The charge of the white brigade

Anant Goel had to make more than just a 20-second “elevator pitch” to sell his milk-delivery startup idea. The co-founder and CEO of Milkbasket had to wait for a year and a half before he sealed a deal with Arpit Agarwal, a principal at early-stage investor Blume Ventures. Agarwal is a bit hazy on which pitch event he met Goel at in Gurugram in November 2015.

What he recalls is asking Goel how Milkbasket was going to make its subscription model work given the high cost of delivery. He also recalls Goel’s emphatic answer. “I agree this is a big problem and here is our solution. We only do early morning deliveries,” Goel had said. Customers book milk and other daily essentials a day before. Orders are dispatched at 4 a.m. the next day and are delivered before 7 a.m.—the only delivery slot. Goel reasoned less travel time and making deliveries early in the morning would cut costs. “The last-mile delivery cost per order is almost as low as ₹5. You can make money on every order,” Goel, 40, had said.

Agarwal was impressed, but he decided to see how things would pan out. And finally after 18 months, Blume Ventures along with China’s Lenovo Capital and Incubator Group, the venture capital arm of electronics company Lenovo, invested $1.5 million in Gurugram-based Milkbasket in a pre-Series A round in May 2017.

“There have been four rounds after that and we participated in every round. We feel strongly about this company,” says Agarwal. Milkbasket has raised $26 million so far in equity funding and $2.2 million in debt.

What impressed Agarwal was that Milkbasket grew almost sixfold in 18 months without much capital infusion and cash burn—just as Goel had said. “We may have met them in 2015 but the first time we gave them a term sheet was in April 2017. That happened because in a year and a half, with very little capital infusion, Milkbasket was doing 3,000 orders per day, up from 500 in 2015,” Agarwal says.

Milkbasket is one of many online milk-delivery startups which have become hot picks for investors over the past year. From Bengaluru-based DailyNinja and Doodhwala to Gurugram-based Country Delight and Milkbasket, all have done brisk business through cost-effective business models. K. Ganesh, partner at GrowthStory, one of India’s largest entrepreneurship platforms, which promotes and runs startups, says interest in the online milk-delivery space is so high that it is being called the milk-tech sector. “With onetime customer acquisition costs, repeat subscription revenue is guaranteed due to the hyperlocal nature and very low delivery costs per order. Efficient and cost-effective logistics, very low return rate, and no cash on delivery issues have fuelled growth,” he observes.

According to RedSeer Consulting, online milk delivery has an addressable market worth of $1.2 billion. A RedSeer report last year pegged the overall Indian dairy market at about $95 billion, of which $15 billion comes from the top six metros. The report added a large portion of target customers buying online dairy products in the top metros falls in the more than ₹10 lakh per annum income bracket.

Industry experts point out that milk sales have the highest frequency and lowest margins in the daily essentials segment. The margin is just 2.5-3%. Typically, groceries are a low-margin category as the business is immensely competitive. On a gross margin basis, groceries and milk together offer 8-10% for both delivery startups and offline retailers such as Reliance Fresh and Big Bazaar. Despite low margins, online milk delivery startups rely on the high frequency of buying milk to draw consumers and then push for other high-margin daily essentials to increase revenue growth.

According to RedSeer data, Indian consumers spend more than ₹1,000 per month on milk and purchase it almost daily.

Milkbasket started with only three milk varieties from Amul and Mother Dairy. Today it sells about 30 sourced directly from different brands. The startup has a turnover of about $3 million a month. Milkbasket serves about 50,000 orders a day across Delhi-National Capital Region (Delhi NCR) and Bengaluru. Their average wallet size today from a household in a month is ₹3,600. By the year end, it expects to break even in Gurugram and Noida.

Country Delight, another Gurugram-based company, however, follows a different business model in the milk delivery space. Started in August 2012 by IIM Indore alumni Nitin Kaushal (36) and Chakradhar Gade (36), Country Delight aims to solve the prevalent problem of adulterated milk by cutting out the middlemen in the supply chain. The startup only delivers fresh cow and buffalo milk besides other dairy products under its own brand Country Delight. Its app-based subscription service is backed by a fully integrated tech platform.

The startup’s journey has not been without its fair share of hiccoughs. Initially, the milk producer and distributor started the business by buying about 60 cows and renting a cowshed in Gurugram. But soon the former investment bankers realised managing livestock is not an easy task. “The main issues in the livestock business are poor insemination practices and malpractices in the quality of the herd. Even the weather conditions in the north are not very conducive for high-yielding cattle [milk dairy farm]. Scalability and capital infusion was also a major concern,” says Kaushal.

The startup decided to move away from its farm-and-livestock model to a direct farm-to-home model. But because of lease commitments, it could scale down the business only by the end of 2014. After that, its major investment went into building a cold chain and ramping up logistics. Today it sources milk from small- to medium-sized farms within a 200-km radius from big cities. “We work directly with farmers. We first collect the milk from farmers followed by testing the milk and chilling the product. Then it is taken to our processing facility where we process the milk minimally. We don’t overheat the product. It is done as per the requirement by the food regulatory body,” says Gade, co-founder of Country Delight.

Technology plays a key role in reducing wastage. From sourcing to delivery, the startup monitors the cold chain. The refrigerated vehicle, which delivers the product from the plant to the distribution centres, is monitored, as well as the delivery fleet. Country Delight, which clocks 90% of its business from its home turf Delhi-NCR, says it logs 1.5 million deliveries a month. It is also present in Mumbai, Pune, and Bengaluru.

