Episode Twenty Four
Guillem Segarra of HappyFresh
17 November 2020
Welcome to episode number 24 of Indo Tekno. Thank you for joining us again. Selamat datang kembali semuanya! My name is Alan Hellawell. I'm founder of startup consulting firm Gizmo Advisors and Venture Partner at Alpha JWC Ventures. Many of us have had a chance to take our first read to the "e-conomy SEA 2020" white paper from Google, Temasek and Bain, which was released three days ago. This annual report has become the Bible for all things internet and Southeast Asia-related. This year's edition was devoted, not surprisingly, to the impact of the pandemic across the major internet sectors. The two categories that saw by far the greatest influx of new users were: a) online education and b) grocery delivery. New users made up 55% and 47% of total volumes, respectively, as a result of COVID 19. Today, we discuss the latter, the online groceries category, with Guillem Segarra, CEO of regional leader HappyFresh. Bienvenido a nuestro podcast Guillem.
GUILLEM SEGARRA 1:18
Thank you. Thank you very much for having me. Indeed, exciting times, and a lot of things going on.
Fantastic. Well, let's start from the top as we almost always do, and that's really getting a sense of who you are. Now, Guillem, it looks like you began your career in your native Spain, and then came out to Asia as a candidate for a master's degree in engineering at Beijing Institute of Technology. You then joined Lazada down here in Southeast Asia. Can you explain this unique path to our listeners?
GUILLEM SEGARRA 1:49
Absolutely. As you say, I'm from Barcelona, Spain, quite far from here. I'm a telecommunication engineer. And I studied in Spain. The first year I started in the school, I saw an opening for a scholarship which was in Beijing. For one of these weird reasons, I thought that that's probably what I would like to do after. So, years passed by and I applied to it when I was finishing my degree. And I got accepted. That's the time then when I moved to China. It was my first time ever in Asia, obviously, and first time in China. I didn't know much about it. That's where my Asia journey started. I spent a couple of years in Beijing, where besides doing my master's degree, I also started my first company, something really small. I was bootstrapping it and didn't have any clue about business. And very early on, we also realized that it was quite difficult to do business in China. Once I finished my Master's in Beijing, I was lucky enough to know some people that worked back then in Lazada. And I got an offer to join as an intern. And right away, I packed my stuff and moved to Jakarta. And that was already back in 2013. A lot has happened since then.
Excellent. Now Guillem,, how exactly does the HappyFresh model work? You connect pre-existing grocery stores to customers in all of your markets, yes?
GUILLEM SEGARRA 3:11
Yes, exactly. Our mission has always been to provide an easy grocery shopping experience with a focus on high quality. We wanted to achieve three main things for our customers; the first one being choice. How can we provide a full range of products so our customers can find everything they need; whether it is your veggies, fruits, meats, or seafood, snacks or any household items that you might need. The second thing that is extremely important for us it to do it in a very convenient and easy-to-use way. So that's why we put a lot of effort into our personal shoppers to make sure that we deliver that quantity that you want. You can get it delivered on demand or on a schedule; whatever is better for you. The third bit that is obviously important to consider is the value for money component. And to do that we give access to all promotions and discounts. So the important bit is how do we manage and how the model works. To support the above, we partner with supermarkets as you well said. It's very easy. We just give them an upfront "plug-and-play" solution for them to be digital. And then we put our shoppers in the stores and then we will be able to deliver those orders right away to you. Ultimately, we built a model that is well thought through, and covers the full range: fast delivery and high quality in a scalable fashion. And we like to say that it's really built to deliver a simplified life.
So Guillem, very clear. Another set of questions. Do you have your own delivery fleet? Do you have your own cold chain? Do you for instance, carry any inventory?
GUILLEM SEGARRA 4:39
Our model is an asset-light model. We rely on the already existing supply chain, the "brick-and-mortar" from our supermarket partners to take care of the heavy part of the equation. Instead we bring our fleet of personal shoppers into the stores. They receive your order as a customer and we will do the picking for you. Once the order is "picked-and-packed", it will be passed to our riders, who would go with a two wheeler with a thermal insulated box. And then we'll take care of the last mile, covering anything around five to 10 kilometers radius around your favorite store. So we don't have the need to take care of centralized warehouses or a supply chain. We don't have also to carry our own inventory. Yet at the same time, we can offer a full range (more than 200,000 SKU's) for our customers to choose from.
