Take a walk through any neighborhood in India and there is one sight you simply cannot miss- the potholes Kirana stores. These are your quaint little unassuming stores, peppered all across the nation in various shapes and sizes. All of us probably also have similar memories associated with them- your favorite around-the-corner store where you’re greeted by your name and a nod, a one-stop-shop for all your sundry needs: from biscuits, groceries, pulses, to your favorite chocolates, and a ‘usual’ 10% discount owing to your familiarity with the owner. Kiranas have sustained local neighborhoods for decades, and contribute heavily (90%!) to the overall Food and Grocery (F&G) Industry.
 

The lockdown made Kiranas more relevant than ever- they emerged as local saviors during this time of crisis. Amid uncertainty, consumers turned to their local Kiranas for their requirements. They truly rose to the occasion- operating within a truncated window during the early hours of the morning, dealing with supply chain disruptions, stepping up their services to meet the overwhelming demand, and getting (slightly) comfortable with technology adoption. The pandemic made one thing increasingly clear- the Kiranas have remained largely similar for generations and would remain so unless technology intervened and enabled operational efficiency. Zoom out further from your local neighborhood and this problem is persistent and amplified across all the 13MM Kiranas in the country.

 

Think about it: 13MM Kiranas waiting to be tech-enabled, making up 90% of the overall F&G industry seems like a huge market.

 

Just how big?

 

$500BN+ big.

 

Let’s do the Math- India’s Retail Industry which stood at $850BN in 2020 is estimated to reach $1.3TN by 2025. The F&G market has consistently accounted for 65-68% of the total retail spend in India, currently amounting to ~$560BN. Being a nascent market, this figure is much higher than the 30-40% contribution found in developed countries like the US and UK. The Food & Grocery category comprises of fresh fruits & vegetables, packaged food, personal care & home care, and utilities. Going deeper, Modern Trade contributes <8% to F&G, and Online Commerce contributes <2%. This leaves the Kiranas (called General Trade in retail parlance) with a 90%+ contribution, presenting a $500BN+ opportunity. This big of a contribution by GT is unheard of- the figure stands at 6% in the UK and 8% in the US.

If it was not already evident, Kiranas hold massive potential waiting to be unlocked and as stated by the numbers above, is a uniquely Indian opportunity with no western parallel. Disruption is a term we often use in the startup world. But interestingly so, owing to their massive size, Kiranas are waiting not to be disrupted but to become tech-enabled. Thankfully, a plethora of startups have realized this opportunity and are working with Kiranas to solve for various day-to-day responsibilities of the Kirana owner, giving rise to a newly coined industry: KiranaTech.
                                                    

 

 

E-commerce firms have realised they are better off functioning with the Kirana stores rather than disrupting them.

 

 

So, what is KiranaTech? It consists of any tech solution that is built for solving problems and inefficiencies Kiranas face throughout their day-to-day processes.

 

One quick caveat before we go deeper: For the sake of this discussion, Kiranas and SMEs are two separate entities. Kiranas are stores that stock F&G and FMCG products. More formally, a Kirana is a small, usually family-owned shop selling groceries and other sundries. They are owned and operated on a small scale, usually by an individual or a family. SMEs are your local businesses that sell everything from hardware, clothes, stationery, to anything non-FMCG.

 

 

         Kirana stores and SMEs are not the same

 

Growers and Enablers for Kiranas
 

A Kirana store owner wears multiple hats throughout the day-

1) Inventory Procurement- The day starts with procuring inventory and occasionally visiting the market yard to get goods
2) Inventory Management- Once the inventory is obtained, it needs to be stored and accounted for throughout the day

3) Access to Credit- Limited access to Working Capital, mostly through informal sources, hampers the growth of Kiranas

4) Payments- Managing and consolidating all payments through different forms, choosing a PoS machine, and understanding how to operate it

5) Book Keeping- Maintaining a ledger (Khata) in a notebook to keep a record of all payables and receivables

6) Attendance and Payroll- Maintain a book or keep a mental check to pay daily wages and mark attendance. Doing this manually becomes cumbersome only in SMEs where >10-12 people are employed

7) Online Sales- Along with walk-in customers, Kirana owners now also need to have an online presence and facilitate deliveries to customers ordering online

8) Valued Added Services- Kiranas can also decide to tie up with other startups in the commerce or EV space to better utilize their store space and diversify revenue streams
 

This wraps up the day and the entire process has to be repeated the next day. The opportunities in this space are directly proportional to the inefficiencies in a Kirana owner’s above-stated daily routine. In this post, Vivek provides a great mental model to think about a startup’s offerings in this space: Growers v/s Enablers.
 

