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Quick Commerce in India- A Deep Dive

Here’s a quirky sunday past time you could try- make a list of all the things that you surprisingly fail to do in under 15 minutes. We’ll go first- thinking of an appropriate Headline for our articles.

 

We’re back to discussing humankind’s most obsessive habit- i.e. redefining supply chains. 🤷‍♀️ Just when we thought that hiring a delivery agent to assemble our grocery list from local stores was convenience redefined back in 2020, here we are 2 years since, enjoying JUST-IN-TIME Inventory in households with 10-15 minutes grocery delivery solutions! We’re calling it Convenience-Ultramax-Pro.

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For the uninitiated, Quick Commerce Startups like Zepto and BlinkIt open dark stores (small delivery warehouses) in densely populated urban neighborhoods to service that area with grocery deliveries in under 10-15 minutes. But does it make ANY business sense? Can Startups really earn money by delivering in under 10-15 minutes? Doesn’t that require a complex well-knit infrastructure that comes with a huge cost? Let’s unwind this:

 

Who Started the Party?

By now we’re well versed with the pattern: A ground-breaking idea takes birth in one of the developed countries attracting massive investor attention --> Entrepreneurs in India quickly draw queue from the early success, reinvent the product for the Indian market and set shop here in India --> With all the hype of the Indian Startup Ecosystem, investors flock together, each grabbing a piece in a competing product. Take for eg:

  • Thrasio (e-commerce rollup Startup) in the USA, followed by GlobalBees and MensaBrands in India; and

  • Klarna (BNPL Startup) in Europe, followed by LazyPay, Paytm and Simpl, among many others.

So Quick Commerce is basically the next big trend that first caught fire in Europe and Indian entrepreneurs are simply following suit. In the wake of the pandemic, the UK saw an influx of grocery delivery players, setting up dark stores to make express/ultra-rapid grocery deliveries to consumers who preferred keeping indoors. Their mission was clear: They had to establish a convenience benchmark that would alter the consumer behavior for good. So, if they could deliver groceries in as little as under 10 minutes, there would be no going back to stepping out for groceries, pandemic or no pandemic. By the end of 2020, with signs of early success, a host of such players like Gorillas, Getir, Dija and Weezy pocketed huge fundings in Europe and MENA.

With so much hype and investor attention, a new battleground was made, and the experts christened it as Quick Commerce or Q-Commerce.

 

MAKING OF THE INDIAN BATTLEGROUND

We’ll give them one for it- The Indian ecosystem is at least getting faster in replicating trends from the West. By the summer of 2021, the c-suite of some of the existing last-mile delivery players in India had started running the numbers on Q-commerce. Zepto also took birth in Apr’21 and started building upon this idea in stealth. In Aug’21 after raising $100Mn funding from Zomato, Grofers finally inaugurated the 10-min delivery scheme, inviting massive hue and cry on social media over driver safety. Here’s a tweet that well summarizes the public’s concern and the industry’s response to the allegations:

Note: We've purposely hidden the identity of the creator of this post for the sake of privacy


Quite expectedly, and this is not a poor joke, the Quick Commerce Space heated up wayyy too Quickly. Count all the last-mile delivery Startups that are there in India- Literally all of them got into the Q-commerce space by the end of Mar’22. Here’s a timeline to give you the gist:

With a combined investment of $1.5Bn (as far as we could count) and 6-7 big players now fighting tooth and nail to be the first to get to your neighborhood, no wonder this space is catching fire. 🔥

 

HOW BIG IS THE OPPORTUNITY?

Let's do some math

  1. The high-density areas of Tier-I cities have appx. 20K to 50K households. So let's take an avg of 35,000 households in 1 neighborhood for the calculation.

  2. UK's Q-Commerce Startups have been able to capture 13% of the addressable market in 1 and a half years. Let's assume the same penetration level is achieved by the Indian players.

  3. Some early data suggest Average Order Value (AOV) of ₹ 400-500 and 3-4 orders per month by each user. Let's take an avg of ₹450 per order and 3 orders per month per household in the neighborhood.

If you multiply all of the above, we get an annualized GMV of ₹7.35 Crore per dark store.

Now if we take Dunzo's target of 200 Dark stores by end of December, it can bring an annualized GMV of appx. $200Mn, which is PRETTY GOOD!

