Develop ecosystem for aggregators

As volume builds up, it's feasible to transition to inventory-based model

Aggregator models and hyperlocal delivery, in theory, have some significant advantages over existing business models. Unlike an inventory-based model, aggregation is asset-light, allowing rapid building of critical mass. A start-up can tap into existing infrastructure, as a bridge between retailers and the consumer. By tapping into fleeting consumption opportunities, the aggregator can drive new demand to the retailer in the short term. A hyperlocal delivery business can concentrate on understanding the nuances of a customer group in a small geographic area and spend its management and financial resources to develop a viable presence more intensively.

However, both business models are typically constrained for margins, especially in categories such as food and grocery. As volume builds up, it’s feasible for the aggregator to transition at least a part if not the entire business to an inventory-based model for improved fulfilment and better margins. By doing so the aggregator would, therefore, transition itself to being the retailer.

Customer acquisition has become very expensive over the last couple of years, with marketplaces and online retailers having driven up advertising costs — on top of that, stickiness is very low, which means that the platform has to spend similar amounts of money to re-acquire a large chunk of customers for each transaction.

The aggregator model also needs intensive recruitment of supply-side relationships. A key metric for success is the number of local merchants an aggregator can mobilise quickly. After the initial intensive recruitment the merchants need to be equipped to use the platform optimally and also handle the demand generated.

Most importantly, the acquisitions on both sides — merchants and customers — need to move in step as they are mutually reinforcing.

For all the attention paid to the entry and expansion of multinational retailers and nationwide ecommerce growth, retail remains predominantly local. The differences among customers based on where they live or are located and the immediacy of needs continue to drive diversity of shopping habits and unpredictability of demand. Services and information-based products may be delivered remotely, but with physical products local retailers still have a better chance of servicing consumers.

What has been missing from local vendors is the ability to use web technologies to provide access conveniently for customers. Also, importantly, their visibility and ability to attract customer footfall has been negatively affected by ecommerce. With penetration of mobile Internet across a variety of income segments, conditions are far more conducive for highly localised and aggregation-oriented services. So a hyperlocal platform that focusses on creating better visibility for small businesses, and connecting them with customers who have a need for their products and services, is an opportunity that is begging to be addressed.

It is likely each locality will end up having two strong players: a market leader and a follower. For a hyperlocal to fit into either role, it is critical to rapidly create viability in each location it targets, and — in order to build scale and continued attractiveness for investors — quickly move on to replicate the model in another location, and then another. They can become potential acquisition targets for larger ecommerce firms, which could acquire to not only take out potential competition but also to imbibe the learnings and capabilities needed to deal with demand microcosms.