Kapruka – Leader in Online retail in Sri Lanka

SRI LANKA’S BIGGEST ONLINE RETAILER TAKES MORE SLICES OF THE “ON-DEMAND” ECONOMY

“Kapruka on Echelon Cover at leader in Online retail in Sri Lanka”

DULITH HERATH

• KAPRUKA.COM, KAPRUKA GLOBAL SHOP,  GRASSHOPPERS.LK
• FOUNDING: 2003, 2013 & 2017
• EMPLOYEES: 300
• REVENUE: KAPRUKA.COM RS1.5  BILLION & GLOBAL SHOP RS400  MILLION (GROSS MERCHANDISE VALUE)

Optimism of e-commerce’s potential in frontier economies is due to its ability to reach many customers joining the ‘on-demand’ economy. Importantly, it’s a battle to own the future. Convenience and appealing prices are what attract customers to e-commerce businesses the world over. However, to flourish in frontier markets like Sri Lanka, virtual stores’ willingness to build robust tech infrastructure and providing discounts aren’t adequate, especially when a company envisions to build scale quickly.

For an e-commerce visionary, it can be difficult to keep his/her spirits high in a market like Sri Lanka. The electronic payments infrastructure is poor, most Sri Lankans will only transact with notes and coins; transport infrastructure is weak requiring a day to reach the farther ends of this small island, and only 30% of  Sri Lankans use the internet, compared to a similar level of access even in India, a much poorer country.

Global e-commerce majors may not enter Sri Lanka’s small market, and size is a significant handicap as the pioneer and most successful e-commerce firm Kapruka.com has discovered. In emerging markets, more people are shopping at malls, supermarkets, and branded retail outlets; the so-called organised retail. To be successful, e-commerce firms cannot be mealy grabbing share from organised retail, but must beat their own path by attracting new consumers.

At first, Kapruka beat such a path. Among Sri Lankans overseas it was soon a popular way to buy and send gifts to friends and family living here. Founder and former Chief Executive of Kapruka.com Dulith Herath gave up a career in tech to return to Sri Lanka and lead the business, which he had started and operated for three years while working in the United States.

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• A START-UP CAN STILL BE PROFITABLE

Normally markets grow around organised retail. Logistics, wholesale, and payments industries develop alongside. E-commerce firms enter the fray to exploit the cost arbitrage of running a virtual business, freeing them from overheads of establishing stores. In the West, they rely on existing payments, logistics, and wholesale markets to quickly build scale and dominate the market. Shareholders, back their relentless push for market-share ahead of profitability.

Amazon, one of the world’s largest e-commerce ventures, leverages high-quality existing infrastructure. Its low profitability appears to have little relation to its share valuation. E-commerce pioneers here including Kapruka.com have to leapfrog to succeed. These firms are unable to count on available infrastructure – and must develop their own logistics, payments, wholesale, and import trade infrastructure. This isn’t a uniquely Sri Lankan challenge.

In many emerging Asian countries, e-commerce companies overcome the handicap of derelict supply chain infrastructure by building their own. For instance, India’s market leaders Flipkart.com and Amazon.in are focused on two things; growing the number of customers and increasing the value of goods sold (gross merchandise value).

To overcome India’s clogged roads and ramshackle distribution infrastructure, firms build their own warehouses and invest in vehicles and distribution infrastructure. It has helped that Flipkart’s and Amazon’s shareholders have had a ruthless disregard for profits.

The fight for market-share in Sri Lanka hasn’t been as blood splattered a path as in India. Since businesses are privately held here real financial positions are unknown. However, Kapruka.com’s Herath who owns all the shares of what is Sri Lanka’s first e-commerce company asserts that it stands apart. “We are obsessed about margins,” he says reveling that on Kapruka.com, the largest e-commerce business in the country, gross margins are 56% percent and the net margin 30%. With revenue (gross merchandise value) of Rs1.5 billion Kapruka. com’s profits will be Rs500 million if the net margin was annualized. E-commerce is territorial warfare with funding as its biggest weapon.

Herath refuses to be drawn into this battle, which he says is based on fake economics and unsustainable habits. Unlike many virtual stores, Kapruka has never raised funding following Herath’s investments in its early days and has no debt; an extraordinary position for an e-commerce market leader processing 900 daily orders, delivering islandwide, and accepting cash on delivery. Herath is cagey about how much equity is now held by the 14-year-old company, but emphasises that he takes a long-term view. Kapruka’s strategy on maximizing margins is two-fold. First, it tries to own most inventory it lists on the site. Second, some of the most popular items on the site like cakes are baked at its own bakery and flowers grown at its own nursery.

