Farmers in the villages around the northern Indian town of Agra struggled with meager margins on their potato harvest year after year because middlemen would pay them low prices for the crop.
But all that changed this year when a representative from Indian e-commerce firm Udaan convinced them to form a producers’ organization and sell in bulk to Udaan at assured, higher prices. The company then sold the produce on its digital marketplace to retail shops and other users.
Som Aggrawal, a farmer at Pentkheda village near Agra, says he is happy he got nearly 10% more via Udaan than market rates this year.
The problem of distribution for northern India’s potato farmers typifies a wider supply chain issue that has perplexed Indian producers and manufacturers: how to send goods to millions of small retailers who cater to 90% of Indian consumers.
Traditionally, producers have depended on multiple dealers and wholesale distributors to get their products to shops, but the inefficient system inevitably led to delays, mismanagement, and over-pricing. Even leading consumer brands have no more than 15%-20% direct reach to retail shops.
That puzzle is what Udaan’s co-founders—Amod Malviya, Sujeet Kumar and Vaibhav Gupta, all former executives at digital retailer Flipkart—set out to crack when they launched the business-to-business or B2B trade platform in 2016.
By using a mobile phone app, buyers—mostly mom-and-pop stores that serve the majority of Indian shoppers—can place an order for a product, say, 100 packets of laundry detergent, with sellers who pack it and dispatch the goods through an Udaan group company called UdaanExpress. Retail shop owners can also tap credit for working capital through another group company called Udaan Capital. Udaan makes money by charging commissions on overall transactions, logistics, and loans that it provides to retailers and small manufacturers who need working capital.
Udaan has enrolled 30,000 sellers and 3 million buyers across 900 cities in India, and it reached ‘unicorn’ status faster than any other Indian tech startup when it raised $225 million in 2018. It’s now valued at $3 billion.
“We started with the belief that if we can solve this problem, then we can become the largest digital player for e-commerce across the country,” Kumar, one of the co-founders of Udaan told Fortune.
Malviya, Kumar, and Gupta left Flipkart in mid-2015. Within a year, they had used their life savings to launch Udaan with seven employees. The firm initially went from storefront to storefront in the small towns of India’s southern state of Karnataka to enroll shops as buyers on the digital platform. At the same time, it reached out to manufacturers across India to sell on the platform. Initially, the company had only two product categories, mobile phones and phone accessories and clothing. As transactions picked up, the company gradually expanded its user network across India. Global investor Lightspeed came on board in October 2016 with an initial investment of $10 million. The company emerged as a full service B2B platform with multiple categories of merchandise in mid-2017.
The business model sets Udaan apart in India’s highly-competitive retail landscape that’s dominated by heavyweights like Amazon, Flipkart and India’s biggest conglomerate Reliance Industries. Unlike the others, Udaan focuses entirely on the B2B segment that connects producers with retail shops rather than consumers.
Its single focus has helped Udaan earn an 80% market share of the e-commerce transactions between manufacturers and retail shops, according to a report by global investment research firm Bernstein. Still, the e-commerce segment of the retail trade only accounts for less than 1% of the overall transactions between manufacturers and retailers in the country, a figure that is likely to grow to around 25-30% by 2030, says Venugopal Garre, managing director of Bernstein India.
India’s traditional supply chain network is creaking as consumer goods companies struggle to find quality distributors, especially as a new generation is shunning the wholesaler and stockist trades, which are usually family businesses, says Anand Ramanathan, partner at Deloitte India. But it would be a mistake to think the transition to B2B e-commerce will be quick and easy, as traditional brands will be reluctant to abandon established distributors, he noted.
“Distribution is not something that will get disrupted overnight,” Ramanathan said.
Udaan’s timeline for occupying 10% of all retail trade—up from its current 0.5%—is seven to 10 years, says co-founder Gupta. By then, it expects its sales transactions to total $100 billion, up from $3 billion.
The traditional system of physical distributors means small consumer businesses that make goods like food, electronics, and toys rarely sell to retailers outside their immediate region. The cost of distributing to small towns and villages is too high and the task too complicated because of the need to go through multiple distributors and stockists.
Udaan’s platform is supposed to streamline the distribution process, introducing producers to new markets via UdaanExpress, and giving retail buyers more inventory and price transparency, as well as access to loans via Udaan Capital.
Backed by global investors such as Lightspeed, DST and Tencents, Udaan has had the cash needed to build up its retail and sellers network. But the company will need to map a path to profitability to prepare for an IPO, analysts say.
The company’s revenue jumped 21 times to INR9.78 billion ($131.5 million) in the financial year that ended March 2020, but its annual losses ballooned by over three-folds to INR 25.18 billion ($338.5 million). The company is yet to file its results for the fiscal year ended March 2021.
The successful IPO of loss-making food delivery tech unicorn Zomato earlier this month has lifted share-listing hopes of other tech startups, some of which are yet to make profits.
But a clear path to profitability will still be important as “that is a critical input for IPO investors,” says Ramanathan.
Udaan co-founder Kumar said that the company is planning an IPO in two to three years. The company’s business model requires lots of investment upfront to scale operations, but Udaan can improve cash flows to reach profitability, he said. “Growth should not scare us,” he said. If Udaan backed off its expansion, “then you have to reduce your opportunity,” he said.
