Decoding Bharat

“We are building for Bharat.”

Over the past year, this phrase has been echoed by many founders, each with their nuanced interpretation of what Bharat embodies.‍

At Accel, we define Bharat as the middle-income households in the 5L-15L bracket spread across Tier 2, Tier 3, and rural India.‍

However, as we listen to these visionary founders catering to the Bharat opportunity, a parallel thread of scepticism begins to weave through our minds:

“Is this target group (TG) ready for such ventures?”

“Is the Total Addressable Market (TAM) substantial enough?”

“Can enduring large businesses truly be cultivated here?”

And the perennial question:

“Why hasn’t this been done before? Why now?”

If one engages with operators and founders who have previously endeavoured to create tech platforms and brands for Bharat, one will encounter recurring themes of concern. E-commerce pioneers lament the impracticality of returns and delivery logistics, content creators point to low payment propensity, fintech innovators highlight prohibitive distribution costs, and FMCG companies bemoan lower Average Order Values (AOVs) and unsatisfactory ROI on marketing efforts.

While these observations hold truth, they largely reflect the challenges of the past decade. Upon closer examination, a promising horizon emerges. In the past, most of the startups that failed in these markets did not start with a focus on these markets but treated these markets as an extension of existing business, which we don’t think is a feasible strategy. Many traditional markets across sectors remain fragmented and unorganised, presenting numerous opportunities ripe for innovation.

We believe that this market is more ripe for disruption than ever before. The issue lies more with the supply side than with the demand. Founders need to take a crack at the Bharat Opportunity.

But why won’t incumbents capture this Bharat opportunity?

The incumbent’s value proposition lacks significance for India's diverse customer segments.

In the last 15 years, many consumer problems have been solved, and convenience-first companies have been built. However, most of these startups have focused on building solutions for the top 10% of the income class (income range of 25L+) residing in urban India.

Most of these companies are not built in a manner that caters to the country's tier 3 and rural parts. Minor differences in UI/UX, language support, and customised SKUs, such as embedding lending platforms, can significantly affect and impact the user journey. At the core, business models may diverge substantially, encompassing different user acquisition strategies, unique product assortments, last-mile delivery innovation or assisted buying for first-time commerce users. Additionally, operating at varied price points can lead to business cannibalisation.

It could be a long, patient journey, but it is inevitable. Platforms that can leverage technology, innovate on capex, and build efficient distribution models to provide better products and services at the same or a better price are bound to crack a large potential market.

Rama Bijapurkar’s book Lilliput Land highlights an interesting data-led observation:

“There are 4.4 million Indian households that have a car + air conditioners + washing machine + laptop. There are 114 million households that have a two-wheeler + refrigerator + color TV, of which 55 million are in Rural India.” This segment of 55 million underserved households is growing today and will be a key contributor as the country leaps from a 3.4 trillion to an 8 trillion GDP, which excites us.

The top 20% of the rural population has a higher MCPE (Monthly Per Capita Expenditure) than ~50% of the urban population. This highlights substantial purchasing power in rural areas that is often overlooked.

An equally exciting opportunity lies in rich rural India. Half of the top 20% of households are evenly distributed in rural India. The top 20% of the rural population has a higher MPCE (Monthly Per Capita Expenditure) than ~50% of the urban population. This highlights substantial purchasing power in rural areas that is often overlooked. We are bullish that there will be omnichannel platforms in commerce, health, and education that will cater to the needs of this TG.

“Does this TG even want anything premium? How do you know?”

Bharat's consumers, often labelled as price-conscious, are, in reality, highly aspirational with a keen eye for quality and value. They seek products and services that elevate their lifestyle and mirror their aspirations for upward mobility. This trend is vividly illustrated across various consumer data points.

In the two-wheeler market, new-age riders in Tier 2 and Tier 3 cities increasingly choose 125cc bikes over the more basic 100cc models, signifying a preference for enhanced performance and superior features. Similarly, a notable transition from single-door to double-door refrigerators indicates a readiness to invest in advanced and convenient home appliances. The surge in demand for used iPhones in Tier 2 and beyond further underscores this aspiration for premium brands.

Consumers are finding ways to access these coveted devices, even if it means opting for pre-owned ones. There is a marked increase in international travellers from Tier 2 towns. Zudio is a prime example of affordable yet stylish fashion in the fashion sector, drawing a substantial portion of its revenue from smaller cities. The luggage market has also significantly transformed, shifting from unorganised to organised, with brands like Safari experiencing remarkable growth in recent years. These shifts indicate a move towards branded, high-quality products with superior durability and style.

In essence, the evolving preferences of Bharat's consumers reflect a broader trend towards quality and aspiration, demonstrating their readiness to embrace products and services that resonate with their desires for an enhanced lifestyle and upward mobility.

“But why have startups not succeeded at building for this TG in the past? Why now?”

Although we have just started to see large successful models like Meesho, Physics Wallah and Zudio emerge, we are often asked this question. The answer lies in the lack of proper infrastructure, customer behaviour, and focus.

Over the last decade, several startups aimed at addressing the challenges of rural India fell short of expectations. Upon closer examination, it became clear that consumer behaviour and payment propensity were only part of the puzzle. The more significant obstacles to scaling and achieving economic feasibility included:

• Poor delivery infrastructure with limited pincode coverage, unresolved reverse logistics, and inadequate systems make it challenging to handle low-order volumes at feasible rates.
• Limited financial coverage, lack of access to credit, and restricted digital payment options.
• Insufficient internet stability and mobile phone penetration.

