Quick Commerce
Aadit Palicha - the 22-year-old founder of Zepto, recently suggested that they could be a Dmart scale company within the next 2 to 3 years.
Quick commerce and 10-minute delivery actually started out as a fad during COVID, and experts believed that it would fade away once things opened up, similar to what happened to the Ed Tech sector. But they were wrong - Quick commerce is going nowhere but upwards, and it is now even threatening giants like Flipkart and Amazon.
In fact, quick commerce penetration in India was already among one of the highest in the world by 2022 - While its just 3% in Europe, 7% in China, India was way ahead at 13%. Zepto alone has increased its Monthly Active Users from 1.8 Million in 2022, to 4 Million in 2023 - adding 2.2 Million users in a single year, and both Blinkit and Zepto have hit over 1 billion dollars in gross annual sales run rate.
In fact, the impact has been so monumental that Quick Commerce platforms like Zepto, Blilnkit, and Instamart, are now contributing between 30 to 50% of the e-commerce sales of FMCG companies.
The head of the domestic market of KRBL, the brand that sells India Gate rice, says that they are witnessing an annualized growth of 1500% in sales on these quick commerce platforms, while in Kirana stores it it just 10%.
Now you might be wondering, how are these companies able to deliver goods to your home in just 10 minutes, how are they ever going to make a profit with a business model that seems inherently flawed, and why are giants like Flipkart and Reliance so eager to get onto the Quick Commerce train?
To understand this, you first have to understand how the business model of Quick Commerce really works.
The arena is currently dominated by 3 major players - The 3rd biggest player with a 25% market share is Zepto
the poster boy of Quick Commerce in India. Founded by 2 teenagers who dropped out from Stanford, Zepto has left behind strong players like Dunzo and BigBasket, even though it began operations much later than t hem in April 2021.
On the 2nd number is Swiggy’s Instamart - as the name suggests, it was launched by Swiggy in August 2020, and it has been able to capture 28% of the market so far by tapping into Swiggy’s existing customer base.
And finally, the leader of the table is Blinkit. Blinkit initially started in 2013 as Grofers and had a business model similar to Big Basket - They provided slotted deliveries, within a few hours or on the next day. But in 2021, Grofers made a pivot to under 15 minutes delivery, and rebranded itself to Blinkit. Then in 2022, it was acquired by Zomato for almost 4500 crore rupees in an all-stock deal. Blinkit has a market share of 35%. At the bottom of the table is BBNow, which was bought by Tata, which has a market share of 9%. Until recently, there was also Reliance-backed Dunzo but it has been struggling and scaling back recently.
Now, all of these Quick commerce companies work on a similar business model which centers around dark stores. See, the only way to deliver items within 10 minutes of you placing an order is by having those items stored very close to you. And this is where dark stores come in. These are mini stores that are roughly 3000 sq ft in size, and they are accessible only to the employees of the store - not even to their delivery agents.
90 to 95% of a customer’s daily needs basket consists of the same 1500 SKUs. SKU is short for Stock Keeping Unit, or simply the number of products in layman's language. These stores are densely stacked to ensure they can store all these 1500 SKUs and more - So they have everything that a person might need at their home. And since they do not need to be in front of customers, the stores are usually located in back allies or basements.
So think of dark stores as your regular departmental stores, except that only employees can access them and they are way less spacious and optimized for maximum space usage. These dark stores are strategically placed in different localities to minimize the difference between them and the customers, and each dark store usually serves a radius of about 2 to 4 kms around it.
So when you select your location on the Zepto app, it automatically selects the dark store that is nearest to your location and shows you the products available in that store. When you place an order, it is sent to that particular dark store. Each dark store has a fleet of delivery agents that are waiting in the store.
So when the dark store receives the order, it is packed as quickly as possible, picked up by a delivery agent right there, who immediately leaves for your house and arrives as soon as possible. Since the distance between the dark store and your home is so small, the driver is able to easily make it within a few minutes even if he drives at a modest speed of 15 to 20 kms per hour.
