B2B Marketplaces part 3: how do you solve for perishable supply chains?

On today's episode, we talk about perishable supply chains - the challenges that come with it, & the learnings we've gained from partnering with our founders who are building in the space. Tune in for more.

Salonie:

Hi. And welcome to Matrix Moments. This is Salonie. And on today’s episode we have Sudipto Sannigrahi who is principal as well as the lead for the B2B sector at Matrix Partners, india among others. Today we’re going to be talking about perishable supply chains and Sudipto has actually recently invested i would say fairly heavily within this space. So, Sudipto, can you break it down and actually tell us what really is a perishable supply chain?

Sudipto:

Sure, Salonie. First of all thank you. As you know we’re doing this series on B2B Marketplaces and sort of different nuances to it. So for example in the last episode we spoke, right, if you look at the indian consumer, an indian consumer consumes up to a trillion dollar worth of goods. What do they consume, they consume milk, they consume fruits and vegetables, they consume sea food. And across these three sectors it’s close to 250-300 billion of that entire pie rest is obviously FMCG goods, grains, pulses, home décor, electronics, smart phones, lifestyle and accessories and others.

Now if you look at these categories what is perishable, perishable is something which is very low shelf life. Which means from the time of production whether it’s a farm or factory to the time of consumption this is a very short period of time after which it essentially degrades or deteriorates in quality or value. So these three supply chains, milk and milk products, fish and milk protein, seafood and fruits and vegetables are which are the large categories within perishable supply chain.

And these are the areas where you know as a fund we’ve invested in Country Delight in milk, in Captain Fresh for seafood, animal and protein, and in fruits we’re investors in VeGrow. Right, so we’ve invested across actually all these three verticals. VeGrow, Captain Fresh being B2B and we’ll speak a lot more about those two companies today and Captain Fresh is more vertically integrated D2C. But all these three are perishable supply chain investments and of the trillion dollar of consumption close to 30 percent what a customer consumes is actually perishable.

Salonie:

Right. You just mentioned verticals which is literally my next question. So why are perishable supply chains good verticals to build Marketplaces on?

Sudipto:

So, again, referencing to what we’ve sort of spoken before, right, a great marketplace is someone who is essentially solving and creating value in the supply chain. if you’re essentially sort of- if you’re a trader who is pushing boxes from point A to point B and eliminating middlemen then you’re truly not adding value because today in india in most supply chains, right, there are 2-3 intermediaries. Those 2-3 intermediaries essentially put in their labor and their capital and for that they make a few percentage points in margin.

if you want to replace them and say replace 2, 3 middlemen and connect from A to B you will make some margin but that will be a very thin margin business and you’re not adding true value. However if you look at perishable supply chains there are no large B2B perishable supply chain company in india till now. Why? Because if you have to build a pan india large perishable supply chain you have to solve for a lot of problems.

What do you need to solve for, first, you have to take produce from point A to some place 1000, 2000, 3000 kilometers away. Moving that article in transit and ensuring its freshness is a challenge in itself. Second, in perishable supply chain every time someone touches a product, you touch a fish or you touch a fruit the product actually reduces in value because its quality degrades. How do you design around that?

Then perishable supply chain there are lot of grades. For example if you’re consuming wheat the customer generally is not that sort of fussy around what is the kind of wheat. if you’re buying apple or seafood the quality of the apple, the size of the apple, the color of the apple, is very different. So the end customer’s needs vary differently, right, so there are lot of challenges to be solved. You have challenges around wastage and dump, lot of perishable supply chains have up to 25-30 percent in wastage because in transition they either sort of the quality gets depleted or what the customer wanted the exact quality does not come to him or her. So there are lots of problems to be solved.

Wherever the problems that’s why entrepreneurs can actually come build first principles sort of models and use tech to solve some of them, right, which is why we’re very bullish on perishable supply chains.

Salonie:

Got it. You spoke a little bit about the problems but could you go a little deeper on what really are the problems that you see from Captain Fresh or VeGrow or what are the real areas the founders are spending max time on to solve for and what really are the challenges in this space?

Sudipto:

So if you’ve to build a great company in perishable supply chain the process is fairly simple and Captain Fresh, VeGrow broadly follows similar processes as well. First, you need to procure at scale from the source. So if you’re going to a farmer you buy the entire orchard of apples. You go to a fisherman you buy all the fish from the pond. So first can you procure at scale because in every orchard and every pond there will be some fish which is good and some which isn’t. Most companies or traders in the past tried to get the good fish or the good apples.

The challenge is what will the farmer do with the rest of the products which is why the good fish and the good apple is charged super normally to compensate for the loss for the other products. So, first, can you procure at scale?

Second, do you have the technology to have this entire orchard that you’ve procured or a pond that you’ve procured and grade the quality of the fish or the quality of the fruit? So first is ability to procure, second is technology to grade and figure out the quality. Third is do you have the distribution network and once you know this is grade A, grade B, grade C can you distribute. Typically any supply chain the best quality product is actually exported. Then you sell to modern retail or brands, then you sell to GT and then you essentially through distribution networks in tier 2, tier 3 essentially it lands up there or unfortunately lands up in hotels and hostels and sort of canteens and stuff like that.

Then the third thing is do you have this distribution network that once you have all the produce you’ve graded it can you distribute it to the right people. And fourth is having the logistics and supply chain that from procurement to the final consumer it is a 2-3 touch process versus a 10-12 touch process. And by doing each one of them, by procuring at scale you’re procuring it cheaper, by grading it you’re essentially figuring out who will pay premium for the produce, through the supply chain you’re reducing wastage.