Rehan Yar Khan, managing partner at Orios Venture Partners, an investor in Country Delight, says the biggest difference between the company and other online grocery retailers (such as BigBasket) is that Country Delight has its own brand of milk and dairy products. “So we don’t compete with online grocery stores which do only hyperlocal delivery service. As retailers, the margin is limited compared to a brand. It is a very different business model,” says Khan.

Kaushal concurs. “The brand proposition helps us the most. When a consumer is buying a Country Delight product, he or she is already paying a marginal premium that helps us build a sustainable business. I feel the consumer doesn’t mind paying `300 more a month as long as we give them a good product,” he says, adding that it operates at a 10% margin as a business. Country Delight has raised $12.5 million so far in equity funding and $4 million in debt. The business model, however, is not new and similar to companies such as Mumbai-based Pride of Cows (a part of dairy major Parag Milk Foods). The farm-to-home milk brand recently launched its services in Singapore as well.

Bengaluru-based Doodhwala uses a part-time fleet to keep costs low. Started by Manipal Institute of Technology (MIT) alumni Ebrahim Akbari, 30, and Aakash Agrawal, 32, in January 2016, the milk-and-grocery delivery service provider operates as an aggregator of milk brands and other perishable items. As a subscription-based app-only model, it is already operationally positive with milk delivery alone. “To keep the cost low our last-mile delivery is a part-time fleet. Our operational cost is just about 5% of our sales,” says Akbari.

While maintaining margins upwards of 10%, the startup says to keep costs under control it maintains a warehouse under 10,000 sq. ft. “Despite its size, the warehouse handles almost 2 million litres of milk a month,” Akbari says. Doodhwala delivers more than 30,000 litres of milk a day in Bengaluru, Pune, and Hyderabad. It has an active customer base of about 50,000 growing at 15% month-on-month, with 70% of the business being just milk delivery. The startup has raised $5 million so far in funding. It is currently in talks to raise fresh funds.

Bengaluru-based DailyNinja, too, does not have a delivery fleet for last-mile delivery. Instead, the startup has partnered with milkmen on an incentive structure based on the number of orders delivered. DailyNinja says it was operationally profitable within a few years of starting the business in 2015. It says using milkmen for delivery is much more cost-effective. “A milkman already has a ready customer base and typically does over 100 orders a day compared to a delivery person who does about 40 orders. Our milkman also delivers groceries and other items along with milk,” says Sagar Yarnalkar, 29, co-founder and CEO of DailyNinja, who along with Anurag Gupta, 28, started the firm.

The Sequoia Capital-backed milk-and grocery delivery startup, which has raised $8.5 million so far, does more than 80,000 orders a day across Chennai, Hyderabad, Bengaluru, Mysuru, Mumbai, and Pune. The startup works on a fixed-commission model with grocery partners and milk brands. It says its margin in groceries is 6% and it has a similar margin percentage in milk sales because of its milkman-delivery model. “Retention of customers is very high in a milk delivery business because they buy every day from the same platform. And the subscription-based model makes it even stickier. Our aim is to end the current fiscal with 150,000 orders a day,” says Yarnalkar.

What do customers say about this new wave of delivery services? For homemaker Anindita Sen, who lives in Mayur Vihar in Delhi, what really matters is convenience, quality, and price. “I had a good experience with Country Delight. I loved the products and also the convenience. One litre of Country Delight low-fat cow milk costs ₹58 (two packets of 500 ml each), while a litre of toned milk from Mother Dairy costs ₹42 in Delhi. So, for Country Delight, I would end up paying ₹16 extra per litre,” says Sen, 35, who did a five-day trial run with the startup.

Sen says the price difference is larger when cashbacks on milk bought at Mother Dairy outlets are factored in. “So maybe if Country Delight had some such offers, I would definitely consider it, as I found that the quality of milk and other dairy products was better,” she says.

Sen’s shopping philosophy is hardly unique. People who buy products online are typically vendor-agnostic and seek the best product at the lowest price. With a wide range of services on offer, only a few will survive. Customers are not going to download multiple apps for milk and groceries. Competing with larger online grocers such as Bigbasket, Grofers, and now Swiggy Stores won’t be easy, too, as these deep-pocketed players are equipped with operational efficiency, logistics control, multiple categories, and bigger order sizes. According to a report in The Times of India quoting sources, Swiggy is investing $100 million in Supr Daily, its subscription-based delivery business.

Experts say for online milk-delivery startups, the challenges are in terms of ensuring consistent quality at scale. According to the National Milk Quality Survey, 2018, released by the Food Safety and Standards Authority of India, among all the samples analysed last year, less than 10% had contaminants largely due to poor farm practices.

For now, entrepreneurs are milking the opportunity for all it is worth. Gade thinks the potential of the milk market is huge. He says Delhi-NCR alone consumes close to 10 million litres of milk daily, Mumbai consumes about 9 million litres. Bengaluru’s consumption is about 7 million litres; Chennai and Pune consume 5 million litres each. “Our target is about 30-40% of this [combined] market. Even if we reach about 25% of scale in these markets it is a huge business,” says Gade.

This was originally published in the August 2019 issue of the magazine.