 

                                                          

 

Simply put, a startup in this space will fall into either of these 2 categories depending on what problem they’re trying to solve for:
 

• Growers- As the name suggests, these startups help in increasing the revenue of the Kirana by ‘growing’ the business, usually by introducing and unlocking revenue streams that didn’t exist before. These don’t increase revenue from operations. (seen in Yellow). The best way to identify these Growers: For a Grower company, Kiranas simply act as a new distribution channel to ‘grow’ their business- they’re not exclusively building for Kiranas. The growth happens both ways- these startups offer Kiranas new revenue streams, while they get access to new distribution channels in the form of Kiranas.
• Enablers- These startups help in the smooth functioning of responsibilities that are inherent and unavoidable to a Kirana store owner, making store operations more streamlined. This newfound efficiency doesn’t come through new revenue streams but rather by making the Kirana a well-oiled machine and increasing its Operating revenue. (seen in Red)

 

We believe that the true opportunities in KiranaTech only really lie in the Enabler space. We don’t mean to imply Growers are bad businesses. They are excellent companies. But from a ‘Building for Kirana’ POV, Kiranas remain a small part of their strategy. On the other hand, the Enabler startups are the ones who are truly leveraging the power of Kiranas and tapping into the $500BN+ market. Startups who classify as Growers are simply looking to expand their core business by using General Trade’s inherent distribution as a new channel to acquire customers. The slight upside (and sometimes downside) which is passed onto the Kiranas is a mere byproduct of this strategy, none of them are truly working towards helping improve the operations of the Kirana or make them function better.

 

Growers

At present, the use cases of the humble Kirana store are limited only by companies’ imagination. From players like Swiggy to electric mobility companies like Bounce, Kiranas are increasingly being touted as an important part of the future, rather than something to be replaced.

 

 

 The ubiquity of Kiranas makes them a valuable last-mile connector for the storage of products, or even the delivery of small items like smartphones, books, or groceries—anything that can be done on foot or a two-wheeler.

 

Companies have started to look at Kiranas beyond just a simple ‘mom-and-pop store’- they’re recognizing their distribution potential and have begun incorporating GTs in their strategy to gain more eyeballs. Agreements differ across companies, but Kiranas either get a flat fee or keep a profit share. Some of these use-cases are:

 

1. Ecommerce- Amazon’s “I Have Space” program has helped them cover 100% serviceable pin codes in India, reaching every nook and corner in the country. To quote them “Our delivery partnership with small store owners benefit us with last-mile connectivity, while our partners discover an extra source of income with zero investments.” Flipkart too has partnerships with Kirana stores to deliver orders daily. Store owners are usually paid Rs 14-15 ($0.19-0.2) per order for a typical shipment size of 25-30 items a day. Although this plan doesn’t work for everyone because giving up precious real estate for packages is a trade-off with storing more SKUs.
    
2. Payments- PhonePe launched an ATM service on its app in 2020. The feature allows users to collect physical cash—up to Rs 1,000 ($14) a day—from a Kirana store and transfer an equivalent amount to the merchant from their PhonePe app. There was no commission involved for Kiranas in this, so we believe there is no real incentive for them to give up petty cash and rather creates a lot more distrust in these digital payment apps.
    
3. EV Battery charging- As the cost of installing charging stations is high at the moment, given the low demand, the return on investments is also up for debate. Kiranas are used either as a storehouse for EV batteries or as the site of a battery charging station. Companies like Bounce believe in the former- it allows its users to swap used batteries for fully charged ones at Kirana stores it has partnered with.

