Last week I wrote this post about why Grofers is not a sustainable and scalable business. The basic point was that goods they sell undergo both high inventory cost (having been stored in a retail store) and high transport cost (delivery).
The most common response to the post was that my claim was wrong because “Grofers doesn’t store any inventory but only delivers”. And it was not unintelligent people who said this – I counted at least three IIM graduates who made this claim on Twitter (ok if that statement gives the impression that I think that all IIM graduates are intelligent, so be it. I don’t disagree).
While their claim is correct, that Grofers doesn’t store any inventory but only delivers, the problem with their line of attack is that they are looking at it from a very localised perspective and not looking at the bigger picture.
A similar problem can be seen in this post on TechCrunch announcing BigBasket’s latest round of funding. Relevant section here (hat tip: Rohin Dharmakumar):
Challenges faced by BigBasket include the grocery industry’s low margins, the cost of adding new delivery staff, and the fact that it carries its own inventory. This allows BigBasket to offer a large selection, but also means it has more overhead than hyperlocal services that partner with existing merchants and needs to more time to prepare before expanding into new cities. (emphasis added)
Catherine Shu, who wrote that piece, might be right in claiming that Bigbasket carries its own inventory. But she is wrong in claiming that it is a problem, for Bigbasket is in a completely different business compared to those hyperlocal services, and in my opinion in a superior business. The carrying of inventory is a feature rather than a bug.
What the twitter comments on my post on Grofers and this piece on BigBasket illustrate is the lack of “systems thinking”. People are great at looking at localised problems, and localised “point solutions” to these local problems. What is not so intuitive is to look at a particular problem as part of a bigger picture and in a more holistic fashion.
Grofers itself may not carry inventory, but the goods it ships would have been part of inventory of some retailer. So while Grofers may not directly incur this high inventory cost, someone along the chain (the retailer in this case) does, and that means there is less money for Grofers to play around with and make a margin.
BigBasket, on the other hand, carries its own inventory and this inventory is aggregated at a much higher than retail level. This implies that the inventory costs for BigBasket are significantly lower than any retailer (since aggregation leads to lower inventory costs). And this inventory cost thus saved can help BigBasket make higher margins. It also allows them to serve the “long tail” to the customer cheaply, something Grofers may not be able to do if no shops in the customer’s vicinity stock such products.
The problem with localised thinking is that it leads to localised solutions, and local optimisation. Optimising locally at different points in a chain makes it harder to optimise at a system level.