Introduction :

On March of 2022, the team at Kirana Kart, the startup, founded by Amit and his team had the

chance to tackle a major challenge in the highly disorganized Indian retail sector. Their goal was

to create a solution that could change the way neighbourhood stores typically operated and

procured supplies for stocking their shelves. The plan was to establish a B2B platform that Indian

neighborhood stores could access on their smartphones to order supplies. The application users

could browse through the list of products offered by FMCG (fast-moving consumer goods) master

distributors and order the products.

Amit, the founder, and his team had spent six months, to understand the challenges of the kirana

stores, a key pillar of the retail landscape of India. Nearly 85% of the Indian retail industry fell

under the unorganized category, making this a significant opportunity for these young

entrepreneurs to explore and make a difference.

The term “kirana” typically referred to small mom-and-pop stores consisting of either general

stores, traditional grocery shops, or small businesses. A kirana store, commonly known as a

neighbourhood or corner store in India, typically meant a local retail store that sold a wide range

of everyday items such as groceries, household essentials, personal care products, snacks, and

sometimes even non-food items like stationery. These were mostly owned and operated by

individual proprietors or families. The kirana store roughly constituted 75-78% 1of total consumer

goods sales in India. They drove over 90% of FMCG sales. Contributing 10% to GDP and

employing 8% of the workforce, they were vital to India's retail economy. This category of stores

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https://www.cbinsights.com/research/kirana-store-india-retail/

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or kirana shops played a significant role in Indian society, offering personalized service, credit

facilities to regular customers, and a deep understanding of local preferences and tastes.

The team nearly visited hundreds of kirana stores to understand the pain points of the store owners

which were further aggravated by the COVID-19 pandemic. Various startups had also penetrated

the kirana landscape with their own value offerings. Yet, a deeper study of the market revealed

interesting insights of the various market segments, especially the smaller kirana stores with

relatively smaller order volume, which were currently ignored by the competition.

These categories of stores faced major challenges such as frequent stockouts, restrictions with

frequency of orders and delay in delivery of stock leading to loss of business. Amit thus wanted to

solve these problems and thus saw a huge opportunity in the market and wanted to capitalize on

it. As they worked on the value proposition to the identified problems, the team debated upon two

business models to launch themselves. With such intense global, national, and regional

competition, it was crucial for the team to re-examine their idea and determine if their business

model would align with market dynamics.

On one hand, the team contemplated an online distributor model which would involve receiving

orders from the kirana stores through their app, buying stock from the Master distributors and

supplying to the target kirana stores. This would involve setting up dark stores in the specific areas

of operation followed by logistics support.

Dark stores were specialized warehouses and storage facilities designed to fulfill online orders and

deliver products to retailers or end consumers. They were not open for in-person shopping and

focussed on efficient order processing and fulfillment. These stores would serve as distribution

centers for businesses and stocked a variety of products that retailers commonly ordered. When an

online order would be placed, the staff would assemble the requested items from the nearest dark

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store for delivery. This would ensure that the products are delivered at the earliest to the nearby

retail stores that have placed the order.

A distributor model would ensure frequent deliveries to the target customers, i.e., accelerated

delivery time and also provide better control on the pricing strategy by Kirana Kart, thus helping

with customer acquisition. However, the startup would need huge working capital on a regular

basis to buy the stock on a frequent basis. Amit and team contemplated the financial implications

of such a model.

On the other hand, the team also deliberated on a B2B Marketplace model where Kirana Kart

would act as a platform connecting the Master distributors, sub-distributors, and the kirana stores.

The marketplace would provide a better reach to the distributors to reach kirana stores, while also

enabling the kirana stores to buy the needed stock online supported by logistics support from the

startup. While the need for working capital would be relatively much lesser, however, the customer

acquisition cost of onboarding kirana Stores would be high followed by issues with consistency

and standardization of services across the transactions. Issues around revenue model would also

need some clarity,

Being aware of the benefits and the tradeoffs associated with each option, Amit and his team faced

the dilemma of choosing between the two options for the identified market opportunity.