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Of course, there's a long list of ifs and buts to the above assumptions but you get the gist, right?


blinkit's numbers in comparison

Zomato reported BlinkIt's numbers as of May'22 which revealed even better results:

Number of customers serviced per dark store

5,200+

AOV

₹509

No. of orders per month per user

3.5

Annualized GMV per Dark Store

₹11.38 Crore


And What do the experts say?

As per RedSeer’s analysis, India’s Food and Grocery segment is expected to reach a total market size of $790Bn by 2024. Within this space, the Quick Commerce segment has a total market opportunity of $45 Bn and is expected to grow by a whopping 79% CAGR till 2025.

 

Do we have winners yet?

Bobble AI analyzed data from 50 million smartphone users who use the Bobble keyboard. Their report released in May’22 suggests the following:

-Zepto’s open rate was averaging at 63% in the Jan-Mar’22 qtr, much ahead of Bigbasket, BlinkIt and Dunzo- deepest pocket first?

-In terms of time spent by users on delivery apps, Dunzo topped the list- not completely sure whether this is a good sign.

Other than this, it’s really tough to point out a clear winner since the race seems to have just started. FY 22-23’s results will be a good reference point for drawing comparison.

 

What can pull this business down?

THE COSTING

The cost of operating in high-density areas of Tier-I cities will be extremely high. You’ll rarely find a new Kirana store opening in a posh neighborhood, and you’ll often find shops frequently shutting down in a posh neighborhood, both for the same reason- high fixed costs. This is therefore inherently a high cash-burn model to begin with.

What’s more, every dark store will have to be sufficiently stocked up, making this a capital-intensive business as well. This probably explains why Swiggy is pegging $700Mn (₹53,900 Crore) for this project. 😮

How fast they are able to increase order frequency in each neighborhood will be their real test of time. We may see a lot of dark stores opening and closing much too often.


post edits: As reported by Entrackr on 11th Nov'22, Dunzo shut down 25-30% of its dark stores in Delhi NCR and Hyderabad to "drive operational efficiencies and optimize costs".


THE MARKET SIZE

We in India have not done a good job of estimating the market size. We have traditionally overestimated the market (opportunity)...

--Narayan Murthy, founder of Infosys, in his address at the India Global Innovation Connect held in June’22


Beyond the densely populated cum mid-and-high income neighborhoods Q-commerce players will hardly find it worthwhile to set shop. Both the AOV and order frequency will be low, making it more challenging to cover the fixed costs. Moreover, in such areas the sensitivity to price will also be higher, causing the margins to contract further and making it tougher for the consumers to stick. So, scaling beyond the top 30-50Mn households may not even be a feasible possibility. The model can earn money but probably never at a scale as the VCs are dreaming of. 🤕


THE COMPETITION

The food and grocery segment is extremely overcrowded. The Quick Commerce solution is sandwiched between the now established, traditional online grocers offering 1 hour- 24 hours turnaround time and the large grocery chains (Modern Trade) who have been around for decades now. To add to this is the unorganized traditional retail segment- the local kiranas and sabzi mandis that still own a whopping 95% of the industry. Now on top of this imagine having 2 or more competing Q-commerce players in the same neighborhood!

All of this basically means no economic rent. This will be a game of practicing relentless operational efficiency with no expectation of any extra profit.

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THE PUBLIC OPINION

The growing public concern for the safety of the delivery agents in a Quick Commerce framework is a looming threat for the players. While we believe that the larger public opinion on the subject is premature, the Startups may still have to tweak their models if the lawmakers take this seriously. A recent tweet by a parliamentarian captures the essence:

Can this balloon up?

-Q-commerce Startups in the USA and Europe like Gorillas for example have tweaked their 10-minutes promise to Within Minutes following an increased scrutiny by the lawmakers.

-A New York City Council member also introduced a bill to prohibit grocery apps from advertising 15-minute delivery.

 

The Silver lining

THEY'RE DOING THE HOMEWORK

The Q-commerce players have started off on the right footing by being selective of where they open shop and whom they cater to.

  • Currently, they’re setting up in high density areas of tier 1 cities, catering to mid-high-income households, living within a 3 km radius from the dark store.

