How Zerodha disrupted Indian Brokerage industry

Recently I came across the success story of Zerodha, published by Yourstory. The title honored Zerodha with rare profitable business unicorn in India. Zerodha is a common household name in stock trading segment. Though not considered as a Fintech company, it is effectively a company built on the principles of new age technology. After all, Zerdoha led a zero brokerage disruption in the trading industry. Today, Zerodha is the biggest trading platform in India and still growing strongly. Zerodha was a challenger trading platform until it achieved the rare Proficorn (a profitable startup with no external funding) title. Lets look at how Zerodha disrupted an established industry.

Early 2000s

In the first decade of this century, Indian Markets were majorly bullish, thanks to good economic performance. When bull run, stock markets attract retail investors in huge numbers. Retail participation in Indian markets was in low single digits. Developed markets like USA saw retail participation in local exchanges at about 50%. Stock brokers were on-boarding almost every individual they met. Most of such accounts were dormant, majorly due to poor understanding of markets or poor post on-boarding service. The stories of pooling Indian money in Indian markets and increasing penetration never saw light of the day. In total, brokerage industry saw an upper limit to its business expansion, despite many untapped opportunities. Story of Indian retail participation was slowly fading away.

Arrival of Zerodha

Nithin Kamath, a young trader, took up the challenge to revolutionize the brokerage industry. Nithin launched Zerodha, in 2009 from his Bangalore office. His concept was simple in terms of pricing. Flat 20 rs fee for same day trading. If you hold on to shares beyond one day, no charges were levied. This fee structure arrived at a time when minimum fee in the industry was Rs 35. Zerodha made heads turn, but it did not see the success as yet. Since the fees were small, It needed large audience to be profitable. In the first year, it saw just 3000 accounts registered. Zerodha had to scale the business.

Building of an economic moat

The term economic moat, popularized by Warren Buffett, refers to a business’s ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. Zerodha was building this economic moat by staying lean. Zerdoha built its ecosystem purely using technology. All their apps and systems were available across the board. To stay leaner, it cut out on frills like research reports and tips. Zerodha avoided the whole model of relationship managers and sub brokers. Most important of all, it stayed away from doing advertising.

Pursuant efforts started paying off. Initially being questioned for quality, people now started showing faith and opened accounts. Its clean interface helped user transact with ease. The word of mouth then spread its wings and took off. Nithin describes interface of its platform as clean as Google and that is what helped the pickup of users performing transaction. Zerodha was then all set to become the key player in the Indian brokerage industry.

Playing on Psychology of Zero brokerage

Zerodha had a clear advantage of zero brokerage USP. It would easily tempt people who would want to trade even for a small margin. Those users who saw a good pie of their profits being taken away in form of brokerage, saw a ray of hope. Millennial and small business traders who had time and risk appetite would now trade even for a thinner margin. Ultimately people started trading often. This worked very well in favor of Zerodha. Utilizing free time well is the same psychology advertised by Binomo. Robinhood, one of the prominent faces in US brokerage industry leveraged strategy followed by Zerodha and has reaped some good dividends.

How does Zerodha Make Money

Zerodha has built their business around the economies of scale. Out of their user base of 12 Lakh odd users, even if say 2 lakh users make daily trades, they make (2*20), 40 Lakhs a day in revenue. The more a user trades, better is their revenue and eventually become profitable. Assuming that cost of acquisition for a customer is 5000, user has to trade on daily basis roughly for a year. Post that all trades would be more or less contributing towards the bottom-line of company. Zerodha has also setup API library for trading, acting as source of income.

Zerodha makes money through various platforms like Kite, Sensibull, Smallcase. Image depicts offerings from Zerodha

Zerdoha as a platform did face the challenge of scale. During several peak days of high trade, their platforms stopped responding. This lead to massive losses. Taking this as a learning, Zerodha has planned to scale its infrastructure. Thus eventually becoming Zero obstacles (as their name suggests Zero – Rodha meaning zero obstacles)

Ultimate Goal

Nithin Kamath now aims to add 5 to 10 million users to his platform. Effectively, targeting increasing retail participation and reducing dependency on foreign capital. Zerodha may or may not be the torchbearer of future, but it definitely has opened avenue in the industry and leading many starups to reinvent the way business is done.

