Why startups are courting convenience stores from Mexico to Indonesia

Convenience stores, especially in emerging markets, represent a treasure trove of opportunities for startups - big tech even wants a slice.

Aug 25, 2022

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Preamble

Let’s get some definitions down first. In this article, convenience stores will refer to small, locally owned stores that sell daily necessities and a few small food items, which can be categorized as Fast Moving Consumer Goods (FMCG). These stores have different names around the world including bodega (USA), warung (Indonesia) or kirana (India). This article won’t talk about franchised supermarket chains or SMEs as a whole. It’ll only talk about convenience stores and why startups are dying to digitize them.

The opportunity

The sheer size, ubiquity, and longevity of the convenience store market are often overlooked. Today, it is estimated that the global convenience store is worth $900 billion, with a heavy footprint in densely populated emerging markets such as Southeast Asia.

These stores are often deeply engrained in the local community, with shop-owners knowing repeat customers by name and fostering a close relationship with them. That personalized relationship with customers is often what protects these stores from stiff competition. Customers are also loyal - in LATAM for example, 65% of groceries are purchased at convenience stores. In Indonesia, so-called warungs contribute a GDP 4 times higher than the country’s e-commerce channels.

Interestingly, the global convenience store market has been extremely resistant to the rise of e-commerce. Indeed, FMCG products have never really been conquered by e-commerce, as people prefer the accessibility, human connection, and overall ease of shopping at their local convenience store. Some tech-backed ventures aimed at somewhat disrupting the market such as Stockwell or Amazon Go have failed to live up to expectations.

On top of heeding the e-commerce menace, the global market value for convenience stores is set to increase in the following years, due to the inexorable rise of the middle class in emerging markets.

“McKinsey estimates that over 90 million Indonesians will join the ranks of Indonesia’s ‘consuming class’ by 2030. Digitialization will prove crucial for warungs to tap into this wider addressable market, which currently comprises 168 million people transacting $252 billion” - Source

Problems to be solved

Despite their prominence around the globe, a majority of convenience stores still function in a completely analog manner, wasting the store owner’s time and leading to “margin leakage” due to entangled supply chains. Those inefficiencies, combined with the financial weight of the global convenience store market, make for an indubitable startup opportunity.

“As one of the largest distribution channels, the flow of information among stakeholders within the traditional channel is still asymmetrical due to the opacity of the multilayered distribution process with many middlemen. This doesn’t allow warung owners to know the actual selling price of products they’d purchase, while, at the same time, brands can’t get the visibility of where their products are distributed.” - Source

A plethora of startups, from Mexico to Indonesia, have risen to the challenge (this will make for interesting international M&As once the startups try to expand beyond their local market). Here are the three problems startups are trying to solve for the sector:

Point of Sale (POS): Startups enable convenience store owners to accept new modes of payments, which is often a first step at getting them to digitize other parts of their business.
Inventory management and delivery logistics: Startups aim to facilitate store owners’ way of ordering, delivering, and keeping track of what they have in store.
Accounting/bookkeeping: Startups help store owners keep track of their finances more efficiently.

These 3 sectors constitute “phase 1” of digitizing convenience stores. However, the holy grail for startups operating in the space is the financial services part, whereby they intend to offer financial services, such as credit, to store owners. Many startups in the space base their monetization strategy on this move while heavily subsidizing growth during “phase 1” activities. Big tech also wants on the financial service part.

“But winning the warung sector offers the loss-making e-commerce giants a chance at a wider prize: providing financial services with higher profit margins, like microloans, to these small businesses. Replicated over the country’s tens of millions of small businesses, interest rates on loans could add up fast.” - Source

A good way to get a grip of how this sector functions and thinks is by visiting the websites of some of the biggest startups in the space, namely Ula (Indonesia), Chiper (Mexico) or MaxAB (Egypt) to name a few.

An additional monetizing strategy to look into is marketing - indeed, big FMCG brands spend a significant amount of time and resources for shop penetration, and enabling them to market on the same digital tools now used by shop owners represents a golden opportunity.

Overall, while some startups solve problems for convenience stores, others simply want to rely on convenience stores’ trust network and existing consumer base to expand their own product.

Big tech jumps in

As noted earlier, big e-commerce companies haven’t managed to displace the convenience store market, failing to provide a satisfactory alternative to the human connection and community importance offered by locally-owned convenience stores. After realizing that, e-commerce giants such as Amazon or Flipkart have radically changed their strategy to instead leverage the convenience store networks to boost their own operations. Programs such as Amazon’s “I have space” enable convenience store owners to act as “mini-warehouses”, expanding Amazon’s rural reach at almost no cost.

“Kirana stores are very useful as collection and return points by hyperlocal communities to ease last-mile delivery. This activation has provided additional income to kirana stores. Adapting to technology and digital requirements of the end consumers and suppliers is something that cannot be ignored if one wants to stay relevant and to thrive in this ecosystem,” Vasudevan Chinnathambi, co-founder of B2B platform for vegetables and fruit, Ninjacart

Other industries are eyeing convenience stores to expand their own distribution networks at a minimal cost. Indeed, some convenience store owners act as contact points for “agent banking”, which is popular in emerging markets, or even as local charging stations for EV vehicles. Some refer to this trend as “Karana as a Service Hopefuls” or KAASH, which engulfs all of the different industries attempting to leverage convenience stores’ hyper-proximity and community connection.

“For as long as mom and pop shops have existed, they have been faced with limited sourcing information, opaque pricing, and unstable cashflows. That’s where we believe technology can add the most value, not by replacing the human touch and the shops’ anchoring role in the community, but by empowering them to be more resilient and make better money.” - Tech in Asia

Pushback

The sales pitch doesn’t work on everyone. A significant chunk of convenience store owners resists new technology offered by startups, citing an incremental betterment of their processes for what they perceive as a fundamental shift in how they work. Furthermore, the digitalization of all payment inflows and outflows would make it near impossible for convenience store owners to skirt around taxes, something they can do with cash.

Traditional reluctance from SME owner: “I’m doing this business just to survive and don’t care about all that (digital tools),” one entrepreneur said. “I don’t think I can afford to pay some fee every month for recording something that I can write in a book,” another quipped. - TechCabal

Some convenience store owners also just don’t see the need to grow their business, instead viewing their shop as a sustenance business, operated by the longstanding relationships they have with their loyal clients and their traditional suppliers. The socio-economic status of convenience store owners also makes digitalization an uphill battle, given low rates of digital literacy.

Conclusion

The opportunity presented by convenience stores’ digitalization is exacerbated by two factors: the fact that they won’t be disrupted anytime soon, and the fact that a growing middle-class in emerging markets will inevitably increase transaction volumes. Many startups in the space are subsidizing their growth, hoping to gain the loyalty of these stores with inventory management products in hopes of selling them monetizable financial services down the line. Let’s hope the extreme competition in the sector makes those upcoming credit services competitive and fair to the store owners instead of trapping them in cycles of debt.

Convenience stores could become the bridge between the tech and the analog world, working as a middle ground between the efficiency humans want and the sense of community humans need. The fact that e-commerce giants have partnered instead of competed with these convenience stores demonstrates a realization that tech and legacy businesses can co-exist for the greater good.