The Unorganized Retail Market in India

Unorganized retail in India was made up of tiny retail firms that operated on a smaller scale with

little or no standardization and selling products to local clientele within a narrow geographic area.

India's population growth, growing urbanization, rising household incomes, connected rural

clients, and increased consumer spending were just a few of the aspects that made the country so

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desirable for retail investment. India's retail market is highly unorganized. According to Statista,

the unorganized retail sector dominated India's retail industry in 2019, accounting for 88 percent

of the total industry. Even with the emergence of a large-scale organized retail sector, the

unorganized retail market in India was the most essential means of retailing for most of the

population.

Current Situation and Statistics

The share of unorganized retail had reduced to 75% in 2021 and the share of organized retail

markets was gradually increasing. The percentage of modern retail, which included e-commerce,

had risen to 30-35% while the share of conventional retail had declined to 65-70 %. According to

data from Forrester Research, India's retail business had an estimated $883 billion in sales last

year, of which $608 billion came from food retail. The market was anticipated to increase to $1.3

trillion by 2024. With a 1.3-billion-person population, India had developed into a popular shopping

destination with an increasing number of young and wealthy customers.

At such stores, hundreds of home products were crowded inside wooden or glass shelves, or out

in the open. Many stores were so tiny and claustrophobic that customers never entered; instead,

store employees who worked behind a counter, handed out goods.

Many of these stores also sold essentials like rice, flour, and legumes in loose or unbranded form.

Typically, they would be open from early in the morning until late at night. These kiranas could

be further segregated into various categories based on these various categories such as order, store

size, location, and geography by the distributors.

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Broad classification of kirana Stores :

Amit and his team categorized the market by two criteria. Having studied the kirana landscape

Amit realized that the market could be categorized by the average monthly order value placed by

the stores with their distributors. Secondly, the store size was also an important criteria as it

determined the storage space available with the kirana stores, Thus a larger store size would enable

ordering a large quantity of stock and thus reduce the need for frequent ordering and thus reduce

the number of visits by the distributors. The average order value was also related to the store size.

The location of the store also played a role in category segregation among the kirana stores. For

example, a kirana store in a locality such as Indiranagar, located in the central part of Bangalore

(where the study was carried out) would have a higher number of sales as compared to a kirana in

the outskirts of the city due to the lower population density.

Based on the above two criteria, monthly average order value and the store size, the team arrived

at three broad market segments. See Exhibit 1 for the categorization of kirana Stores.

Thus, categorization of the various stores had serious implications on multiple fronts. Amit and

team understood that each category had their own pain points and challenges and a one-size-fits-

all approach would not serve any purpose. As the team delved deeper, he found that the pain points

of Category “B” and “C” retailers were very different from Category “A” retailers. Smaller order

size coupled with low store space indeed brought out pain points that were not yet addressed by

anyone in the market. Amit further decided to study the competitors in this space to understand

how the market was being currently served and identify possible gaps.

Competitors in this space

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Udaan

Founded in the year 2016, Udaan was India’s largest B2B e-commerce platform wherein

manufacturers and wholesalers offered their goods to retailers by using the internet or mobile

platforms. Additionally, the business provided merchants on its platform with accounting, order

management, and payment management tools. Therefore, in addition to serving as a platform for

retailers and distributors, it had begun approving loans at interest rates of 10-15% for these micro

businesses. To fund SMEs, it had also been granted a non-banking financial corporation (NBFC)

license.

Udaan followed a B2B marketplace business model wherein manufacturers and wholesalers sold

their products to retailers via Udaan’s online platform or mobile application. Udaan financed the

capital and assessed interest on it for its customers. Briefly said, the customer had the option to

purchase items directly from the market, sell them in their nearby shops, or use them for personal

purposes.