Also ReadWhy Fin-tech is becoming a lucrative space for Large Tech Corporations

References
https://economictimes.indiatimes.com/markets/stocks/news/burned-out-broker-got-rich-aiding-millennials-trade-for-free/articleshow/69248060.cms#:~:text=were%20always%20hassles.-,”,cost%20a%20maximum%2020%20rupees.&text=The%20closely%20held%20company%20has,an%20eventual%20initial%20public%20offering.
https://zerodha.com/
https://blog.finology.in/entrepreneurship/zerodha-success-story-nithin-kamath
https://yourstory.com/2020/06/zerodha-rare-profitable-bootstrapped-fintech-startup-turns-unicorn
https://www.moneycontrol.com/news/business/companies/the-zerodha-story-how-the-kamath-brothers-built-indias-largest-retail-broker-3403181.html
https://economictimes.indiatimes.com/markets/stocks/news/burned-out-broker-got-rich-aiding-millennials-trade-for-free/articleshow/69248060.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
https://www.investopedia.com/ask/answers/05/economicmoat.asp#:~:text=The%20term%20economic%20moat%2C%20popularized,market%20share%20from%20competing%20firms.

Can JioMart be the Robinhood for declining Kirana stores

Reliance Jio is becoming the great startup story of the Indian business arena. It had a blockbuster launch with mobile network segment. Though Jio Fibre is yet to pick up as much, there is a good scope of expansion. Reliance saw unprecedented interest in stake sale for Jio. This was on the backdrop of its substantial growth and soon to be launched – JioMart. JioMart had a big bang launch in 200 cities and is planning to revamp the way India does business.

Background Of Indian Retail

Before we jump to the business model and possible growth story of JioMart, let’s look at the Indian business scenario. In the Indian context, 70% of the business is in the retail space. This is highly governed by a supply chain, distributors, wholesalers, and retailers. This whole supply chain is inefficient and expensive. Future Group, Flipkart, and Amazon identified this as a possible business idea and introduced India to various ways of purchasing goods. These new mediums had better efficiency and a much lesser cost mechanism. In India, offering something at low cost, would provide significant business advantage, effectively high stickiness of consumers and slowly form an economic moat for the company.

With growth of Amazon and Flipkart, the retail market wasn’t growing substantially. Hence the market share saw a dynamic shift. The major loser was the Indian Kirana store (also know as Mom and pop stores). Not only was their business disrupted, but their whole supply chain suffered. Indian Kirana stores were left with little market share and big challengers in the form of aggregators.

The Scale Problem

Even if these Kirana stores wanted to go online and sell through e-commerce platforms, they faced a mega challenge. The way these aggregators are designed is that they favor the sellers with scale. If you sell 1000 Crore Rs worth in a year, your products get a lot of visibility, offers, low-cost structure, etc. A small Kirana store or say a tea merchant (who sells packaged tea of his brand), would have to pay substantial commission and delivery fee, thus leaving little or no scope for huge business. Small scale businesses had no means to catch the fast running train of e-Commerce.

The Yin and Yang philosophy

Taking an analogy from the Chinese Yin and Yang philosophy goes, there is always a bright side in the dark. The biggest problem that all e-Commerce aggregators today are facing is of the last-mile delivery. So much is the pain that Amazon has introduced a program called Amazon Flex, which would allow students and non-employed individuals to deliver goods to end customers.This program is still growing fast.

Jio mart realized that this is a great opportunity. Since the Kirana stores already have inventory and local presence, they could utilize the presence to reach the masses. They planned to become aggregators of the sinking business of mom and pop stores. The wholesalers and small retail shops would get an electronic order to fulfill. All they have to do is process these orders.

Sustainable Model for the Future

The obvious question is, will this work? If we look at the west, Instacart has implemented a similar model. Though they have two major differences, they deal with most major chains and their delivery boys do the delivery. During the 2020 Pandemic times, Instacart has seen exponential growth in its business. You may argue that this is a fad and may not sustain, but convenience is the pillar on which many industries rely.

