Lightbox's May 2023 Roundup

The changing distribution of Food and Grocery to Indian households

Hi there, welcome to the May edition of Lightbox’s newsletter- Lightbox Insights, curated every month by the Lightbox team. Consider this newsletter your monthly rendezvous with the Indian startup ecosystem written from Lightbox’s vantage point. If you missed the past newsletters, you can catch up here. Now, let’s dive in!

Who are we?

For all our old subscribers and new, Lightbox is a consumer-tech Venture fund based in Mumbai. Over the past 9 years, we have had the pleasure of partnering with some of the leading consumer companies in India (spot them above!) that are shaping the future of consumption in India by leveraging technology and brand in a sustainable manner in a market that is often unorganized, fragmented, and undergoing parallel changes.

In a world driven by FOMO (yes, even in finance), we are proactive, thesis-driven investors. Every investment that we underwrite is backed up by exhaustive bottoms-up sectoral research, complemented by significant time spent with founders, allowing us to proactively source investments. Our endeavor to be the most involved investor on the cap table is made possible by our unique concentrated portfolio construction, our degree of operational engagement, and the use of an internal suite of analytics.

Portfolio Spotlight

Amaha’s OPD located in Mumbai

Amaha is our investment from 2021. As investors in India’s consumption story, we believe social factors pose a big risk to consumption. Mental health is one such problem. Unfortunately, this is hidden in plain sight- there are folks all around us suffering yet only a few people seem to be seeking care for it. There are about 200MM Indians requiring care for their mental health conditions. 90% of these people never receive the treatment they deserve. The treatment gap and lack of awareness are worsened by the fragmented nature of the industry and the lack of government spend (1% of the overall healthcare budget). Amaha wants to tackle this daunting problem and build India’s leading omnichannel mental health ecosystem. Here is how they’re doing it:

1. Finding their niche: Amaha focuses on treating moderate to severe mental health problems such as severe depression, schizophrenia, bipolar disorder, and more. These are issues that absolutely require clinical intervention. Hence, Amaha made the decision not to go down the chatbot route early on in their journey. What this led to was a sharp focus on building their teleconsultation practice- a strong onboarding/training process for clinicians and building incredible tech tools for consumers and clinicians alike.

2. Setting up offline presence early: As mentioned in the previous edition, Amaha believes in "supercharging" their customers by launching offline touchpoints at a faster pace than average. Customers who experience the brand offline, rather than online, tend to have a deeper immersion in the brand experience. Additionally, Amaha's niche requires human intervention, making an OPD (Outpatient Department) network essential. This also contributes to the creation of a national brand of mental health OPDs, distinguishing them from the typical mom-and-pop clinics prevalent in the field.

3. The next offline frontier: As customers flow from teleconsultation to OPDs, IPDs (Inpatient Departments) become the next logical step for Amaha to venture into. We have identified interesting macro reasons that act as tailwinds for the company:

a) Average Revenue per Occupied Bed (ARPOB) is a significant metric in the hospital industry, often regarded as a north star. Typically, it hovers around the ~$600 mark, but mental health beds bring it down due to requiring fewer diagnostic tests and surgeries. Consequently, hospitals lack the incentive to build dedicated mental health wards due to the lower average revenue per patient.

b) Amaha's exclusive focus on mental health IPDs provides them with a cost structure advantage over existing players. This is achieved through much lower capital expenditure (CAPEX) per bed, allowing them to operate more efficiently.

Lightbox Insights 💡

The changing distribution of Food and Grocery to Indian households

Out of the total annual retail spend of $821BN, the Food and Grocery vertical remains dominant with $560BN in sales. However, despite its size, organized retail accounts for a modest 4% ($22BN), while online retail holds just 1% ($6BN). The remaining 95% market share of food and grocery sales is attributed to the 13MM Kirana stores in India. With the increasing trend toward organization and online spending, the food and grocery category is undergoing disruption, creating opportunities for various emerging players.

Characteristics of the food and grocery category

Food and grocery are commodity products with minimal differentiation. Building a brand in this category requires focusing on characteristics like quality, freshness, and price. The key pillars of the food and grocery category are availability, affordability, and assortment. By understanding the target customer, one can determine which pillar to prioritize. Our customer segmentation reveals that affluent, aspirers, and strugglers allocate 20%, 35%, and 47% of their total annual spend on food and grocery, respectively. Across segments, affordability remains the key driver of purchase. Affluent customers also seek availability and assortment, aspirers seek affordability and availability, and strugglers only optimize for affordability.

Leading Players

In the food and grocery retail industry, dominant players in India and the USA are often discount grocery stores. They offer the cheapest prices, carry fewer product variants in large quantities, and achieve strong growth and earnings. A prime example of this model is demonstrated by the operations of Costco in the US and DMart (Avenue Supermarkets) in India. Both companies offer a wide range of products at discounted prices in bulk.

Despite their low prices, both Costco and DMart have maintained consistent gross margins over the years, with Costco at 11% and DMart at 15%. Moreover, they have achieved revenue growth while ensuring stable earnings, with Costco reporting 3.1% EBIT and DMart reporting 8%. These companies also exhibit high return on capital employed, with Costco at 22% and DMart at 25%. These impressive metrics are attributed to efficient operations, optimal asset utilization, and high inventory turnover (12-14x).

These business models demonstrate that customers in the Food and Grocery category are highly price-sensitive, considering the frequent purchase and commodity nature of the products. Although there is potential for these businesses to increase gross margins through strategies like private labels or improved sourcing, they choose to pass on the savings to customers instead. This is evident from their consistent gross margins, which indicate their commitment to offering competitive prices to customers.