ShopKirana

Founded in the year 2015, ShopKirana was a supply chain company that developed B2B e-

commerce platforms and focused on supply chain technology. It encouraged retailers to be

competitive by delivering technology, operational expertise, and scale advantage.

ShopKirana worked on a Zero inventory management business model and positioned itself as a

multi-brand marketplace for retailers. The demand they received from retailers would be sent to

the brands, which would be delivered to ShopKirana’s warehouse in 48 hours. The goods would

then be delivered to retailers on the same day, mostly within three to four hours. Shop Kirana

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linked independent retailers with suppliers for placing orders, delivering goods, and receiving

payments.

IndiaMART

Founded in the year 1999, IndiaMART was India’s largest online B2B marketplace, wherein the

channel focused on providing a platform to Small & Medium Enterprises (SMEs), Large

Enterprises as well as individuals. IndiaMART operated on a subscription-based model for

suppliers.

Having studied the market segments and the competitors, Amit, and team realized that the

competitors catered mostly to the needs of Category A and B retailers. Smaller kirana stores did

not buy in bulk and thus faced different challenges which currently did not fall within the purview

of the competitors studied above. Currently, Category C retailers were not among the priority

target group of the competitors who were mostly looking at large retailers and their problems.

These smaller kirana stores indeed faced a lot of challenges that Amit decided to dig further. He

could see a potential gap in the market.

Pain points of the Category C kirana stores.

Suppliers are not accessible in certain parts of the city.

In most cases, retailers had been heavily reliant on just one supplier who was operating irregularly.

Moreover, with limited accessibility, stockouts were common issues.

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Lack of storage space:

Small kirana stores' lack of storage was a serious issue for them because it had an impact on how

they stored their merchandise. The lack of adequate space in many of these small establishments

made it difficult for them to attract a larger consumer base by offering a wide range of goods.

Losing business days:

Many of these small shop owners in kirana stores chose to purchase goods for their establishments

from wholesale markets for example, like Metro and Yeshwantpur, in Bangalore due to the

convenience these wholesale networks provided. However, this also resulted in loss of business

days for them requiring them to close shop and take out time to collect the stock.

Delivery of products from specific areas and no fixed distributor

Having purchased goods from a particular region, shipping time was often longer. Additionally,

this caused a delay in the product's delivery. The delivery time generally fell anywhere between

5-7 days and at times 10 days. Customers left as they waited for the merchandise to arrive, costing

them business. With no fixed distributors, the delivery time cycle of the kirana shops was also

affected. Certain products were often delivered late due to delays in delivery.

Less exposure to a wide range of goods:

Because of less storage capacity and limited distributors sometimes kirana shop in the outskirts of

the particular city were unable to order some products which were necessary and could contribute

to the revenue. See Exhibit 2 for specific data highlighting some insights based on interview of

Kirana stores.

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Solutions to the pain points

Having identified the target market, the pain points of the market, Amit and his team contemplated

the solution to solve the issue. The team studied the business model of the competitors such as

Udaan, Shopkirana, etc., and found that they operated as marketplaces with logistics and delivery

support to the brands. Amit and the team were aware of the marketplace model and its benefits

and challenges. However, they knew that the target group for Kirana Kart was different as

compared to their competitors. These kirana stores had very small average order values and

required frequent replenishment given smaller store sizes. (Please see Exhibit 1) Further, limited

access to suppliers for many of these stores leading to stockouts was a common issue and often

the delivery time fell between 7 to 10 days, post placing the order due to reliance on a single

distributor, etc. Major distributors prioritized high-order value customers, often ignoring category

C Kirana stores. As a result, the store owners would often lose a business day as they closed shop

to purchase their stock. The category C-category Kirana stores did not enjoy the advantage of

stability from the distributors.