So this is the business model of quick commerce – Speed and convenience for items that are in high demand and have high rotation frequency. This is in contrast to how e-commerce companies like Amazon and Flipkart work - They have giant, multi-acre fulfillment centers that cater to several cities in a radius of hundreds of kilometers.
While having a single, giant center brings down costs, it obviously increases the time - The order is picked up from the fulfillment center, then sent to a smaller hub of your city, followed by the delivery center of your locality. Here, it is picked up by the delivery agent along with several other orders, and then he follows a route, delivering all the orders one by one.
And this factor of the number of deliveries completed by an agent per day or per hour is the single biggest pain point of Quick Commerce. To help you understand this better, let me simplify the unit economics of this Quick Commerce model. The central entity in the profit and loss equation is the dark store - Profitability of a quick commerce company depends on making individual dark stores profitable.
Let’s say a dark store receives an order of Rs. 300. Depending on the contents of the order, Zepto can have a margin of anywhere between 5% to 40%. Groceries have a higher profit margin of 18% to 40%, while FMCG products like oil or rice have a margin of 4% to 15%. So let’s say that this is an average order and the profit margin is about 20%.
That means the cost of the products is 80% of Rs. 300, or Rs. 240. So the margin left is 60 rupees. Now, out of this 60 rupees, you have to take out the fixed costs for the dark store as well, like salaries, electricity, and rent. For a dark store of Blinkit or Zepto, rent is almost nothing, because the revenue per square foot for dark stores is the highest for any commerce format.
Not only are these stores small in area, but recall that they are also located in back allies or basements, where rent is already very low. Then, on top of it, the revenue generated every day is very high - Zepto alone is doing 1 Billion dollars of annual sales run rate with just 330 dark stores - That would convert into roughly 1.8 crore rupees of revenue per dark store.
So the fixed costs for the dark stores are less than 10% of the revenue, and this covers everything including rent, electricity, and employee salaries. So 10% of 300 or another 30 rupees goes to fixed costs, and now the margin left is just Rs. 30. But it does not end here - Zepto pays Rs.
50 per delivery to the delivery agent, which means that they are essentially losing Rs. 20 per order. And then, there are corporate employees on their payroll, server costs, and taxes. In other words, the business is simply not profitable. Blinkit lost Rs. 1,078 crores in 2023, while Zepto lost Rs. 1,272 crore.
So does this mean that Quick Commerce will never be profitable? Well, not exactly. You see, these companies can be made profitable, and for that, they have 3 levers. Number 1 is by increasing the Average Order Value. Coming back to our example, if the order value is increased from Rs. 300 to Rs. 700, then the profit margin becomes Rs.
140, but the fixed costs and the delivery cost remain the same at Rs. 30 and Rs. 50 respectively, so the final profit per order turns out to be Rs. 60 per order. With 4 lakh orders a day, this can turn into 2.4 crore rupees in profit every single day, and if you increase the average order value even further, then the final profit percentage increases exponentially.
This is the lever that all these platforms are prioritizing right now - In 2022, the average order value was Rs. 553 for Blinkit, Rs. 400 for Zepto, and Rs. 500 for Instamart, but by 2023, this had increased to Rs.635 for Blinkit, about Rs. 500 for Zepto, and about Rs. 550 for Instamart. Now, you must be wondering, how are they increasing their average order value, right? Well, one way is by introducing a low-cart fee and a higher delivery fee for small orders.
The driver of sales continues to be the core categories, and to avoid the delivery-fee, customers end up adding items from adjacent categories. But this only goes too far - Blinkit, Zepto, and Instamart applies this small cart fee on orders below Rs. 99 only. So while this can uplift the minimum order value, it can definitely not thrust the average order value over Rs. 600 or 800.
So the strategy that they are employing instead is adding more categories to their offering - Initially, these Quick Commerce companies relied on the fact that 90 to 95% of a customer’s basket consists of the same 1500 SKUs, but they have been steadily adding more and more categories. For example, you can now easily buy beauty and makeup products on Blinkit and Instamart as well - Something they were not selling earlier.