Very interesting model there, Guillem. Can you now position HappyFresh amidst the broader regional or global range of grocery delivery models? Who shares the most in common with us would you say?
GUILLEM SEGARRA 5:41
We've seen different players trying to solve the equation in different ways; from an inventory-led model to an asset light one, farm-to-table and so on so forth. Though I believe the key here is really localization and understanding the particularities of each of the markets. If we zoom in to the context of Southeast Asia, or Indonesia for that matter, we've also seen different players try to solve for different use cases. We might have from the more traditional e-commerce platforms a focus on bulk purchase like milk powders, diapers, and mostly offering nationwide low margin products and playing the volume game. This works well, especially in covering the accessibility challenge, and presents a really broad spread across Indonesia. Other players are optimizing more towards a "top-up" type of use case; and you can think of your typical Circle K. That's mostly being tackled currently by ride hailing taxi companies such as Grab or Gojek. Although we believe in offering a full range of choice, so we can cover your weekly grocery needs. We understand that the mid-to-long term players that are able to offer a one-stop shop solution will take the larger part of the cake. That's a cake that presents the most attractive basket size composition from a margin perspective. When we look globally, this has been the winning combination; players like BigBasket or Grofers in India, Missfresh in China, or even Ocado in Europe or Instacart in the US.
Now Guillem, a Facebook Bain study estimated last year that a mere 0.3% of Southeast Asia groceries were online. Even China was only 4% penetrated. Can you size the market opportunity for HappyFresh?
GUILLEM SEGARRA 7:22
We believe that in 2020 obviously, a lot of things have changed and very, very rapidly. Today, the opportunity in the markets we operate in alone is estimated to be already above $1 billion of annualized revenues. Our focus is in urban areas with a rapid growing middle class. They value their time and convenience in getting their needs delivered. That definitely drives also a very interesting customer behavior, with high monthly purchase frequency and return rates. Things are changing really, really fast, too. I believe we are going currently through what will be probably the year where customer behavior will have the most dramatic and profound changes, driving massively the adoption of digital services like HappyFresh itself. When looking at the penetration evolution and the expected addressable opportunity for groceries, we believe that that would rise to above 10 billion in annualized revenue by 2025. And this is mostly driven by a shift of consumer behavior from offline to online in categories like groceries, but also the adoption of these type of services, not only in "A" markets, but also "B" and "C" markets. And overall a natural evolution of our demographic of fully digital generations entering into a more mature age group, and driving a large proportion of grocery purchases,
A lot of growth going forward, clearly. Now Guillem, does most of our revenue come from a commission that we assess on each order? What is the business model?
GUILLEM SEGARRA 8:51
With the partnership model or the marketplace model that we operate, we provide value to different stakeholders at the same time within the same ecosystem. And hence, we are able to build multiple revenue streams. The first and most important I would say is our customers. We provide a convenient way to get your groceries and thus one of the revenue streams is a delivery fee. The second one is from supermarket partners. Since we provide incremental sales through our additional digital channel without them having to do any upfront capital investment or maintenance or worry, we are able then to basically have a type of agreement of profit sharing. For every product that we sell for them, we will get a commission. The last one, and one of the most rapidly growing ones for us, would be because we work really closely with brands and FMCG companies to help them navigate the grocery digital space by offering a platform where they can advertise, transact and understand customer behaviors and insights all in one go. And that's proven to be really, really interesting for them in that space. Think of that overall context: where consumer behavior is moving more and more from office line to online. Hence, brands and FMCG companies also want to take a big portion of that.
Quite a wide range of monetization opportunities that I wasn't aware of. HappyFresh, I believe currently operates in Indonesia, Malaysia and Thailand. Are there any interesting compares and contrasts amongst these three countries' consumers?
GUILLEM SEGARRA 10:18
All these markets are extremely different amongst each other. For each market, at the scale that we are today, it requires a localized approach. And that goes from the business model perspective to the type of partnerships you might or might not bring on board, but also to the product and even the branding and positioning. If we drill down a little bit more on the customer behaviors, they are also indeed quite different when it comes to things like price sensitivity, how much they value service quality on their purchase, or even purchase patterns themselves. Frequency, size, and also basket composition, differ. Well, what I can tell you for sure, is that everybody loves the snacks, regardless.
Now Guillem, what has been the toughest nut to crack in succeeding in online grocery shopping? Is it logistics or payments? Is it maintaining freshness, or is it some other element?