So, the team also contemplated other business models to deliver the value proposition of accepting

smaller value orders and delivering them within a short time frame period. The team considered

the business model of quick commerce startups in India that were emerging and providing fast

deliveries to consumers. For instance, they studied the model of Zepto. Zepto was a B2C startup

that offered faster grocery deliveries to consumers within 20 minutes. Zepto worked as a

distributor. The startup set up several dark stores and warehouses within 2–3 km of high-demand

areas, thereby helping in quick packaging at dark stores and delivering them once an order was

placed online. Zepto typically bought items in bulk, either from a master distributor or

manufacturer, at low cost and sold them at an almost-market price within 1-2 days. This particular

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model appeared interesting as it offered several key features to solve the pain points such as limited

suppliers in high-demand areas (category C stores) leading to delay in stock deliveries. However,

KiranaKart was a B2B model while Zepto was a B2C startup. Thus, the team had to keep in mind

the same.

Keeping in mind the competitors’ business model, and the pain points of the target customers, the

team mostly had two options in mind, but each of the options had their own benefits and

challenges.

Marketplace Model

One of the options was to go for the marketplace model, wherein the startup would charge a

commission per sale between the two parties. The platform would handle the payment and levy a

percentage or flat fee when a customer pays a provider. In a similar manner, Kirana Kart would

serve as a marketplace that connected retailers and small kirana stores with distributors, and sub-

distributors who would be onboarded on the platform. The fee charged from distributors and

wholesalers would be divided based on the types of products and established in accordance with

existing market norms. In this arrangement, there would be regional dark stores from which the

delivery would be made from various master distributors for various products to the kirana stores

(See Exhibit 3a). By acting as a middleman between the master distributor and the kirana shop

owner, the goods would be delivered to the kirana stores. However, there were both advantages

and disadvantages of having a marketplace model. A wider reach among retailers could be possible

as a significant amount of untapped market exists among tiny retailers in rural areas and outside

cities and towns. This would aid distributors in accessing a wider audience, in raising their sales

revenue, and build a platform that made it simple for the merchants to order products and receive

them.

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Further, being just a marketplace, would also prevent any threats to any distributors in this space,

who may otherwise see the entry of the startup as a threat to their territory. Also, the marketplace

model would help in keeping costs very low as it would be asset-light with minimal working capital

requirements. Further, the variety of products available would be high, given a marketplace model

as the platform would onboard multiple distributors. This was an important factor regarding the

viability implications of the startup as high working capital requirements could raise issues

regarding the viability of the startup. The platform could incentivize the distributors to boost their

sales. More importantly, retailers could now order from the platform without losing business days

and customers for lack of product availability due to frequent stockouts.

However, there were challenges also facing the team. Onboarding the distributors and retailers to

use the platform would involve huge costs of acquisition. The success of the platform would rest

upon the volume of transactions that took place between the two entities. Another challenge

involving a marketplace model would be to ensure consistency of service across the transactions

since the platform would only provide an interface coupled with delivery services. However, the

quality of the stock, defects, etc. based on the distributor purchased from, by the retailer would

make an impact on the service quality offered on the platform as a marketplace model would

provide lesser control on the stock quality. Consistency of the service across purchases would be

key here. Further, there were other challenges with the revenue model. Should the team charge a

set fee vs a percentage for each transaction?. Should the percentage amount be charged to both

entities or only one of them.?

Distributor Model

In this model, the startup would procure the stock from the master distributors and resell to the

kirana store who would order via a platform. This would involve the use of a large warehouse

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where the stock would be stored primarily with several dark stores in the city, to deliver the goods

to the kirana stores on a frequent basis which would help solve the pain point of the kirana stores.

See Exhibit 3b). There were several advantages to this mode. In this case, a direct distribution

model might provide quicker delivery due to better control over every channel, including shipping.