 

A large part of the upside lies with the Grower startups themselves, rather than the Kirana store. At times, this has also led to malpractices such as predatory pricing and misusing customer data obtained from Kiranas to eventually undercut them. This further sows the seeds of distrust between Kiranas and startups.

 

 

 Growers form the set of functionalities that help the Kiranas increase their business by providing more services

 

Enablers

To understand how big of an impact these Enabler companies can make, we need to revisit what a Kirana owner’s daily responsibilities look like. Everything from Inventory Procurement to Book Keeping is riddled with inefficiencies and all the work to this date remains largely manual and offline, with small incremental improvements. Currently, less than 25% of all Kiranas are using “some sort of a tech platform” leaving the door open for companies to build for them. The text in red below highlights what the status quo of solutions look like:

 

 

                                   

 

                                        

 

 

A Kirana owner’s daily responsibilities

 

We have noticed startups have flocked to each of these pies within the circle, keen to offer their solution and capture market share. This flocking happened in waves:

 

The first wave of KiranaTech solutions addressed Inventory Procurement, Availability of Credit, Inventory Management, and Digital Payments + PoS solutions. We also spoke to a bunch of Kiranas in our neighborhood and it was clear that the primary need for all of them were solutions that increased ‘dhanda’. It was a simple equation in their head: any solution which smoothened operations and increased operational revenue was a welcome one. Digital payments and better handling of inventory through PoS solutions led to just that. This remains an extremely crowded and well-funded space with a lot of players carving their niche.

 

The second, newer wave of KiranaTech are solutions that are targeted to digitize the internal processes of a Kirana (Khata, Pagar) and help in the creation of a digital storefront (Dukaan). This second wave is what everyone colloquially refers to when they think of ‘KiranaTech’. We have observed this need for digitization of processes remains a secondary need, the primary one simply being an increase in revenue. Who knew Kiranas had their own version of Maslow’s Hierarchy of Needs?

 

                  

 

              

                                  

KiranaTech startups- first and second wave

 

 

The Kiranas we spoke to corroborated this theory- the smaller Kiranas with no access to PoS and Inventory Management solutions had no interest in optimizing their internal book-keeping or Payroll yet. The larger Kiranas and SMEs with access to these solutions, and a larger employee base understood the value of going digital and were keen on trying the new apps, given someone (their kids/company salesman) took out the time to educate and make them aware about it.

Thus, it becomes extremely important for all startups in the second wave of KiranaTech to identify the right kind of merchant (size and scale) they’re going after- simply ‘building for Kirana’ won’t help and will lead to mismatched demand and no Product Market Fit.

 

 

 

How different scales of Kiranas perceive KiranaTech solutions

 

 

First Wave of KiranaTech

The first wave of KiranaTech solutions were targeted towards Inventory Procurement and solving for our supply chain. Grocery supply chain in India suffers from the following problems:
 

1. Due to the heavily unorganized Food and Grocery space, the grocery supply chain in India is very fragmented, wherein different supply chain models exist for different types of cities. Our food exchanges hand at least 7 times before reaching the consumers. As a result of this, significant margin leakage happens at each level of intermediary. For local Kiranas, this margin leakage is as high as 12-15%. This leads to higher costs of products for the consumer.
2. Along with margin leakage, there is also massive food wastage along the way. Across post-harvest, process, packing, and distribution there is a wastage of 17% along the Food Supply chain in South and Southeast Asia. This wastage is even more pronounced within Food and Vegetables, increasing to 32%.

 

Various businesses have emerged along the supply chain to address these inefficiencies

 

 

                                                                                         

           Different companies’ approach to become an Inventory Procurement platform

 

 

We believe that this competition amongst Inventory procurement platforms will be won by players who are a one-stop-shop for all supply chain solutions and are capable of plugging existing loopholes. These full stack ‘soil-to-sale’ business models alleviate all the current supply chain problems:

• Lower wastage due to single point handling
• Transparent pricing mechanism
• Better incomes for farmers thereby driving social impact
• Improved inventory planning for retailers

Our portfolio company, WayCool is able to implement a soil-to-sale model on the back of its incredibly strong sourcing network (directly from farmers) and wide demand penetration (GTs, MTs, Wholesalers, D2C, and HoReCa). It has emerged as a leader in enabling and upgrading India’s B2B Supply Chain.