Costco v/s DMart metrics

 Grocery in India: Kiranas and newer business models

Kirana stores dominate India's food and grocery industry contributing approximately 15% to India's GDP. With widespread coverage across the country, these mom-and-pop stores have established extensive supply chains, aided by distributors for brands like Hindustan Unilever (HUL), which reaches 9MM retail outlets through 3,500+ distributors. Kirana stores vary in size from 50-500 sqft and generate monthly sales ranging from Rs. 1-5 lakhs ($12,500 – $62,500), with profits typically in the range of 1-4%. However, they face challenges in offering a wide range of products, availability, and affordability due to their smaller scale. Reliance on middlemen for supplies often leads to higher prices for customers, and they prioritize fast-moving products to manage inventory, resulting in a limited assortment.

Supply chain of a traditional Kirana store

  1. Organized Modern Retail Stores: Often large format stores in India with a focus on customers in the top 20 cities. In this format, we see players either focusing on premium stores (Nature Basket and Foodhall) or discount stores (More and Dmart). In this model, the retailers often aim to remove the middlemen and try and source goods directly from the brand or the farmers instead of wholesalers and distributors.

  2. Online Grocery: In the online grocery segment, Big Basket stands as the leading player, achieving $1.1BN in revenue in FY2022. The company caters to the affluent customer base (according to our segmentation above) seeking convenience and a wider range of product options rather than the lowest prices. As a result, they maintain a higher gross margin of 18%+ and offer approximately 10 times more SKUs compared to DMart. Notably, 95% of their SKUs are priced higher than those available at DMart. Online grocery players, like modern retailers, strive to eliminate middlemen. However, the distinction lies in the delivery process, as goods are shipped to customers from warehouses and dark stores instead of traditional retail formats.

  3. Organised Modern Retail in smaller cities: In smaller cities, retailers are adapting to the lower population density and competition by opening smaller stores, typically around 750 sq ft. These cities often face challenges in terms of customer satisfaction and turnover rates. To address these challenges, emerging players in these areas are opting for a franchise-owned and franchise-operated model. Franchisees receive support from the franchisor in-store operations, technology, local marketing, and as the sole supplier of goods. This enables them to offer competitive prices and a wider assortment of products compared to nearby Kirana stores. Customers also have the convenience of ordering groceries online and receiving delivery from these franchise stores. Over time, franchisees can expand their offerings to include slow-moving products by taking online orders and having the franchisor deliver them to their location.

    This model benefits both the franchisor and franchisees. The franchisor eliminates middlemen, achieves better margins, and operates with lower capital employed since they don't need to invest in individual stores. Franchisees, in turn, experience increased revenue and profit with the support provided by the franchisor, including affordable product rates, enhanced assortment, and simplified supply chain management.

Our view on the sector:

Affordability Focus: We are inclined towards a player that prioritizes affordability. Premium grocery stores and high-convenience models may struggle to scale due to limited customer willingness to pay higher prices for commodity products, despite the added convenience or premium service.

Skepticism Towards Increasing Gross Margins: While new distribution models are intriguing, we are cautious about relying solely on increasing gross margins through private labels and better sourcing to achieve profitability. We believe companies need to focus on lean operations, high inventory turnover, understanding customer segments, optimal asset utilization, and leveraging technology for demand prediction to drive operational efficiency.

High Retention Rates: Given the frequent nature of grocery purchases, we seek companies with high retention rates (ideally 60%+ M1, and ideally 100%). Lower retention rates may indicate that customers have alternative channels for procuring food and groceries, suggesting a weaker value proposition.

Lightbox's Cafe Upstairs

We love playing host in our office in Mumbai. Our lovely, green office space often doubles up as a space to host team activities, events, and catchups. We like to call this our Cafe Upstairs. While we haven’t hosted any events in the past quarter, we were ‘hosted’ by VCCircle where we shared some of our thoughts on the funding winter, exits, and fundraise.

On the funding winter and changes in the macro environement:

“The venture opportunity in India centres around organizing the unorganized. Many segments don’t have large incumbents so there is an opportunity to leverage technology to build market leaders that deliver a unique, defensible proposition to consumers.

Three of our portfolio companies, Zeno Health, Bombay Shirt Company (BSC) and Amaha have used this funding downturn to narrow their focus and strengthen their customer proposition by leveraging a hybrid approach of online and offline channels to reach customers. In these businesses technology is not the end all and be all, it is an enabler in the system. This understanding enables these businesses to build on their core value proposition and emerge from the funding winter stronger.”

On the changing investment thesis:
“I’ve always been interested in consumption. Whether we are in a boom market or an uncertain time, people are still going to consume. What changes is how those products or services are manufactured, delivered, or marketed to customers. You're always going to eat, you're always going to need healthcare, finance, education. These basic things will always be consumed. The question is whether an entrepreneur can use technology to provide this more efficiently and, in the process, build a brand that merits a premium. As income gaps expand and consumption segments get more defined, it becomes increasingly important to understand which customer you are addressing and ensure that you are building with them in mind. For example, the affluent customer is willing to pay a premium for convenience, while the aspirers and strugglers make their purchasing decisions based on price. Understanding these differences and positioning correctly can make all the difference in a business finding product market fit.”

Check out the entire article here.

The Golden Number


The highest-ever annual net profit delivered by a bank in India. State Bank of India (SBI), the largest bank in the country, recorded net profits of $7BN in FY23. This also makes SBI the second-largest company by profits in the entire country, after Reliance Industries.

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