Achieving product-market fit for a new idea constitutes a crucial milestone in the journey of a young business. But that’s just the start. To transform into a viable and scalable business, the product needs to achieve mass adoption in the broader market, often employing multiple distribution channels. Buoyed by a recent capital infusion and an acquisition, Zeno Health is poised to do just that – accelerate retail distribution and expand its presence beyond India’s metros via social commerce.

The next big frontier for this Mumbai-based startup is, as founders Girish Agarwal and Siddharth Gadia like to put it, “unlocking Bharat.”

Before getting into how and why they plan to do that, let’s put the latest developments at the company into perspective.

Reimagining healthcare

Back in 2019, ecommerce was the flavour of the season. Flipkart had validated the concept of selling books, electronics, fashion and more online. The idea of selling medicines online at higher discounts (compared to offline pharmacies) had started to gain traction in the startup arena. 

Amidst this market shift, we discovered and invested in Zeno Health (then known as Generico). At the time, it was a controversial call. Backing a company that was building a chain of offline pharmacies seemed the least exciting prospect in a market riding on the alluring promise of online pharmacies transforming India’s underserved healthcare market.

But, at Lightbox, we were thinking a decade into the future.

In India’s $25 billion-plus pharmacy market, medicines constitute the highest frequency purchase for any customer. Government spending on public healthcare is abysmally low – 2.1% of GDP in FY2023, per the Economic Survey 2023. Large swathes of the country’s citizens are vulnerable to high out-of-pocket expenses, even as chronic ailments such as diabetes and cardiovascular diseases gain momentum across the population.

For India to reap the benefits of its demographic dividend, we understood that healthcare had to be reimagined. In Zeno, we saw a differentiated and disruptive product and solution to the problem at hand. With its focus on harnessing unbranded generics, better known as trade generics, to make quality medicines affordable and accessible, Zeno’s mission of democratising healthcare aligned perfectly with Lightbox’s investment thesis.

Zeno’s plan was simple – build a product that would help reduce the burden of healthcare costs for citizens. Starting with medicines, the game plan was to disintermediate the supply chain by removing misaligned incentives associated with selling branded generic medicines. The company’s goal was to offer medicines to customers at true prices via trade/alternative generic medicines and private labels.

When we entered Zeno in 2019, we found the company receiving a lot of customer love and validation for their product from the 30 stores they operated. They were able to convince customers to switch from branded generic medicines to alternative generic medicines. Already, 25% of sales came from alternative generic medicines, the highest in the industry at the time!

At Lightbox, we were excited about the validation of the value proposition and keen to see them scale distribution and create an impact on millions of consumers across India.

Building the foundation

Over the last eight years, Zeno has focused on building the foundation for mass impact, creating a differentiated, omnichannel pharmacy chain with industry-leading gross margins and store EBITDA margins. It now operates around 180 stores concentrated in Mumbai and Pune. 

We strongly believed that offline pharmacies were the right way to distribute medicines because the model not only allowed for trust to be built with customers but also enabled advocacy to increase consumer awareness about generic medicines and substitute customers from branded to unbranded generic medicines. Today, the company serves about 300,000 users every month, saving them about 40% on their prescription value. Generic medicines and the company’s private label – GoodAid – account for 35% of its revenues.

The change in product mix allowed the company to close the calendar year 2023 with gross margins exceeding 32%. 

The company has doubled gross margins since we invested in 2019. Using data from its stores on the highest-selling medicine SKUs, the company started launching private labels in 2021 with 50 molecules, increasing it to over 400 molecules today. If we look at the data for the 400 molecules, 70% of the volume comes from GoodAid and trade generics, and only 30% from branded medicines. This shows the trust that Zeno has built with customers and its ability to substitute medicines. 

The strategy to focus on just Mumbai and Pune is also well thought through. “The strategy has always been to go deep, go hyperlocal. That allows us to unlock economies of scale for a particular location. In Mumbai, for example, there are 110 locations and there is probably room for another 100. That allows us to bring supply chain efficiencies, operational efficiencies and it also allows us to be very customer-centric in our service. We are practically 30 minutes away from any address,” says Zeno co-founder and director Girish Agarwal.

Having established product-market fit for its generics-led omnichannel pharmacy model, Zeno is now ready to catapult itself into the next phase of growth. Armed with a recent $25 million capital infusion from Korean private equity firm STIC Investments and Lightbox, it is hard at work building out the “assisted ecommerce model” or the social commerce model. 

