How ElasticRun has changed its business strategy to achieve profitability

The Pune-based unicorn, backed by investors such as SoftBank and Prosus, has moved its focus away from large national brands to regional-focused consumer brands in a bid to build volumes, its co-founder and chief executive Sandeep Deshmukh told Mint.

While the strategy shift has resulted in a slight drop in revenues in FY24 compared to the previous year, Deshmukh said the revamp has improved the company's margins (take rates) by three times and pushed it closer to profitability.

Working with multiple regional brands instead of a few national ones has primarily helped the company multiply its ‘take rates’, a key metric that shows how much money an e-commerce company is making from each transaction. 

During FY23, the company also pulled out of some key markets like Madhya Pradesh, Uttar Pradesh, and West Bengal, anticipating these regions to weigh on the firm’s overall profitability due to scaling challenges, the chief executive explained.

These regions typically offer low take rates, making it unprofitable to operate there, he said. “We took the conscious call to pull back and put our house back in order. We chose profitability over scale which brought about a slight dip in the top line last financial year," Deshmukh noted.

In FY23, ElasticRun logged an operational revenue of ₹4,755 crore while losses stood at ₹618 crore. The company is yet to file its FY24 numbers. 

Also Read: ElasticRun FY22 loss widens to ₹373 crore

Founded in 2016 by Sandeep Deshmukh, Shitiz Bansal and Saurabh Nigam, ElasticRun enables FMCG and grocery brands to reach the remotest parts of the country and supports them with larger scale and a wider audience.

It assists a host of clients including food, general merchandise and pharma companies to reach rural consumers through its nationwide network of 10 million stores. It also enables banking institutions to extend financial services to consumers beyond urban geographies.

The company had secured $330 million from SoftBank, Prosus and Goldman Sachs, among others, at a valuation of $1.5 billion, in February 2022. 

A “large chunk" of the capital raised still remains unused and the company has a runway of five years, Deshmukh told Mint.

Last week, HSBC, in a research note, halved ElasticRun’s valuation by 50% as part of its evaluation of Prosus’s portfolio. However, the note clarified that the valuation cut was applied on all portfolio companies whose latest funding round was more than six months old, to account for “recent correction" in several sectors.

Profit over growth

ElasticRun’s call to rework its business strategy comes at a time when startups across sectors have found the need to cut costs and focus on improving their bottom lines. 

With over $40 billion raised during the funding rush of 2021, India’s startup ecosystem has not only seen startups getting massively inflated valuations but also witnessed many of them burning cash way beyond their means.

An acute funding winter that has gripped the startup ecosystem in subsequent years has led many startup founders to realise that capital alone, without achieving any significant scale, can only take a business so far.

According to a Mumbai-based e-commerce analyst, ElasticRun’s quick strategy shift shows frugality, especially in a sector that has been marred by tough long-term growth.

“It’s prudent for companies to take a step back and evaluate strategy even though they have raised sufficient capital. It’s particularly commendable for a B2B e-commerce company, especially considering how several other players are struggling," the analyst said, asking not to be named.

Betting on rural consumption

Non-urban regions hold significant untapped potential for digitisation, according to Shubham Singh, an analyst at market research firm Counterpoint. 

“Although commercialisation is still limited, increasing internet penetration and rising purchasing power in these areas present substantial opportunities for growth," he added.

ElasticRun’s closest competitors include DST Global-backed Udaan and social commerce player DealShare. However, both these companies have suffered massive setbacks over the past few years.

Udaan has severely downsized its business since its revenue more than halved in FY23 compared to the previous year. Moreover, it had to raise $340 million in debt funding last year.

Similarly, Dealshare, which had been searching for an identity in social commerce for several years, finally decided to steer away from the group-buying model and become a retail online supermarket banking on offline stores, in early 2023. In FY23, the company's losses grew to ₹502 crore while gross merchandise value remained flat year-on-year.

Also Read: Rural demand is finally taking off. FMCG firms capitalize with strategic moves

Rural markets have been a significant concern for India’s FMCG companies for more than a year now. However, in the March 2024 quarter, the FMCG industry reported a 6.6% growth in value terms, driven by a 6.5% increase in volumes, according to data by consumer intelligence firm NielsenIQ.

“Solving for consumption beyond metro cities is difficult. Rural consumption is predictable and a large market, but organising it is a challenge," the e-commerce analyst quoted above said.

ElasticRun’s Deshmukh says it continues to work on keeping costs in control. “Our operational efficiencies have helped multiply revenue for the same amount of business in FY24. We kept costs steady and improved the take rate which has helped get us closer to profitability," Deshmukh added.

ElasticRun is looking to re-enter the Madhya Pradesh, Uttar Pradesh and West Bengal markets during the current financial year, but more tactfully this time, Deshmukh said.

“The plan is to re-enter those markets with the right assortment [of products] and higher margins. We have realised that cookie cutter strategies won’t work in some regions, so the idea is to bring about the regional flavour."