 

Then came the payments revolution in Kirana. While the initial surge in adoption came from online transactions, Kiranas have given a big push for the adoption of UPI in offline stores. UPI was the second-most popular in-store payment method in 2020 with a share of 22% after cash payments, which had a 34% market share. In a market where cash remains king, UPI is on track to overtake cash payments in 2024 with a 33% market share. While PhonePe and GooglePay are leading the UPI transactions in the country, it is still yet to be seen how any money can be made off UPI with the zero-MDR debate.
 

The Payment platforms have also further diversified to have their own QR codes at offline retailers. AmazonPay has so far enabled 5MM SMEs, whereas PhonePe is on track to grow from 17.5MM to 25MM SMEs by December ‘21. The true pioneer of interoperable QR codes remains BharatPe: it lets small merchants accept payments from any UPI app like PhonePe, Google Pay, etc. without needing to download those apps. BharatPe commands a 50% market share in the Offline UPI Payments category and uses these QR code transactions to approximate cash flows, using them to underwrite small-ticket loans to merchants.

 

Some observations about the first wave:

1. The first wave of companies were marked by abundantly clear streams of monetisation- Lending (BharatPe, CapitalFloat etc) or Commerce (Dunzo, Udaan, Ninjacart, WayCool, Jumbotail etc) (or sell PoS solutions! GoFrugal, PineLabs, PayTM, mSwipe)
2. PoS solutions are more than just card swiping machines. While card swiping remains the most common device, the entire setup also includes billing systems, barcode scanner, and thermal printers
3. Word of Mouth (for brand selection) and pre-existing relationships with distributors drive a lot of the products and services they choose
4. Increasing their top of the funnel remains the primary need for all Kiranas and SMEs. Thus, PoS solutions are almost always their first introduction to a tech solution and hence developing brand affinity
5. Going full stack is a common trend in KiranaTech and definitely provides easier adoption of services because of strong Word of Mouth and past experience with PoS machines. Eg- PayTM (Payments + QR + PoS + Lending + Commerce), BharatPe (Payments + Lending + Other financial services)
   
   To quote a Kirana owner we spoke to, “The PoS machine does everything for me- from QR codes, inventory, to Khata management. I don’t need or know of any other app”
    

Second Wave of KiranaTech

 

All of us have heard the famous “Software is eating the world” line by Marc Andreesen countless times. This couldn’t have been truer as the second wave of startups began building for Kiranas. While the first wave had a product as an offering (PoS, Commerce, Payments), the second wave offered to digitize all internal processes for Kiranas and SMEs. There are 3 major operations that need the Offline-to-Online shift:

 

1. Book-Keeping: Shopkeepers have always used a Bahi Khata (ledger) to maintain account payables and receivables. Companies like KhataBook, OKCredit are building bookkeeping software on an app for Kiranas and SMEs. Vyapar is also a notable mention here, although they deal a lot more with GST filing, invoicing, and billing.
2. Payroll and Attendance: Similar story where it is currently maintained in a book or the owner simply remembers it owing to the small employee strength of local Kiranas. PagarBook, OKStaff (By OKCredit), PagarKhata (By KhataBook) are the top players here (See why it gets confusing?).
3. Digital Store Enablement: While merchants have realized the importance and potential of having a digital presence, assisted shopping remains a major crutch while selling and hence only happens through call or WhatsApp. Companies like Dukaan, DotPe (Majorly focused on restaurants for now), OKShop (By OKCredit), MyStore (By KhataBook) are at the forefront of getting SMEs and Kiranas online.

 

We found that all these apps had a similar Go-to-Market strategy: Acquire, Acquire, Acquire. This was, of course, aided by the massive capital raise seen especially in the Khata space (OKCredit and Khatabook have each raised ~$86MM). At least on the face of it, this strategy has worked well- both these companies have had ~20MM registered merchants each on their platforms. Talk about tough competition.

