana e-commerce.

CLSA Analysts attribute this rapid growth to udaan leveraging its national supply chain, range of products and lowest customer acquisition cost (CAC).

udaan recently raised $250 million, of which $200 million was in the form of convertible notes and the remaining is debt funding. The firm was valued at $3.2 billion and the firm will evaluate an IPO by mid-2023.

The report said the $1 trillion purchase done by shopkeepers in India, historically has been through wholesale and distributor.

“It is a huge market and there is always space for more,” said Sujeet Kumar, cofounder, udaan. “There will eventually be three to four large players, but everyone has to fight for it equally.”

The overall market is fragmented (with 150-200 million entrepreneurs/trade participants), almost 100 per cent is through virtually small unorganized suppliers. “Organizing wholesale and distribution is a massive opportunity, which Udaan pursue to transform via e-commerce,” said the CLSA report.

The company is going mainstream, taking its services across markets. Given distribution channels are broken in smaller markets, the company is addressing needs in Tier 2-3 markets. Its 70 per cent of growth comes from these markets and it has invested more in infrastructure and the last mile.

“Its (udaan’s) playbook has five different elements: go to market, sourcing, working capital finance, supply chain and technology,” said the CLSA report. “With its playbook in place, udaan is looking to sustain its leadership in Kirana e-commerce.”

The firm has also recently adopted a community grocery model as an additional revenue stream. udaan is attempting to construct a full-stack platform for small and mid-sized firms to create a mixture of the market, logistics services (udaan Express) and working capital financing (udaan Capital).

The firm has a network of over 3 million users and over 25,000 sellers across over 900 cities covering more than 14,500 pin codes. The company is looking to expand its retail coverage to over 5 million (small retailers) by December 2022. In Nov 2021 it launched a community grocery buying initiative, Price Company, primarily for small and marginal retailers in tier 2-4 cities.

Organising wholesale and distribution is a massive opportunity, which udaan pursues to transform via e-commerce. Under its Kirana e-commerce model, it has over 500,000 products available across 14 categories on its platform. Under Project Bharat it is on track to reach 1,500 towns by December 2022 and wants to expand coverage to 10,000 towns in 10 years.

Amongst the categories it is present in, groceries represent two-thirds, lifestyle 10 per cent, electronics 10-15 per cent and general merchandise 5 per cent. In terms of market focus, udaan generates 20-30 per cent of its business from the top 10 cities. The next 200-300 cities make up 40 per cent. The bottom cities represent 30-40 per cent of revenue, where it wants to expand share, given it has defocused segments by trade and brands.

“It (has) capabilities in data, where it has data for the past five years. On a monthly basis it has 5-6 million transactions and each transaction provides 10-12 data points,” said CLSA report. “This has helped udaan build a unique underwriting algorithm.”

The report said the company has been driving share of organised trade, as its services are much better compared to traditional channels. The firm now has a direct relationship with over 120 FMCG companies, which have multiple brands.

udaan is tapping the market with three key initiatives which include credit, logistics and community buying. udaan Express is a leading end-to-end logistics solutions provider, serving clients across the country. With over 70 warehouses (a reach of 200-250km) and 500 last-mile fulfilment centres, udaan’s supply reaches all of India. The firm is also looking after the working capital needs of trade under udaan Capital. Over 100,000 businesses have benefitted under this initiative, where over Rs70 billion has been disbursed amid partners residing in over 500 cities across India.

The firm also has Price Company (community grocery shopping): Under this community buying initiative, the company is looking to address demand from small and marginal consumers in tier 2-4 cities.

The CLSA report said the Indian consumer sector would face several potential disruptions over the next few years testing the agility of companies to brace and benefit from them. It said FMCG companies will need to brace for a supply-chain reinvention even as the consumer increasing shifts towards omni-shopping.