And then finally everything that you buy you’re selling all of it which reduces dump and wastage. The good Startups in this space who’re building for perishable supply chains are actually solving for all of it. And the thing that we really love is not only are they building a great business food is a major problem not only in india but globally. They’re reducing wastage by doing all of this and essentially building the capability that for the end customer you can get the right quality of produce at the right price without any wastage happening in the middle. Which is why we really, really like this space.

Salonie:

Got it. But in an ideal world if you had to kind of put down what really does a marketplace solve for what would you say?

Sudipto:

So marketplace in any ideal world solves for discovery where --

Salonie:

i would have thought aggregation but -- okay.

Sudipto:

First is discovery like i’m sitting in my hometown, i don’t have access -- if i’m a retailer in my hometown don’t have access to fish in the coastal areas of Andhra or orchards in Kashmir, so discovery of different products. So that’s the first thing that marketplace solves for. Second, they solve for trust. if i’m buying and they’re committing to a particular quality that will be the quality because i have to then sell it to my end customer.

And third is essentially price that i’m getting it at the right fair price. And fourth, sometimes it’s more around credit and stuff like that. Through what i spoke before all of these things can actually be solved for, for the end buyer and customer.

Salonie:

Right. Could you like summarize for us and i know it’s hard but if you could summarize why you actually did invest in companies like Captain Fresh and VeGrow and from your first investment across the follow on rounds what have you really -- for you have there been learnings and if yes then what are some of those learnings?

Sudipto:

First i think on both, right, so both VeGrow and Captain Fresh have similar thesis and we went early in both. First i think founders, i think both of these set of founders have 10,000 hours in the space. The VeGrow founders i’ve known for 10-12 years, Shobit, one of their co founders and we are from the same wing at iiT.

Salonie:

Oh, i didn’t know that.

Sudipto:

Same hostel. Same wing, same hostel bagal bagal rooms, i’ve known him for 12-14 years. And Uttam i’ve known for at least a few years and actually we spent 6-8 months discussing before i ended up investing. So very few people understand the complexities of a perishable supply chain. Everybody thinks that buy from the mandi, sell to the B2B customer. it is actually if you’ve to solve for perishable like Chakradhar does for Country Delight as well. You have to go to the source.

And these founders truly understood that and they were actually building capabilities that they could go to source, do the hard work of procuring at scale, quality, matchmaking, connect to the right customer which was very interesting. So, first, i think two very sort of talented and special set of founders were building businesses. Second, the thesis i think both of them actually almost said 80-90 percent of the same thing in terms of how they want to solve. Although it was different verticals --

Salonie:

Do you remember a line of what the line that they said which was the same?

Sudipto:

Everyone ended up saying that this is procuring at scale and then a matchmaking business that you procure at scale, you do matchmaking and over a period of time you earn distributed demand. And obviously they’ve taken different approaches to it, obviously different B2B products that they’re building the marketplace in but their thought process is very similar in the way they do things which is very interesting to see.

i think as we’ve invested i’ve also learnt a lot from both the companies, i think from VeGrow i’ve learnt that it is a technology and data company and not a supply chain company. They’ve truly demonstrated how tech and data can lead to growth, can lead to expansion in margins, can lead to reduction in wastage and demand. i think what Captain Fresh has taught me is how distribution can be a mote, you’ve done all the hard work of procuring at scale but they have truly magnificently cracked all kinds of distribution.

So they do modern trade, they do general trade, so B2B, B2R, they sell to online brands who essentially sell to the end customer, they sell to aggregators like Swiggy etcetra through instamart and which sells to end customers. They do group sort of social commerce where they go to societies and there’s an influence in the society that also sells fish. They go to hawkers and hawkers sell fish and they’re doing exports to different destinations in different formats.

So what Captain Fresh has really taught is once you have this supply and you have the product process tech to handle something which is as delicate as fish. Then you can just scale one distribution channel after another and grow really, really non linearly and rapidly. And the beauty is the more expensive your distribution channel is the more you can procure because for Captain Fresh whatever you buy they can sell. Because they have all distribution channels across all grades they can do it. So those are the broad learnings.

So anybody who’s trying to build in perishable supply chain i think first go to the source, solve for supply and ensure you have the capability of procuring at scale, do quality and sort of quality grading and then have the supply chain to deliver it to the end customer without touching the product a multiple number of times. if you can build that capability then you can open one distribution channel after another and scale non linearly and both these companies for us have had demonstrated that.

Salonie:

Very interesting. But what’s next, like going forward how are you looking at the space and what are some of the opportunities or even like interesting trends that you’re tracking from a future perspective?

Sudipto:

So i think in terms of domestic markets we have the category leaders, right, and those are the companies i mentioned. But india exports a lot of produce globally. Will incumbents do some of the exports, yes, will new companies have the opportunity to do something interesting in this space. Definitely, yes, so there’s an area and an opportunity where you can build an export brand for india. it may not be a marketplace but can you build an export brand coming out of india. So that’s one area for sure.

if you go to the raw material side of it lot of raw materials that get into a farm or a factory are also perishable. So there’s an opportunity in those supply chains where you build the raw material part of it. For example in fish we’re looking at finished seafood. But where is the fish coming from, right, and the supply chain behind that like the essentially raw material, the chick for a chicken, or for fish the seed for a fish that goes into a pond that’s also perishable supply chain.

The same is true for silk, the same is true for cotton. So if you look at raw materials supply chains there are lot of perishable supply chains there as well where a lot of these same first principles actually act for them. So i would say if i’m looking at perishable i would look more at exports and i will look at more at raw material supply chain where there is still vacant areas where great companies can be built.

Salonie:

Got it. This has been super interesting and i hope our viewers find it as well. Stay tuned for more.