 

 

                                          

Khatabook and OKCredit have seen massive traction

 

 

How did they manage to acquire so many merchants in a relatively small amount of time? Access to capital, sure. But we believe it was also the power of on-ground sales team + Network effects (and FOMO) kicking in. Word of mouth remains an incredibly strong channel within Kiranas. Presence of a strong on-ground sales team, at least in the early days, is incredibly important. This channel has been especially effective for acquisition- BharatPe claims to have hired 3,000 on-field agents and paid them $350-$400, effectively getting the merchant CAC down to $3. Tally’s journey tells a similar story: “Between 2009 and 2015, more than 25,000 Tally Partners reached out to individual businesses, installing the product in their offices”

The Kiranas we spoke to had similar things to say- especially the newer, younger generation of store owners remain incredibly aspirational. They are eager to try new products if someone is ready to explain it to them in person. OKCredit’s Annual Report states that its most common use-case (49%) remains mobile shops which are usually run by the younger generation- this adds up.

But we get it- this is the classic venture-funded playbook. Build an excellent product. Acquire millions of customers. Gain rapid scale. Plugin monetization. While acquisition seems to have happened smoothly, there have been unanswered questions around retention and monetization. Most business owners in India do not value technology, primarily because the substitute labor is cheap. When you could manage your books for free, why would you pay an app anything, the Kirana would think.

Although, Vyapar has challenged this argument successfully- despite having a similar approach to acquire merchants, they have also monetised through a freemium approach + having a desktop version (almost like a new-age, easy to use Tally). Thus, merchants are willing to pay- mindset is not the problem. You just need to position your product correctly. More on it below.

 

 

Acquire → Retain → Monetise

 

Even with Pagar and Dukan apps- in a space where capital is not a moat anymore, building strong product differentiation, with a retained cohort of customers seems ideal.

 

These platforms in the Khata, Pagar, and Dukaan space face the risk of being fungible not just by their other well-funded competitors but by Kirana's trusted notebook. It seems like when you offer your software as a service, acquisition becomes cheap and simple but comes at a tradeoff with ease of monetization.

 

On the other side of the spectrum are companies who came to market with a clear use-case and a clearer monetisation model. Dunzo, one of our portfolio companies, is a perfect example of scaling sustainably and efficiently (from a WhatsApp group to an app used by millions), building one of the most loved brands in the country, all the while being very forthcoming about its monetisation plans through Commerce. It also happens to be at the intersection of both these waves of KiranaTech by not being a Software-as-an-app play: It was one of the earliest startups to not just help digitise Kirana stores but also help streamline their demand generation + fulfill it using Dunzo’s own logistics.

 

 

 

Software works incredibly well for distribution, not so much for monetisation

 

 

Some observations about the second wave of companies:

1. Platforms have had myriad definitions of what they define as ‘Active’ merchants. If the platform is not able to retain merchants, ‘total registered merchants’ becomes a mere vanity metric
2. In the end, will all roads lead to lending and other financial services for monetization?
3. Even within these companies, going full stack remains prudent. All the major apps exist in all the above 3 segments
4. Organic downloads through discovery remain tough. Platforms need to have an on-ground team to educate, help in product discovery, and adoption. Merchants’ willingness to pay for these services remains low
5. Most of the Kiranas weren’t interested in digitizing their Khata and Payrolls. Digitizing Payroll comes in only if employees >10-15 and Khata is maintained in a notebook and digitized using Excel or Tally by the younger generation
6. Vyapar, backed by IndiaMart has already begun monetization by carving out a niche for itself within billing and invoicing, swapping monetization with early viral growth. It has a differentiated brand positioning which seems to be working- “An accounting tool for you, not for your accountant”

 

 

Closing Thoughts

We have always been bullish and very confident on the Kirana story playing out in India and a couple of our portfolio companies, Dunzo and WayCool, are contributors to the first wave of KiranaTech startups. Startups solving for making a store’s operations smoother (Enablers) will always have a market in India. As the second wave of startups brings with it a new wave of digitization, we’re keeping our eyes and ears close to the ground, while trying to find answers to differentiation, retention, and monetization.

If you’re a founder building something fascinating here and have answers to these questions, or just someone who wants to chat about the space and the companies, I’d love to talk. Drop me an email at atharva@lightbox.vc