  • While the population density will rule the order volumes, the avg. income of the neighborhood will impact the Average Order Value (AOV). So, if you already have a dark store in your neighborhood, congratulations you live in a highly populated area.

  • Higher order volumes and higher AOV will allow the units to break even faster.

  • Interesting fact: Amazon uses a self-developed AI system named Mechanical Sensei that simulates the orders passing through Amazon’s fulfilment centers (warehouses) and predicts where the next warehouse should be located. Q-commerce players may emulate.


AN OPPORTUNITY TO CREATE VALUE

Gartner’s research states that having the ultra-fast delivery option improves customer satisfaction by 18%. At the 10-15 minutes delivery segment, the Q-Commerce players are effectively altering consumer behavior.

Let’s admit it, we take longer than that to go buy a packet of noodles from the next door kirana (don’t forget to add the time you take to put on a pair of pants). Which means, Convenience-Ultramax-Pro is a valid product offering. Which also means, the Startups have to be relentless in their effort to fulfill the 10-15 minutes delivery promise with EVERY SINGLE delivery. No 2nd thoughts on this.

  • UK based Q-commerce Startup Gorillas for example promises free delivery for 3 months if they’re unable to deliver within 10 minutes.

  • BlinkIt for example delivers 100% in Q-commerce format and has been able to achieve a median delivery time of 12 minutes, per Zomato’s filings with the exchanges. 🤯


MATURE PRICING

If you’ve tried one of the Q-commerce apps, you must have noticed that surprisingly enough, they run very few discount schemes- only the kind that big grocery stores (Modern Trade) run. This is totally unlike the 2010s when nascent Startups like Swiggy and Zomato or Ola and Uber or Amazon and Flipkart would run deep discounts for months for the sake of customer acquisition. This again is a great first move as Convenience-Ultramax-Pro can now be developed as a perceived luxury.

  • For example: Data suggests, Deliveroo and UberEats in the UK have been able to train their customers to see their rapid service as a premium and something one has to pay more for. Experts believe that this framework can work well in this space, allowing the players to somewhat expand their otherwise paper-thin retail margins.

  • However, it will be worthwhile to observe whether all the industry players are able to collectively uphold such a business practice in the coming months.


THE GOLDEN OPPORTUNITY

Anyone who could crack the wicked supply chain for fruits and vegetables (F&V) would have a huge advantage. F&V constitutes a big chunk of quick commerce, and this is a tough category to crack and needs patience and commitment.

-- T.N. Hari, Head-HR of BigBasket in an editorial post in livemint


  • It turns out that the biggest ailment of the existing online grocers has been that they have been unable to convince the consumers to buy F&V from them.

  • Morgan Stanley’s 2016 and 2017 surveys show that the biggest reason consumers avoid online shopping of grocery is that they want to make sure they get fresh produce. As everybody knows, online grocery used to take a long time, which gave consumers the sense that their goods had expired. Express grocery delivery overcomes this concern of the consumer by giving them a sense of freshness of the grocery.

  • Therefore, Q-commerce players do have a golden opportunity to capture a space that has for long been plagued by failures.

  • Reality check: Bobble AI’s analysis revealed that the top searched products in quick grocery apps till date have been milk, cooking oil, sugar, curd, ice, bread, onion, cakes, atta and potato chips. Basically, not F&V yet.

 

WHAT DOES THE FUTURE LOOK LIKE?

One thing is certain- Just like every new supply chain solution eventually finds a way to fit into the overall value chain, Q-commerce is here to stay- probably for simply satisfying our Covid-induced urge for Convenience-Ultramax-Pro until we find something even better (whispering: drones). 🤞


However, we believe that the need for such an offering may not be lucrative enough to justify it to be a main focus of business. Q-commerce will therefore fit in much more appropriately as one of the supply chain solutions of a more comprehensive grocer, in our opinion.


What does it mean? It means one can reasonably expect takeover of these players by established companies in the future (Like Tata taking over BigBasket in 2021 and Reliance Retail buying 1/4th stake in Dunzo in the beginning of 2022). And if the money continues to tighten up, the takeovers may even start within the next 18 months, but then again that's our opinion.

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This article is a part of the May'22 edition of our Startup Newsletter. Here's the complete publication: