Neighbourhood stores are as ubiquitous as tuk-tuks in Asia. Indonesia, for instance, is home to 3.5 million warungs, while India houses 13 million kirana stores, which sell items from groceries, toiletries, and cosmetics to snacks and cigarettes.
Despite being commonplace, there is much scope for improvement when it comes to venture investments in warung and kirana tech. “This could change if VCs understand that mom-and-pop stores are not interested in profits but cashflows,” said Smita Aggarwal, global investments advisor, Flourish Ventures.
Aggarwal was speaking at a panel on ‘The future of warung/kirana tech in India and SE Asia’ on the second day of the Asia PE-VC Summit 2022 on Sept. 28.
“When we researched this sector, we realised that kirana/warung stores may have gaps in operational efficiency but they just won’t pay for any tech that enhances efficiency, because they don’t think of profits. They are more concerned with cash flows. How much cash they can generate today, tomorrow is more their concern than annual profit,” said Aggarwal.
Visa Kannan, partner, Saison Capital, who moderated the panel, referenced her earlier experience with Indian grocery delivery startup Grofers, and said, “When I was with Grofers, we realised that a kirana store on average has 20-30 suppliers and some 100 delivery boys visiting. So many times, the store owner has only a rough idea of what’s selling in the store, and what’s been lying on the shelves for months. So adopting tech like QR codes in B2B distribution of FMCG (fast-moving consumer goods) helps in tracking. But will they pay for such tech is the question?”
Where’s the monetisation opportunity?
“Access to credit is still a huge barrier to growth for kirana/warung stores. Some FMCG majors give credit to their distributors, but this doesn’t trickle down to the neighbourhood stores,” said Arvind Sankaran, founder, Imaginarium Advisors.
“The biggest question for GP investments in kirana stores is ‘Where is the monetisation opportunity?’,” Sankaran added. “Buy now, pay later (BNPL) would be an opportunity.”
An added attraction to BNPL in Asia would be that it falls square in the bucket of “financial inclusion”. “Be it India or Indonesia, governments are always keen on tech that ticks this box, as kirana stores would mostly be ignored as potential customers by banks,” said Sankaran.
VCs also pointed to the fact that kirana stores have always remained profitable, even as big-box retail burns through “millions of dollars and still remains unprofitable”. Sankaran pointed to how even during COVID-19 mom-and-pop stores did well.
In a study, Flourish Ventures found that as high as 71% of customers bought their groceries from their corner stores, even during the lockdown, showing these businesses are particularly resilient.
Sourcing is a crucial problem for mom-and-pop owners. “They act like superman/woman. It’s a one-person show. They do all the buying, sourcing, shelving, accounting; sometimes maybe with a little help from one or two family members,” said Aggarwal, adding, “If you are doing all the sourcing it means you might have to shut down the shop to go pick up goods; or not get the variety you’d like.”
Another pain point is the lack of variety in mom-and-pop stores. “More than lack of shelf space, what we found is that mom-and-pop stores usually stock only one brand in a category. This is because most distributors set a threshold for minimum number of orders,” said Kannan.
The topography of Southeast Asia is also a challenge. “Logistics is easy in Jakarta. But there are hundreds of small islands. If someone could solve the supply chain issues and ensure deep penetration — then there is a big opportunity,” said Aggarwal.
Coming back to the point that “kirana/warung stores are keen on cashflows and not profits, Aggarwal said, “Our research showed they aren’t keen on profit or profit margins. They only want cash flows, and a higher velocity of sales. They would rather sell more groceries which is a fast-moving, low-margin product, than something like cosmetics, which is a low-volume, high-margin product. That’s a very different mindset from the big stores.”
“If tech can make it possible for them to have high volumes and high margins then kirana/warung stores may be interested. Tech should provide price transparency for them,” added Aggarwal.
VCs also pointed to the changing mindset among investors that would benefit kirana/warung tech in the coming years. “In the initial years of venture capital, there was a focus on tech companies. VCs wanted to back pure-play innovation. Today they don’t want to back innovation but execution. So kirana tech could seem increasingly attractive,” said Sankaran.
Another reason for VC optimism would be hybrid sales models at kirana/warung stores. “Mom-and-pop stores are now doing a lot more than groceries; they do mobile recharges, remittances, and bill payments,” said Aggarwal.
Given the global economic downturn, the Russia-Ukraine war and inflation in Asia, the macro environment has also been having an impact. “It’s now profit over growth. The era of cheap money is over,” said Sankaran.