GUILLEM SEGARRA 11:09
I would say all of them to be honest. Online grocery is definitely not an easy endeavor. At the same time, I also believe that that's probably one of our key competitive advantages. To get to the point where now we offer a service that is consistent enough, with high quality standards that our customers love; and to the point that we've created a household name by itself is not easy at all. We've seen a lot of players, especially now, trying to benefit from the pandemic, coming up. But at the same time, we also see really bad reviews from customers who are very unhappy with the service quality. And it all boils down to the focus that we've had very much since the beginning on providing that excellent service. Looking back, probably our first epic achievement was on the logistics side. Back then, being able to provide a full range of assortment and delivery to you in one hour; that was impressive. And we're talking four or five years ago. But since then a lot of things have changed. We've redesigned our delivery box four or five times to really ensure the freshness. We've continually improved the tools and apps for our shoppers and drivers, the training materials and the learning path for our fleet too. And we also put a lot of effort into product and experience itself. That definitely was a tough one too, given that the grocery journey itself is very complex by nature. Understanding how best to guide our customers throughout it, and bringing that engagement and fun, is something that we still working towards. We are especially trying to move a little bit away from the pure transactional aspect of groceries, and adding elements and components that deliver personalization, engagement and fun. Bottom line, a lot of things we've already cracked, but looking forward probably there are still a lot of them that we like to spend more and more time on.
Now Guillem, delivery platforms are often characterized as being very capex and open- intensive. I know you mentioned the words "asset light" earlier. But how exactly does HappyFresh relate to their peers who are more asset heavy?
GUILLEM SEGARRA 13:12
That's a very interesting conception of the category itself. And these characterizations apply mostly to players that have to build their own supply chain capabilities, central warehouses etc. And that requires heavy upfront investment. Also, at the same time, given this platform might not have yet the purchasing power as, let's say a brick-and-mortar supermarket or its network, it is also heavy on the economics and margins, especially during the scale up phase. Adopting the partnership and marketplace model allows us to have that massive scale coverage area, but at the same time be profitable on a unit economics basis. Even if we go one level deeper, for those players also trying to build their own supply chain at a small scale and without the right expertise, the inefficiencies completely override the additional margins you can get by going further up into the chain. Overall, our model is known to be asset-light and capital efficient, especially in the early stage and the scaling up stage. We are relying and complementing the already existing supply chain and infrastructure at scale.
Understood. Now Guillem, what are the main steps of beginning operations in a new urban market?
GUILLEM SEGARRA 14:28
Well, we mostly need three things for a new market in order to operate. The first one is partners to get the products from. The second one is our HappyFresh personal shoppers and drivers to deliver the orders. And the third one is customers. For us, it's relatively easy to cover more and more new areas given that, as of today, we have a real large network of supermarket partners across Southeast Asia that supports and encourages our expansion strategy, whereas the only thing that we need to consider is from a customer standpoint, whether it makes sense for us or not. So things that we would consider more importantly is the addressable market itself, customers' behaviors and patterns, and how this translates into unit economics and competitive landscape. But from a pure operational standpoint, given that we have fully digital platform, we are pretty scalable in that sense, as long as we have the footprint in different markets.
Now Guillem, what elements of the value proposition do we feel that we have nailed perfectly? Which of our features and functions are truly unique in the market?
GUILLEM SEGARRA 15:38
HappyFresh is known for its quality, both on the products and the service delivered. So, quality for sure is a part of the value proposition that we put more efforts on, and we optimize and design for, and now it's also recognized for. If we think about in the model, it's all about, first of all, picking the products from our supermarket partners, which have years and years of experience in supply chain, in quality control, in making sure that the products that are put on the shelf are to the highest standard when it comes to freshness, quality and selection. Then, the people that choose products for you are our personal shoppers. Personal shoppers are trained to pick the best quality for you. And that's not only on the fresh produce, but also they check what's the longest expiry date? What is the type of product that might fit your needs? And also that allows a channel for communication with our customers. And you can literally be at home picking the products. And if it's something that you might not like or will like, or it's something that might not be up to our standards, a shopper will just give you a call and ask if you still want it or not. So we build and design the model entirely around quality. And we're pretty successful on that front as well. We believe that that's key for customer satisfaction, especially for customers coming back. And that's ultimately what we want. And the second thing that we've cracked quite well is the overall ease of use and choice. The fact that we can offer you all the products that you want as fast as in one hour, or you can also schedule your delivery to be delivered anytime you want within the next 2, 3 or 5 days; gives you that flexibility to operate as a customer without having to worry about anything else. At the same time the product and the app allow you to pick your favorites, build up your list and look at your past orders. So literally, you can be doing your shopping in less than five minutes today, sitting comfortably and safely at your home. So I believe the combination of these two: 1) quality and 2) ease of use together with a very competitive pricing and value-for-money, makes us very unique service for customers.