It’s setting up facilities to manufacture soft toys and ornaments. Kapruka does significant sales to businesses purchasing cakes and gifts in quantities. Its competitors fiercely discount TVs, refrigerators, laptops, and mobile phones to attract customers. Virtual stores focus on these because of their high value. “How do you make a 56% gross profit on a TV?” asks Herath rhetorically.

“So I don’t touch those categories.” Customers can purchase electronics including TVs on Kapruka.com but it’s inventories owned by an electronics retail chain, which takes care of warranties and after sales service. E-commerce ventures do operate in marketplaces where independent vendors can sell their stock.

However, Kapruka’s isn’t a marketplace in the same way, as electronics retailers transfer stock to its warehouse allowing Kapruka to fulfill orders.

Herath still notices packages, as they are loaded to Kapruka’s 40 delivery vans with a red marker, indicating a lossmaking sale. He confides it’s challenging to always make money especially on groceries delivered over great distances, which are listed though a partnership with a supermarket chain. “I am selling shoes, clothing, and handbags now because you can have margins in these.” Sri Lanka’s small manufacturing base, especially for electronics, globally the best-selling category for e-commerce, limits local sourcing opportunities.

Kapruka’s focus on owning the inventory has meant it imports container loads of stuff from China. “Most e-commerce businesses are too top line focused and want transactions at any cost,” says Herath during an interview at popular Colombo coffee shop Java Lounge which he owns. Kapruka.com’s 14% to 20% annual revenue growth is lower than global or Sri Lankan e-commerce growth rates, he concedes. High profitability is due to Kapruka’s frugal ways.

It spends little on advertising, obsessively focuses on selling things it can only profit from, and invests in technology to master the chaos of emerging market e-commerce. Herath marks out Kapruka.com as traditional e-commerce. “The inventory mostly belongs to me, and I sell like Amazon,” he says. Most visitors to his website are from many of Sri Lanka’s 43 large towns outside of Colombo attracted by lower than local high street prices.

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• EXPAND TO RELATED BUSINESSES WHEN YOU HIT A DEAD-END

“I was financially disciplined from day one and I realized the market isn’t growing fast enough for me. So I thought that, instead of throwing money on billboards and hiring more people, I should start an army of e-commerce ventures,” Herath confides. Founding of Kapruka Global Shop followed in 2013, a venture that allowed Sri Lankan consumers to place orders for products available at major US virtual stores like Amazon.com, ebay.com or bestbuy.com.

Kapruka quotes a price inclusive of shipping, import taxes & levies and a service fee for delivery of products to the customer’s home. Last year, Kapruka Global Shop sales topped Rs400 million. However, Kapruka’s net income from this is approximately five percent or around Rs20 million. So far, Global shop hasn’t generated the kind of revenue Herath anticipated, however it has contributed towards gaining e-commerce scale in a market where profitable growth was limited. Hearth admires Chinese e-commerce giant Alibaba’s success but is not following that retail strategy here. He is also selective about which aspects of US giant Amazon.com’s strategy are relevant here. Kapruka.com has differentiated itself from other virtual stores by not feverishly competing on price, or offering discounts that chomp away at its own margins.

He thinks the Amazon.com like monopoly model is not something he is aiming to replicate. He admires what he describes as inclusive e-commerce in Germany and many other European countries where no single player has inventory great enough to dominate. In emerging markets, a successful e-commerce company will have far greater impact than delivering keen prices and convenience. Because large e-commerce players like Kapruka are making determined investments to leapfrog the infrastructure shortfall in the market, the importance of e-commerce will stretch beyond these individual firms and into the wider economy.

First, where payment infrastructure is weak, e-commerce firms have to address this if they want people to transact. Most Kapruka sales are paid for at delivery in cash. Second is the impact of e-commerce on retail. Importers and producers have a far greater reach by partnering with e-commerce firms’ established marketplaces. This is called the long tail strategy and Kapruka amplifies this success. However, instead of relying on a marketplace for inventory; it procures or manufactures its own to maximize margins. Low value products ignored by other virtual stores contribute massively towards the topline and profitability.