This could help to raise client satisfaction levels and give smaller firms in the FMCG business a

fighting chance against larger ones that might have more resources or control over existing

channels of distribution. Customer concerns regarding defects, quality of stock could be resolved

more effectively with faster delivery times, including the option to provide replacement products

more quickly. For example, a product such as Maida will always be readily available for delivery

upon request made by the customer and can be made in the fastest manner due to ready availability

as compared to a Marketplace model where the replacement of products may not happen as quickly

as possible due to dependence on the distributor who provides it. Further, the direct distribution

model would allow the team flexibility in their pricing strategy by eliminating third-party channels

from various operations. By providing better deals, discounts or sales, the startup would have

greater control on customer acquisition in order to get the stores to switch to them. Elimination of

intermediaries between the master distributor and the sub-distributor could offer the advantage of

lower pricing while also being a profitable proposition to the startup in the distribution model. For

example, a product like Sugar can be offered to retailers at ₹30per kg, while other existing sub-

distributors can offer only at ₹32 per kg due to other intermediaries from where they buy their

stock.

However, some of the major challenges, involved the need for huge working capital to buy and

sell stock on a regular basis. This again would raise concerns from the viability perspective for the

startup particularly in the initial phases. Many other startups currently such as Udaan etc. have

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continued to receive huge funding from multiple investors to fund their operations, and thus scale

up, however with also losses. 2 Hence penetrating the market with direct distribution model would

need access to funding to manage the huge working capital requirements. Further, the team was

also aware of the channel conflicts that they might face as other sub-distributors may see them as

competitors. Thus, channel conflict might be an issue going forward. This thus needed further

thought and deliberation.

Dilemma:

Having deliberated over the two options, the team had to think the right business model for

launching themselves. The gap in the market was clearly identified, in terms of untapped potential

in the unorganized retail landscape. However, the choice of business model would lay out key

questions in terms of the need for resources, capabilities to build, key activities and revenue and

cost areas to consider. Which of the two business models would be more feasible and viable? The

team had an important dilemma to address.

Exhibit 1: Market segmentation by the team.

Category Order value Store Size

A - > ₹50,000/- (3-4 times a > 800sq.ft

month)

B ₹30,000 to ₹50,000 (2-3 600Sq.ft to 800Sq.ft

times a month)
C < ₹ 30,000 (2-3 times a < 600 Sq.ft
month)

Exhibit 2: Insights from the Distributors on the margins per product.

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https://entrackr.com/2022/12/udaan-scale-nears-rs-10000-cr-losses-go-past-rs-3000-cr-in-fy22/

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 1 2 3 4 5
Item Name Rice Maida Oil Sugar Egg
Cost price 42/kg 38/kg 160/l 34/kg 4.50/egg
Selling price 50/kg 45/kg 190/l 40/kg 6.00/egg
Margin on 8/kg 7/kg 30/l 6/kg 1.50/egg
product
Inventory 100kg 75kg 50 l 100 kg 300 eggs
quantity
Stock out 5 days 5 days 4 days 6 days 2 days
period
% Of order 10% 7.5% 12.5% 10% 2.5 %
value in total
order

Exhibit 3 a) Scenario 1: Marketplace Model operations in Bangalore.

Based on insights from the kirana stores located near the KR market (a wholesale market), the

picture depicts how the marketplace model will operate. There will be a big warehouse in the heart

of Bangalore city, where the startup would pilot. The goods would be stored in bulk and distributed

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to the different parts of the city, using the KR market area as an example. The products will be

distributed from the main warehouse to the dark store, which is next to KR Market. We will

transport the goods to the kirana shops from that dark store in accordance with the order.

Exhibit 3 b) Scenario 2: Distributor model operations in Bangalore.

A picture of the distributor model is seen above. In the distributor model, we would have a master

distributor from whom the startup would pickup the goods in large quantities and store them in our

dark stores. If a kirana shop owner orders a product from a specific area, the goods would be

disbursed from the dark stores so that kirana shops can receive them as soon as possible and lose

business due to delayed delivery.

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