Crystal clear. Guillem, how do we think about 2021? Is it a year of expansion? If so, in what dimension do we expect to expand? Or is it more of a year simply to optimize our existing operations?
GUILLEM SEGARRA 18:01
Well, we have very ambitious plans for 2021. I really want our supermarket partners to double down or triple down into their digital channels. And, as is proven, a majority of the grocery retail industry in Southeast Asia has almost decided the HappyFresh is the partner to work with to scale up these digital channels. So we have a very ambitious plan when it comes to expansion. But also when it comes to really enhancing and empowering these digital channels for supermarket partners even more. From a customer standpoint, we are also very, very excited to double down in some categories that we feel are exciting, one of them being fresh produce. And at the same time, we really want to engage with our users even in a deeper way. By 2021, we plan to launch our very own loyalty program to provide additional benefits to our most loyal customers. At the same time, we have plans to cover cities, not only Jabodetabek, Surabaya, Bandung; but we also plan to go even outside of Java with a quite aggressive inter-country expansion together with our supermarket partners. In a competitive landscape, we wanted to make sure as well that we doubled down on our efforts on maintaining and increasing the market share across Southeast Asia while we keep growing our brand.
Let's talk a little more about that competitive landscape. Guillem, how do we think about competition? Who are our pure play competitors? And do we see other parts of the shared economy becoming more competitive with us, whether it's GrabFresh or Gojek or a Lazada service?
GUILLEM SEGARRA 19:36
I believe the competitive landscape is definitely heating up, and in one hand, that's a validation of the vertical itself, which is now undoubtedly one of the largest categories as a household consumer. But it's also one of the categories that is moving rapidly towards digital and towards online. So, no surprise that a majority of the platforms that are horizontal platforms and have multiple categories have shown interest to also be part of the grocery landscape, though we believe it's also quite opportunistically. The way they are solving the problem of access to groceries is also very different. When we look at ride hailing players; for example, Grab, Gojek; or when we look at e-commerce. Grab and Gojek are focusing more on the top-up, on just 100 to 200 products, and really relying on the existing fleet that is probably underutilized due to the decrease of other services like transport, or even potentially food to make sure that they still capitalize and have some transactions going in. On the other hand, we have the big e-commerce players trying to add a selection of products such as groceries. But that's mostly focused on FMCG products and covering nationwide. It's very important when we look at the competitive landscape to really think from a customer standpoint. We believe that still as of today, and moving forward, HappyFresh is not only the player that is able to deliver your full range, including fresh, including food and household items; but he's able to do that in a very convenient fashion. More importantly, HappyFresh is probably the only player that has always focused on quality. And when it comes to food, quality is extremely important. It's very different, whether it is delivering veggies, chicken breasts and the food that you have to put on the table for yourself or your elders and also for your children; rather than delivering a phone from A to B. So we believe that the core competencies that we've built together with the support of the supermarket partners will really help us to push through an increasingly competitive advantage, but yet still maintaining and increasing our position.
Great. Guillem, you touched on this very briefly earlier. One theme that has cropped up in nearly all of our two dozen past podcasts has been "digital literacy" within the Small Business segment. Many businesses view the inability of the warung owner or a mom and pop supermarket to understand and apply these digital modes as a major challenge. How does HappyFresh look at this digital literacy challenge?
GUILLEM SEGARRA 22:11
We look at it from a slightly different angle. Obviously, we work with supermarket partners. And it's quite interesting that some supermarkets are actually not as digital as you might think. And that refers to the type of systems and services that they might use. So we also have that mission to help supermarkets to bring their systems, their way to understanding customers, their way to manage data and e-commerce capabilities to connect with us in a fashion that allows us to also scale up our operations. So, when we look at the range of supermarket partners that we have on board, we have some really advanced and sophisticated players, but also other players that might not be at that level just yet. What is also very interesting to see is that some of these players that might not be as advanced as some of the players, our customers love these digitized players the most, because they have localized assortments, or because they have access to certain products that you cannot find anywhere else. Our value add is not only that we increase sales, that we bring our shoppers and drivers together and that we take care of the last mile. At the same time, we are helping them to set up a proper forecasting and inventory management system to really move towards data; using customer insights to then plan their campaigns, their promotions and so on so forth. It's been quite interesting and fun to work with some our supermarket partners. And the reward is an increasing of sales, probably much higher than the most developed ones.
