Last week, BigBasket raised $150MM to push for pole position in the hot Indian grocery space, resulting in the company becoming a unicorn. 

DotCom Bust?

The origins of the BigBasket team are not with BigBasket, but way back in 1999. 

The BigBasket team, way ahead of their years, started an e-commerce business in 1999 called FabMart. At a time when dial-up connections in India existed, and pages took a minute to load, FabMart's team had the courage to start a business. 

When payment gateways did not exist and an online consumer based was just an illusion, FabMart went through the dot com bust. Starting by selling only CDs online, the company diversified into other products such as books, watches, and of course, groceries. 

The company was acquired in 2006 and rebranded itself as IndiaPlaza, and even operated as recently as 2011. Indiaplaza was run by six founders, a fairly large founding team that largely remained together for BigBasket. Over a decade of experience in the suddenly exploding internet e-commerce market pushed them for a new calling.  

Four of the IndiaPlaza "mafia", V S Sudhakar, Vipul Parekh, Hari Menon and V S Ramesh moved on from IndiaPlaza to start BigBasket. They were joined by Abhinay Chaudhari to complete the founding team. 

An internet business, only selling groceries, was born.

Big Basket of Capital

Given the founders' relatively high experience in the Indian e-commerce sector, BB started off being very well funded. 

With $10MM of capital in 2011, it was in the esteemed league of Flipkart which had just raised $20MM to capitalize on the to-be-booming e-commerce market. Faced with broken delivery infrastructure, a small but growing set of customers, and limited payment infrastructure, BigBasket was against a wall.

Most Indian consumers in 2011, and even today, purchase groceries from their trusted neighbourhood grocer, mandi, or a Kirana store. Trusting an unknown online grocer to send you fresh groceries, that too over something called the "internet" would be alien to most customers. 

BigBasket would need all the capital to scale its business. 

Armed with capital, but a mountain to climb, BigBasket set out in earnest. BigBasket essentially started off as an online mandi, and given the small customer base, it had to purchase its own produce from a mandi.  

Purchasing from the mandi would mean wafer thin retailer margins, as mandis themselves were places customers would purchase from. BB, though, provided a superior experience to customers who wanted to have groceries at the doorstep. 

Instead of navigating dense city traffic and choosing groceries, the benefits allowed BigBasket to do $4MM of GMV in its first year (and $400K of revenue).

The company, though, was staring at an elephantine market. 

Hunger for Food

To say that the Indian food and grocery market is giant is an understatement.

Food forms one of the largest parts of India's massive $650Bn+ retail market, pegged to be one of the world's 5 largest. Groceries are expected to grow from $300Bn to$600Bn in the next 5 years.

Why wouldn't someone corner this massive market?

Organized retail, despite being existent for decades, has only managed to garner 10% of the overall market. Large offline retailers such as Future Bazaar, D-Mart and Reliance exist in the organized format. Despite having capital, these companies have found it difficult to make inroads into the overall food/grocery market.

The difficulty is an incredibly complex supply chain.

While packaged food and groceries tend to have a more balanced supply chain, fresh produce, which is the largest component, is unbelievably complex. In a morass of middlemen, produce moves and gets wasted, squeezing the farmer. 

In the absence of strong cold chain logistics, fresh produce would get lost or never reach. In an extremely unreliable supply chain at scale, local grocers and mandis sprung up all across the country. 

For such a large market, it operates largely on trust and limited organization. To understand its scale, even capturing 1% of this market would mean making a $4Bn revenue. 

BigBasket was in a big, but tough, business. 

Masters of Scale

BigBasket grew considerably in its first 5 years, growing from a GMV of $4MM to $200MM in 2016. 

Raising more than $220MM along the way, the company had scaled to 4MM users. While expanding to more than 25 cities, the company focused on F&V to hook customers. Fruits and vegetables formed 45% of the company's revenue, and it was key in defining the company's reliability. 

Customers trusted companies that delivered F&V reliably and added on other products to increase their basket size. FMCG and staples made up the rest of the 50%.

The core strength of BB was its strong, in-house delivery network, that it had built over 5 years. Given freshness, its logistics network needed to deliver products within 2 days and were almost at the whim of delivery men. 

Ensuring they were available round the clock would prove to be a big challenge, and BigBasket worked to retain them. As the company scaled, it began to see significant benefits. 

As I elaborated on my piece on BigBasket's economies of scale, becoming big allows significant margin improvement. Additionally, it also allows BigBasket to price better than a local grocer, who has to incorporate wastage risk due to small inventory holdings. 

The scale allowed BigBasket to increase its margins from 10% to 30%, as it began to purchase directly from the source and began holding inventory. This actually implied a net revenue increase from $400K to $60MM, a substantial increase from the company's small base. 

But winter was coming.

Perishable Goods

A significant number of players had cropped up by 2016 that were targeting the grocery/hyperlocal market.

Localbanya, PepperTap, BigBasket, TinyOwl and a small startup called Swiggy were vying for dominance in delivery and groceries. After raising almost $100MM amongst them from marquee investors, PepperTap and TinyOwl began to face trouble. 