Unlocking Bharat

A decade ago, McKinsey & Company introduced the ‘Three Horizon Framework’ which I find particularly insightful. It essentially provides a structure for companies to assess potential opportunities for growth without neglecting current performance. Horizon one represents the core business today. Horizon two represents emerging opportunities that could deliver bigger results in the future. Horizon three is still in the research and pilot stage.

Using this analogy for Zeno Health, the company has proven its core business with the omnichannel model. Without disrupting it, the company is now focused on horizon two via a new distribution model with the potential to be as significant as the omnichannel business.

In early April, Zeno announced the acquisition of TABLT, a Kolkata based omnichannel pharmacy startup that holds the key to Zeno’s ambition of making high quality but affordable generic medicines available to underserved consumers in rural and semi-urban markets. The acquisition will power its expansion into West Bengal, Odisha, Bihar and Jharkhand.

“We recently ventured into building a more penetrative model, the assisted ecommerce model, to gain access to rural and non-urban markets. This is a community partner led model where these partners educate and activate the communities and do last mile delivery. The community partner makes money and we get a very scalable distribution model. To put weight behind this model, we acquired TABLT  in West Bengal. We’ll leverage their distribution model to unlock Bharat for us,” says Agarwal.

The pilot for the assisted ecommerce model started around January 2023 with a few community partners in Mumbai. The idea was to get trusted members from the community to become Zeno champions. They were able to bring customers and those turned out to be chronic patients that offer higher AOVs. The learning from the pilot was that if this model worked, it was highly scalable. There’s no capital expenditure and it doesn't need as much for marketing as an ecommerce company would need.

It was around this time that the Zeno founders came across TABLT which already had a network of 300 community partners and was serving 15,000 active users every month across 400 pincodes, largely concentrated in West Bengal. 

The TABLT model, the social commerce model, works as follows: TABLT acquires a network of community impact officers (CIOs) who are influential individuals in their neighbourhood. The company trains these CIOs to acquire customers by highlighting the value proposition of generics and the savings they offer to chronic patients. The CIO takes customer orders and places them with TABLT. The central team then validates the order along with the doctor’s prescription. Once validated, TABLT ships the order to the CIO’s location for last-mile delivery. To acquire customers and last-mile delivery, TABLT shares a commission on the order value.

While Zeno’s pilot with the social commerce or assisted ecommerce model worked, onboarding 300 CIOs would take a long time. To supercharge the model and learnings, the acquisition of TABLT made sense.

The deal was a win-win for both sides. At the time of the acquisition, TABLT was operating at a gross margin of 12% because they sold only branded generics. “Our pursuit is to take the Zeno value proposition around savings to the TABLT ecosystem. In a few quarters, we believe this can help increase the savings of customers from 18% to 35% on their prescription and increase gross margin from 12% to 30% by introducing our private labels and trade generics,” says Agarwal. 

With TABLT, Zeno now has two strong distribution channels that it will be able to leverage to reach more customers. The hyperlocal retail channel, powered by the offline stores, will enable it to serve large urban markets, including the metros. Simultaneously, it will be able to penetrate deeper into semi-urban and rural markets with the cost efficient assisted ecommerce model. 

In the metros and cities stores are necessary because of the high demand density. Beyond that Zeno doesn't need stores. In the $25 billion pharmacy market, 40% of the sales comes from beyond the metros.

While Zeno had already created a differentiated value proposition with its focus on trade generics, having these two well defined distribution channels in its arsenal gives it the tools to optimise the potential of that value proposition. Trade generics currently account for only 5-8%% of overall pharmacy sales in India, largely on account of lack of awareness among consumers, offering significant headroom for growth.

Sustainable growth

The next 12-18 months will be crucial for Zeno to demonstrate the validity of Horizon 2 – the social commerce distribution channel. The offline stores-led retail channel is already close to achieving profitability. Going forward it intends to expand its network further to deepen its presence in its chosen markets.

 “In the last 15-18 months, one of the key changes in our strategy was to bring the retail model to profitability. We consciously took a pause on expansion and focused on leveraging efficiencies. With the latest capital infusion, we will go back to scaling the retail network” says Agarwal. 

In parallel, it will focus on scaling the capital-efficient assisted ecommerce channel over the next few quarters. Additionally, it is working on opening up more digital channels to deepen its presence in the market.

While the pursuit of growth is priority, the company is clear that it will never pursue growth at any cost. “We have seen growth-at-any-cost models suffer from fragile foundations. I’m not saying high growth is bad. But we are not in this for 4-5 years. The democratisation of healthcare as a vision is larger than short term growth strategy. We want to build a business that sustains over a long time. We understand that there may be a learning curve there but we are willing to undergo that learning if it takes us towards building a sustainable business for the long term,” says Agarwal.