Fantastic and encouraging to hear. Now that Google-Temasek-Bain report that I referenced at the beginning of the podcast indicates that the number of consumers who have now tried online grocery shopping has doubled since the beginning of the pandemic, with over 75% moreover indicating that they'll continue using online groceries post COVID-19. How exactly did COVID impact us over time since its onset?
GUILLEM SEGARRA 24:08
We started feeling the impact of COVID I would say early in March when the first cases unfortunately appeared in Indonesia, Malaysia and Thailand. What we saw is really a course of events that was quite different in different markets. But it has a similarity when it comes to customer behavior evolution. In the first couple of months, what we saw is what we call "panic purchases." So, what we saw an increase in basket sizes. People were purchasing products more to stock up, making sure that you have enough Indomie at home, making sure you have enough water, making sure you have enough toilet paper. So obviously we had to scale up the fleet. But we also wanted to make sure, which I believe it was really really important, that these new customers that try online grocery shopping for the first time; that they get a good experience. So our focus; especially in March, April and May; was to scale up and ensure our operations were up to the standard that we believe our customers deserve. What happened after was also really, really interesting for us to see. After the lock downs were lifted for the first time, we saw customers start to move from this panic buying and focusing on a few categories, more towards buying what you would normally buy during your weekly shopping in the supermarket. So this customer will shift towards buying from two to three categories to 10 to 15 categories. That would include fresh produce. That would include meat, seafood. And then was when we realize that the habit that was created during this 30 to 60 days of lockdown, was there to stay. Psychologically, there is a behavior that if you do something for more than 30 days, it becomes a habit. If you've been locked down for seven days, you might only use HappyFresh one time. But if you have to be there for 30 to 45 days, you probably have shopped with us five to six times, and you've had enough time to realize the convenience factor of it. So moving forward, what we're seeing now in September, October and coming up to November, is that, besides the fact that our top line is probably our peak, our retention rates are better than ever. And what we can deduce from that is that the customers that tried HappyFresh for the first time in March, April and May have now turned into loyal customers, and are fully digital when it comes to shopping for groceries online.
Super encouraging data. Now one aspirational, big picture question for your Guillem. What does the Indonesian grocery store of the future look like?
GUILLEM SEGARRA 26:44
That's an interesting one. Grocery would not be an exception to what we've seen in the retail industry. What we see is the transaction itself moving online just because it's more convenient. And then the brick-and-mortar location will turn more into experiential outlets for people just to go to and spend some time. We've seen this in electronics. A clear example is how now the Apple Stores look beautiful. You examine a little bit the laptop, and then you go home and you purchase it. So from a grocery standpoint, what we see is that 70% to 80% of what you shop for on a monthly basis is exactly the same. So there is no point in going to the store for that. Those are recurring purchases and not very exciting. The other 20%, 30% or 40% is more discoveries and more experimental. The stores might become a place where you can cook your stuff, you can eat it there, but yet at the same time, your regular bulk of purchases happen online. I also believe that there is a trend that is quite interesting, and that's more with the "top-up" convenience stores. Because that bit is also not exciting, I believe it potentially ends up being fully automated, because there is no reason for you to have a fancy store for the customers to go and spend time there when you want it just in order to do the transaction. So all-in-all, the stores in Indonesia, when it comes to grocery will mostly look digital. And the brands would potentially have an outlet to engage the customers in more experimental or experiential ways, in order to showcase some of the key products that you might want to introduce to the market in a "discovery" fashion.
A very interesting view of how we will satisfy our grocery and daily necessity needs going into the future. Thanks a lot for joining us today Guillem. Un placer hablar contigo!
GUILLEM SEGARRA 28:37
Muchas gracias! And again, thanks a lot for having us and hopefully we can all get through this pandemic. And the next time we see each other, it will be in-person.
Absolutely. Today's podcast was translated from English to Bahasa Indonesia by Alpha JWC Ventures. Terima kasih telah mendengarkan. Sampai jumpa lagi!