JioMart has a presence through its Jio Mobile network. Jio can easily lure the customer base to its JioMart platform. As far as the service goes, it did an initial launch of service on commonly used Whatsapp. Though it has faced some challenges in establishing itself, it has received some good feedback in its pilot run.

Can Jio bring back Kirana stores in business?

Jio will have an advantage of scale at the aggregation level. For example, a Biscuit packet or Noodles, which would be sold in all Kirana stores, could be contracted at a much cheaper rate as compared to what the Individual Kirana store brings it down to. Effectively meaning, Jio could offer the shop owners to buy from its platform and then sell it to end-users. If shop owner buys from Jio, it will have a much cheaper rate and ease of managing inventory. Kirana stores will be digitized and also ordering their requirements online. For Jio, they need to ensure they form a strong network and supply chain which can process the scale.

All Rosy picture?

Kirana stores may completely lose the network of their existing chain and may become heavily dependent on the Jio network for their inventory. It may also be a case that Jio may establish its delivery centers similar to D-mart has in the future, which might hurt Kirana stores too. But all this is dependent on many factors which may or may not happen.

In the foreseeable future, Jiomart does bring in a ray of hope for the local shops. If this opportunity is well utilized, expect many other startups to tap the opportunity in a similar space.

Also Read – Curious case of Amazon Restaurant

References
https://www.deccanchronicle.com/technology/in-other-news/260520/kirana-stores-left-out-as-jiomart-launches-in-200-cities-without-them.html
https://www.livemint.com/industry/retail/jiomart-hits-pause-on-kirana-project-over-delivery-staff-crunch-11591724082242.html
https://www.livemint.com/companies/news/jiomart-tie-up-to-benefit-kiranas-hit-by-loss-of-market-share-11592551357399.html
Rise of InstaCart and grocery delivery – https://www.youtube.com/watch?v=WRc3USp1RAQ

Why Mega tech companies are foraying into Fintech

Google Amazon, facebook, Apple in Fintech

At the start of the decade 2011-20, we saw more and more companies foraying into the Fintech space. Most of these companies were new-age startups, which innovated a new way of doing traditional financial transactions. What surprised many, is when Mega tech companies like Google, Apple, Amazon started to foray into this fintech space. These big tech companies opted to partner with financial institutes to create new offerings. They started with a simple payment mechanism and thereafter have been adding to their offerings. Let’s look at why this collaboration was formed.

Background

In the last decade, we saw a global financial meltdown. Banking & Financial services Institutes (BFSI) companies were looking for an opportunity that would provide a much-needed boost. Steve Jobs in 2007 had launched a revolutionary concept of smartphones. These smartphones fast became the drivers of economic growth.

Continue reading Why Mega tech companies are foraying into Fintech

How Netflix could fix it’s India Strategy

How Netflix could fix its India Strategy

In the previous article, we discussed whether Netflix is a success in India or not. While it is too early to be definitive, Netflix landed in India in search of its next 100 million customers, Basis reports, Netflix has only acquired 11 Million customers in India, so far. Netflix being written off by most because of this reason.

India has always presented a great opportunity for any business since there has been enough target audience for most businesses. Netflix has had a decent start in India and could reach its target to acquire all of its 100 million customers in India itself. It will now depend on the course they take further, which will define if they grow exponentially or not. Let’s analyze and look at possible avenues for Netflix to acquire more customers.

Continue reading How Netflix could fix it’s India Strategy

Can Corona be opportunity in disguise for Digital India

Can corona pandemic act as a catalyzer for Digital India

With sudden lockdown in many countries, the Corona Virus has been successful in bringing economies down on their knees. Many businesses that depended heavily on human intervention have suddenly crippled. When Prime Minister of India, Mr. Narendra Modi declared lockdown, digital was seen as a ray of hope. In the Indian context, digital economy started to become the necessity of the hour. The question that now arises is that will Digital be accepted as a way of living or is this a temporary blip.

The picture for Digital Economy 2025 looks bright. For the answer question of current crisis, let’s look at some of the various segments where Digital has expanded its wings and also how it has worked during the Pandemic.

Continue reading Can Corona be opportunity in disguise for Digital India