However, substantial progress has been made in overcoming these hurdles:

• Financial Inclusion & Advancement: The UPI stack has revolutionised payments, and Jan Dhan accounts have broadened financial inclusion. Loan growth remains robust at 15-17%, and the microfinance sector continues to expand with deeper penetration into rural markets.
• Enhanced Delivery Infrastructure: Multiple logistics companies now boast extensive pincode coverage and reduced delivery times. With nearly 75% of e-commerce products paid for on delivery, companies recognise that faster delivery increases acceptance rates.
• Warehousing Expansion: Leasing of industrial and warehousing spaces in Tier II and III cities has grown by 20% year-on-year, mainly driven by the rise of e-commerce and organised retail.
• Localised Customer Targeting: Advanced advertising capabilities and sophisticated data analytics have revolutionised niche market targeting. Precision targeting and segmentation enable businesses to efficiently reach and engage consumers in Bharat, optimising engagement and conversion rates within this diverse demographic.

Another key issue has been the founders' lack of complete focus and priority on this market.

Many startups that failed in rural and Tier 2/3 markets focused initially on Tier 1 cities before expanding. Their focus was not on building for this market. Interestingly, successful urban strategies have often failed in smaller towns and rural areas.

A notable example is startups attempting to solve grocery in Tier 3 and beyond. Grocery startups of Tier 1 can’t crack the Tier 2/3 market with the same supply chain and business models. If a startup wants to match the price of a local vendor in these markets, it can’t afford to sell SKUs that need an air-conditioned supply chain. So, they will have to replenish the supply chain quickly or trim the SKUs they offer.

In Tier 1 cities, thanks to the higher paying propensity and the expected service, you can spend more, deliver better service, and still make money. While you build for this TG, your focus will most of the time be on optimising the cost of your supply side.

This market’s demand is unique, and new local dynamics kick in. If a startup can provide exceptional value for Bharat TG at the right price points, keeping the regional dynamics in mind, there is a significant opportunity. Meesho, Physics Wallah, and Zudio are just the sunrise. Many more companies tailored for Bharat are yet to emerge.

In summary, while previous attempts to tackle rural challenges faced significant barriers, these strides are now paving the way for new opportunities. Innovative founders must make this market their core and leverage the advancements to create scalable, economically feasible solutions tailored to Bharat's evolving needs.

We are bullish on the following themes and believe several large companies will be built in the coming decade:

1. Emerging E-commerce Companies for Bharat building efficient supply chains & the right CX

Today, if you visit the rural parts of the country, you will find commerce operating as usual with little change at the consumer level. The infra is now in place to cater to the scattered demand. We need more companies focused on building e-commerce marketplaces for Tier 3 cities and beyond. We believe that vertical marketplaces across various sectors—Grocery, Beauty, Apparel, Medicines, and Agriculture—will emerge to meet these markets' unique needs and nuances. We expect multiple large, $1bn+ enduring e-commerce companies to be built in the coming decade!

2. Financial Services for Underserved Bharat Consumers & Businesses

With the robust broad-based GDP growth, lending firms in India will thrive across various regions and income segments. From personal loans to loans for cattle or house financing, a new set of lending companies can leverage technology and provide tailored products at the right price to cater to the underserved and aspirational Bharat TG.

For the ecosystem in tier 3 and beyond to flourish, we expect BFSI to drive significant value, a large portion of which can be captured by experienced individuals building new-age fin companies.

3. Rural Healthcare Opportunity making healthcare accessible and affordable for users

From efficiently run mobile health clinic chains, affordable diagnostic solutions, and trustworthy generic medicine brands to solutions oriented towards rising demand for fertility treatments in Tier 3 and beyond, healthcare is a ripe and wide-open opportunity for innovators.

4. Edtech, Upskilling & Recruitment platforms

India has a sizeable unemployed youth base, and a more extensive base is growing to need employment in the coming decade. Solutions that provide primary education, upskill, and offer certification programs at the right price are very few and much needed. With the advent of AI, we are seeing platforms bring down the cost of production and delivery.

5. Upcoming Brands for Bharat built for large categories

Brands taking an omnichannel approach and building for different demographics & geographies are bound to emerge. The lower ROI in rural areas and the higher costs of reaching and educating consumers demand a patient and long-term approach. An interesting observation is the success of Zudio in cities like Gaya, Jamshedpur, Bilaspur, etc., which illustrates the untapped potential in these regions.

Bharat is diverse, deep, and aspirational across strata. We believe there will be multiple Fashion, Utility, and QSR opportunities for today's sizeable, underserved audience!

6. Content Platforms for Bharat

Though it’s still in the early days, the sudden rise in the $$ generated by social platforms and content startups across Dating, Astro, and OTT has started to prove that the notion of “Indian eyeballs don’t translate into dollars” is wrong. We are excited to see companies cater to large audiences, generating enough $$ to build enduring businesses for Bharat.

7. Consumer companies for Bharat leveraging AI

With the advent of AI, we have seen the cost of providing high-quality content go down severely. From making education more affordable and enabling basic healthcare suggestions to delivering the right and customised farming inputs, startups are innovating across domains with the help of AI. We are looking for AI's first consumer company, which will enable Bharat's mass audience across sectors.