The companies would end up burning significant capital and perish, just like the goods they were delivering. 

More than 200 companies shuttered in 2016, with most being hyperlocal companies with unsustainable unit economics. Despite having raised $200MM, BigBasket too went on to raise venture debt to remain safe.

A company that would struggle in the winter would be Grofers. It continued to keep changing its model without scaling significantly, despite having raised as much BigBasket.

With common investors in BigBasket and Grofers, they even began to push for a BigBasket acquisition of Grofers. Grofers held on, while BigBasket went on to raise further capital.

Grofers would almost perish, but while BigBasket did not see it as much of a competitor, a much-feared giant would soon begin selling groceries. 

Selling Churan

Amazon would throw its hat into the grocery ring market in 2016, signalling real intent in capturing the market. 

Mocked by (now erstwhile) CEO of Flipkart Binny Bansal for selling "churan", Amazon would be right on point in identifying it as critical to its strategy. 2017 would, ironically after a funding winter, be the beginning of the "battle for the doorstep". 

The doorstep battle, which I had elaborated about a year ago, made a lot of sense for Amazon. Amazon was in the business of selling low frequency, high ticket items to consumers, and hence visited the doorstep infrequently.

BigBasket, on the other hand, through weekly grocery deliveries, was visiting frequent customers almost 50 times. Swiggy could even be visiting customers once in two days. 

Owning the high-frequency doorstep relationship was critical, and churan was the way to go. 

Haar Kar...

Amazon's entry, which would further support its Prime program, would push BigBasket harder than before. 

After years of incredible growth, BigBasket would grow "only" 50% in 2017. Mr Bansal would soon be eating the proverbial churan, as BigBasket would struggle against both the well equipped e-retail giants. 

Amazon offered to buyout BigBasket, but the company would raise $300MM from an Amazon beater, Alibaba, to bring know-how to the table. 

Owning more than 40% of the company, BigBasket had raised $600MM in total, with a valuation of ~$900MM. While this looks like a success, looking deeper reveals the truth about value creation. 

With $300MM of "incremental" value created with $600MM of capital burnt, BigBasket was clearly struggling. BigBasket was very capital inefficient, creating 1.5x it's total raise. Founders would be left with very little stake in the company. 

PayTm mall, through Alibaba, was expected to completely buyout BigBasket, which would make it almost a distress sale.

Jeetne Waale Ko...

While BigBasket's acquisition may have been a win for their early investors, it could have been the perish of a large, focused e-commerce retailer.

Despite the significant pressure due to Amazon, the company would push hard to build its moat. While Amazon had a huge customer base, what it didn't have was the elaborate grocery supply chain network that BigBasket had built.

The company's fundamentals would begin to show their strength. From an average annual spend of $60 per customer in 2016, the company would scale to a $125average spend in 2018. While gross margins were lower at 15%, it had now increased to 35%.

BigBasket would thus be able to make $60 of gross margin from a customer in one year. If it acquired a customer for less than $60, it would be able to break even on a unit level. With the focus on widening its product base, and targeting the urban middle class, BB would likely be able to acquire customers for cheap.

In line with its razor-sharp focus on faster delivery, the company would acquire Pune based Raincan and other startups (as an aside, Raincan is in my anti-portfolio). The companies were acquired for their technology and city-based networks. City markets are mind-bogglingly big, with Pune itself being larger than a few billion dollars.

Rebranding the daily milk and grocery as BBDaily, the company's growth engine would begin whirring. 

Baazigar Kehte Hain

With the inventory based infrastructure, coupled with last mile logistics under BBDaily, it would be transformational for the company.

From once a week, BigBasket would now arrive at your doorstep daily. It now became a true subscription business, piloting with 20K subscriptions. Estimates peg the current subscriber base for BBDaily at north of 500K subscriptions.

BBDaily and its acquisitions would help scale the company's revenue from 2,000Cr to 6,000Cr. With 50% growth b/w 17 and 18, 3x growth between FY18 and FY19 would be a reversion to the previous growth rates of the company.

BigBasket's grocery focus, which is ironically a "large niche" in the retail segment, would reap dividends. Its website and products would be better stocked than its competitors, delivery more prompt, and subscription would result in tight customer lock in.

While people still find issues with BigBasket, these are growing pains that will be ironed out. There are significant inefficiencies that I had elaborated in a piece, which signal potential to improve margins. 

Through white labelled products, the company can improve margin. Through subscriptions, customers will spend more regularly. Through wider product variety, the average customer spend will increase. I expect a large portion of BB's 8 MM customers to convert to BB Daily customers. Customer acquisition costs will fall dramatically.

With the fundraise of $150MM putting the company's valuation north of a billion dollars, the company is moving towards profitability. If it can now scale without additional capital, and through its own profits, it could rapidly begin to create value.

Imagine scaling to a $6Bn revenue without additional capital. The company would likely be valued at $6Bn, with $750MM of capital. Suddenly, the company has now created $5.25Bn of additional value. 

Like its brand ambassador's movie Baazigar, BigBasket looks likely to win big after losing big.