Why Indian Start-Ups are Failing? Behaviourial Analysis of Indian Market.
Yet another excellent way to get an idea of the behaviour of Consumer India and Indian Market is to study the causes, effects and reasons behind the new talk of the town :- frequent lay-offs in massive numbers - specifically in Indian Unicorn Start-Ups.
Well, many people have highly praised India's 'Jugaad' approach to innovate in Start-Ups and come up with great ideas and solutions in the market.
India is often referred to as a land of startups and unicorns. A lot of Indian startups have even managed to raise crores of investment from investors. But then, there is a flip side to this story as well- More and more startups in India can be seen laying off their employees and they are struggling to survive. A study even showed that around 90% of Indian startups But why is that? If India has such a huge market of around- 140 crore people and investors have so much faith in Indian startups, why are they struggling to survive?
The motive of our today's blog is not only to critically study India's Start-Up ecosystem but is also to understand the complexity of Indian Market.
Error is in estimation of Indian Market Size.
This is the basic problem Indian startups face.
India boasts a population of 140 crore people.
Despite having a large population, how could a startup fall into the trap of overestimating a market?
In 2021, Zomato earned the tag of a 'unicorn'.
With the help of its IPO, Zomato raised more than INR 10,000 crores ($1.3 billion).
But in January, the Chief financial officer of Zomato announced that the company was terminating its operation in 225 Indian cities.
He said that the company’s performance in these cities wasn’t very encouraging.
You might argue that Zomato still operates in other 1000 Indian cities.
But there’s a catch.
Zomato isn't profitable in the 800 cities where it operates.
In fact, around 60% of Zomato’s revenue comes from just the top 8 Indian cities. Just imagine a unicorn like Zomato generates a large portion of its revenue from only 8 Indian cities.
This problem isn’t limited to Zomato.
Let me give you another example.
You must’ve heard of Country Delight. It’s an online grocery delivery service.
Country Delight made a decisive statement when it announced that it aimed at targeting the 1.8 lakh families that have an annual household income of INR 7-8 lakh.
According to Country Delight, only this customer group is willing to pay for expensive products. Why is that the case?
The co-founder of the company said that the company can make a profit only in the metro cities.
Isn’t that strange?
Because 80% of Indian groceries are sold in tier-two cities.
The catch is people from tier-two cities don’t rely on online grocery delivery platforms but instead on ‘Kirana’ stores. There are nearly 1.1 crore Kirana stores in India.
80 lakhs of these stores are located in tier-two cities in India.
This implies that online grocery delivery services face severe competition in tier-two cities.
That’s why they operate in tier-one cities where they could find customers who’re willing to pay for expensive products and who’d prefer to order online rather than visit a Kirana store.
Severe Disparity of Income Classes and Consumers
Herein lies the real complexity.
Economically, India is not 140 crore people market, which seem very ludicrous.
In reality, this India is segmented internally into many many layers of varied income class, mindsets. Most of the Indian population, which resides in tier-two cities, tier-three cities and villages are hardly touched by the promising BUT expensive ideas of Indian Start-Ups.
India is home to 30 crore households.
But just 1 crore of these households contribute to 50% of all consumption in India.
Let me reiterate it:
ONLY 1 crore households contribute to 50% of all consumption in India. These 1 crore households are located in the top 6 Indian cities.
The next 4 crore households are found in the top 80-100 cities. These households are sensitive to prices. They’re very careful with where they spend their money. They part with their money only when they see a great value in the deal.
This is where e-commerce business struggle.
The other problem they face is a high return rate. It’s the practice where consumers buy the product, try them on, and return them.
If you consider the online fashion industry in the e-commerce market, the return rate is nearly 50%. This means that 50% of people return the products they purchase.
The companies usually launch themselves with the aim of reaching more than 100 crores of the Indian population with their products or services. But the reality is grim.
Blume, an Indian venture company, classified the Indian population into three sections.
India 1 comprises people who hold most of the nation’s wealth. Most startups aim to target these people.
Let’s take the case of a fintech startup called CRED. CRED is a credit card management app.
Only 5-6% of the Indian population own a credit card. Kunal Shah, the founder of CRED, is well aware of this reality.
He has openly expressed that the company doesn’t aim at targeting the entire Indian population. It aims at targeting a tiny bit of the population that possesses the larger piece of the pie.
But some companies aim at targeting India 2 & India 3 along with India 1. But it’s easier said than done.
Author Saif Iqbal wrote that startups must realize that the ‘Bharat’ everyone talks about can’t yield profit. Many companies even have to wrap up their business completely.
For instance,
a Singapore-based e-commerce company called Shopee launched in India. In its 6 months of operation,the company realized the reality of generating profit in India.
As a result, Shopee wrapped up its business and left!
India as a whole is quite poorer than we think.
Who is the ACTUAL middle class?
The major problem here is our belief
that India has a large middle-class population. Every Indian, no matter their bank balance, claims to belong to the middle class. But the definition of middle quite is quite different.
Research by Devesh Kapoor and Milan Vaishnav showed that 50% of Indians claim to belong to the middle class. In contrast, an analysis by Pew Research showed that only 2% of the Indian population belongs to the middle class.
It was also found that a middle-class household earned INR22,000-INR45,000 per YEAR.
So, if your family earns between INR22,000-INR45,000 per year, you belong to the middle class.
This shows that the actual Indian middle-class population isn’t as large as it’s believed to be, and it doesn't have enough money.
In fact, Bibek Debroy, an economist and an ex-advisor to PM Modi, released a report in which he calculated the monthly salary one must receive to break into the group of the top 10% of rich Indians.
Make a guess. I’ll give you five seconds for it.
Bibek Debroy said that if your monthly income is greater than INR25,000, you belong to the top 10% of rich Indians. Just imagine it takes only INR 25,000 a month to break into the group of the top 10% of rich Indians.
This is the grim reality of India.
What’s the solution to this? It’s simple.
India must aim at improving its GDP per capita.
In the 1960s, India and China had a similar GDP per capita. But over the years, China’s GDP per capita soared. Until India witnesses a similar level of growth, we can’t widen the middle-class population of our country.
Many don’t realize that only a tiny bit of Indians hold the most wealth in India.
These are the people who can afford to spend money on online grocery services.
Problems of Overestimation
What is the major consequence of overestimating the market? –The companies end up receiving considerable investment, but they can’t generate adequate profit.
Let’s take the case of Teachmint, an ed-tech company. It’s valued at INR 4,000 crores. Guess the revenue Techmint generated in 2022? Only INR 80 lakhs!
So, a company that was valued at INR 4,000 crores could only generate revenue of INR 80 lakhs. Now, Techmint could make up for the loss in the upcoming years.
But by overestimating the market many companies have to terminate their operations.
As we discussed, Zomato had to terminate its operation in many Indian cities from where it couldn’t generate adequate revenue.
Hence, we conclude our today's blog with the knowledge that Indian Start-Ups must make pragmatic plans for their target consumer class, what crucial value their service/product provides to our complex market.
Thanks,
Daksh Parekh.
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