Third is the role in building and encouraging investment in delivery infrastructure. Herath’s third venture aims to solve e-commerce delivery nightmares of not just Kapruka and Global Shop, but other players wiling to use the service. “I thought, let me not create a waterfall, but many streams that feed one river,” he describes the strategy of moving to adjacent areas with innovative business models. In 2016, Herath stepped aside as Kapruka’s Chief Executive but continues to overlook the business as its Chairman.

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Some of the solutions e-commerce companies are devising, like the large warehousing facility Kapruka is in the advanced stages of planning, are straightforward for achieving scale  related cost advantages. Others like the distribution venture called Grasshoppers can disrupt its own business.

“The biggest challenge for e-commerce growth is delivery. They have inventory, a website and staff, but they can’t manage proper island-wide delivery.” Herath says Grasshoppers is not about helping deliver packages to Rajagriya or Dehiwala, but it’s about delivering to Puttlam.

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• ASSET-LIGHT TO ENSURE PROFITABILITY

Grasshoppers is ingeniously simple as it is potentially disruptive in its ability to transform how products are delivered to people far outside the usual distribution channels that existing distribution companies serve.

It also counterbalances Dulith Herath’s Kapruka’s asset heavy strategy of owning most stock listed for sale with an asset light venture managing disparate distribution on a cloud based system. It’s a hub and spoke type distribution model. Grasshoppers links 26 regional hubs with a trunk route operated by Kapruka vehicles.

The 26 regional center leaders called ‘Grasshopper bosses’ have been handpicked for their experience and success as entrepreneurs. They recruit freelancers who do last mile delivery on motorcycles. Hub operators receive 90% of the distribution charged on any Grasshoppers order. “It is a network run by entrepreneurs,” says Herath, “it is entirely app based and we grant access to the agents and their riders. We don’t remunerate the riders or the agents. The business is extremely lean so you cannot compete with this model.”

Grasshoppers will be a pan Sri Lanka last mile logistics service provider when fully operational, but with few employees, trucks or motorcycles. The system is paperless and goods are tracked using barcodes. Herath’s optimism about Grasshoppers comes from his experience with “Kapruka’s own loss-making delivery model,” he says. Unlike for Kapruka.com, Herath and Grasshoppers’ other backers’ have a global vision for the business due to the internet’s rapid spread in Asia and Africa which will allow millions of people to buy stuff online.

In all of these countries, delivery is a logistical nightmare. The expectation is that Grasshoppers learning in Sri Lanka can be quickly transferred to other Asian and African countries. Because the technology is cloud based, it can be deployed quickly and managed from Sri Lanka. Early success excites Herath who is Grasshoppers’ Chief Executive.

“You won’t believe how many orders we deliver to Puttlam,” he claims. “Almost 30 a day.” Grasshoppers’ success is due to its customer list including Kapruka.com and competitors like mydeal.lk and kaymu. lk. Since the Grasshopper hubs and their freelance distributors invest in the logistics infrastructure, Herath is determined to add value to the partnership. Already customers order Kapruka Global Shop goods from a Grasshopper agent and it has recently established them as pickup points for FedEx and UPS packages.

Since global couriers didn’t pick up packages from areas outside the main cities, their customers had to send the packages to a main city for it to be picked up. Indian impact investment fund Aavishkaar’s South-South and Southeast Asia focused Aavishkaar Frontier Fund invested in Grasshoppers at a valuation of Rs1 billion recently. A Non-Disclosure Agreement prevents Herath from revealing more details about the investment.

For Aavishkaar, a venture capital fund investing in start-ups that are impactful in poor or disadvantaged regions in India, South Asia and Southeast Asia, Grasshoppers was the second such investment following its backing of Connect India which has a business model identical to that of Grasshoppers. Kapruka and its associated businesses have identified a market opportunity far wider than Sri Lankan e-commerce and a competitive edge keenness for price and convenience that digital commerce offers in developed markets.

Dulith Herath is building a business encompassing supply chain expertise, payments, and in the process addressing a pain point of e-commerce retailers across the country. Kapruka’s unwillingness to be constrained by perceptions of what business it is in: by entering unexpected and significant adjacent markets, new asset-light growth model and focus on profitability are its greatest strengths.

Where others worry about being over diversified, Kapruka has the culture of a 15-year-old start-up. It is in land-grab mode, like everyone else in e-commerce, but the opportunities it’s eyeing are not the same as everyone else is.

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