Blinkit recently started delivering Playstation 5 in under 10 minutes on their app as well. So they have expanded their SKUs to over 6000 for now, as they continue to add newer categories - They are now planning to add fashion, electronics, and apparel as well. and this increase in the number of SKUs on the app, is driving a corresponding increase in the average order value as well, simply because now there are more products that a customer buy while placing an order.
This theory is confirmed by the increase in average order value for all these platforms from 2022 to 2023, coinciding with them adding more and more SKUs to their offering in the same time period - So it is clearly working as well. This, by the way, is also why quick commerce companies like Zepto are directly competing with the likes of Flipkart - Someone who earlier used to buy clothes from Flipkart or Makeup from Nykaa, would now directly purchase it from Zepto or Blinkit and get it in under 10 minutes
instead of 1 to 3 business days. They can increase profits even further by introducing their own brand labels for different items - For example, Zepto has launched its own meat brand by the name Relish, where they can have a 5% to 20% higher profit margin than selling meat from another brand like Licious.
So this is how these companies are using the first lever to increase profits, which is by increasing the average order value. The second lever that they can and they are utilizing is increasing the density of these stores. See, the time taken to deliver an order depends on the distance between the dark store and the customer.
If the maximum distance between a dark store and a customer is brought down to 2 kms from 4 kms, then a delivery agent could even double the number of deliveries that he can do per hour. Zepto, Blinkit, Instamart - all of them are planning to increase their dark store count by upto 40% quite soon, but these stores will be opened in the same cities - which will result in an increase in the density of their stores - Eventually, there might be no area in Mumbai where a Zepto dark store would be farther than 2 kilometers. But note here that this
lever only works in densely populated areas like metro and tier-1 cities, because otherwise, the number of orders per store would not be high enough, and a dark store needs at least 1500 orders per day to be profitable. And the third and final lever to profitability is advertising revenue. Getting millions of customers on their app means that these Quick Commerce companies can now charge companies to advertise on them.
If you are searching for chocolates on Blinkit, then it makes sense for Cadbury to advertise there and push Dairy Milk to you. Setting up and advertising platforms for brands costs almost nothing on this scale, and it results in ad revenue that is 95% to 99% pure profit - Zepto is now clocking hundreds of crores in advertising revenue every single year.
So this is how a handful of companies have managed to increase the value of the online grocery market from about 10,000 crores in 2019, to almost 1 Lakh 20 thousand crores in 2024. While Zepto expects to become profitable this year itself in 2024, Blinkit says it will achieve operational profitability by early 2025. Now the final question that you may be asking yourself now would be - who is winning this race? Well, I did a lot of research regarding this, and the results were quite surprising.
As I already said earlier, Blinkit is already the market leader with a market share of 35%, while Instamart and Zepto are almost neck to neck at 28% and 25% respectively. But while Blinkit certainly has more customers than Zepto, Zepto has been growing its daily active users much, much faster than any of its ompetitors.
After launching in mid-2021, they had managed to capture 13% of the market share in less than a year by March 2022, and then, in about 1 year, they managed to almost double this share to 25%. And what really blew my mind was how they are actually doing this. While you definitely have to give it to them for maximizing the operational efficiencies to make the logistics as seamless as possible, their expansion strategy also tells a lot.
When you look at the top 3, Zepto actually has a lower number of stores than others. But then, when you look at the number of cities where it is currently present, it is also much lower than others - They are present in just the top 10 cities of India. So what this means is that while Blinkit has a store density of about 17 stores per city, Instamart has about 18 stores per city, Zepto has a store density of 33 stores per city - that is almost 2 times more than its competitors. And recall that I explained earlier
how store density is a crucial factor in attaining profitability - So by having more stores per city, Zepto is able to considerably decrease its delivery times and increase its profits. This could be a major reason why Zepto is on track to achieve profitability much earlier than any of its competitors.
And this delivery speed has the added benefit of increasing customer satisfaction - A survey revealed that quick commerce users in India perceived Zepto to be the fastest delivery option available. So to me, it looks like Zepto is ahead of the curve, at least for now
