Quick commerce in superfast lane: Decoding the biz of 10-minute deliveries

The concept is rapidly coming of age but it's unclear still whether it's a boom or bubble

Quick commerce, or the business of delivering essentials in time frames of 10 to 20 minutes, has set the start-up world abuzz. The idea has come of age only in the past year-and-a-half as Covid-19 drove up digital adoption. Although a couple of quarters late to the party, Indian start-ups like Flipkart, Ola, Blinkit, BigBasket and Zepto joined the bandwagon in the past few months. Meanwhile, early movers like Swiggy and Dunzo have ramped up their operations in the quick commerce space.
 

“The players doing quick del­i­veries in the US and Europe pla­yed a part in convincing us to ex­periment with the idea,” said Al­binder Dhindsa, founder of gro­cery delivery start-up Blinkit (Grofers, until recently). “The brand identity had to be redefined to communicate the speed of our service and the fact that we are beyond just groceries.”

While Blinkit raised $100 million from Zomato in July, and is re­p­ortedly looking to raise ano­ther $500 million from the listed foodtech company, foodtech unicorn Swiggy has committed an investment of $700 million for its quick delivery service, Instamart. 

Last month, Zepto hit the head­lines as its teenage-Stanford-dropout founders raised $60 million at a $225 million valuation. On Monday, the company had doubled its valuation to $570 million in 45 days and raised another funding round of $100 million.

The question that arises: What is attracting first-time en­trepreneurs, seasoned founders and VCs alike to faster deliveries when slower versions over the last 10 years have not yielded sustainable business models?

“The first thing to understand is that the urban Indian consumer’s wallet today has three parts: 25 per cent for monthly stock-up of groceries that is bought in a maximum of two instalments; 20 per cent is discovery-led (a purchase arrived at by searching for the right product such as fashion); and 55 per cent falls in the need-something today,” said a top executive at a food delivery unicorn requesting anonymity.

This 55 per cent bucket has a large number of components that can range from chocolates, bakery, fruit and fresh vegetables, ready-to-eat foodstuff to even first aid. And the quick commerce folks have figured out that a selection of 2,000-3,000 stock keeping units (SKUs) are enough to cater to most consumers’ requirements.

Quick commerce does not seek to emulate a BigBazaar or Walmart store. It just wants to be the biggest kirana store in an urban colony via the dark store model. These are situated near apartment complexes and hold the requisite SKUs. A dark store typically caters to a radius of 2 km and the likes of Dunzo, Swiggy Instamart, Blinkit and Zepto currently have 20-30 such micro-fulfilment centres in the top 10 cities where their 10-20-minute delivery services are operational.

“It is a very fine balance bet­ween the location of these warehouses, assortment of products, and getting enough demand density,” said Kabeer Biswas, CEO and co-founder of Dunzo. “We believe the assortment we carry has to be of a really high turnover ratio (the ratio between the cost of goods sold divided by the average stock level), and is most likely to be distinct geography by geography. This means Hauz Khas and Lajpat will have a very different selection compared to each other, as will Powai and Lower Parel.”

Once such a dark store hits a frequency of more than 2,000 or­ders per day, he added, the av­e­rage order value (AOV) of purc­hases is Rs 350-400, close to that of a local convenience store.

This means that the unit economics would depend on the fact that there is a mix of perishables and non-perishables in such transactions, and not just gr­o­ceries, which can bump up gr­oss margins. Grocery retail has take rates of 5-8 per cent — which is why online grocery ser­v­ices have to club many orders and deliver a couple of hours later or next day to save delivery costs.

“If you look at a 15-17 per cent gross margin on a Rs 400 of AOV, that is a revenue of about Rs 70. Now, from a delivery cost perspective, the unit economics of such an order can be made to work in a radius of around 2 km from the dark store, which means a delivery time of 20 minutes. But if you are hung on delivering in 10 minutes, you are bound to hit a ceiling somewhere,” Biswas explained.

“It takes a delivery rider 2-2.5 minutes to reach the store, pick up the package and get back on the bike. On Indian roads, it is nor­mal to assume that it would take 5-6 minutes to cover one ki­l­o­metre. So, 2-3 km in 20 minut­es is a good bet considering that the deliveries are to the gate of an apartment complex and not at the doorstep,” said the e-commerce executive quoted earlier.

Although the quick commer­ce business model looks enticing, there are three major heads of investments: setting up a dark store, putting a large delivery fl­eet on ground and, most importantly, acquiring customers thr­ough discounts and vouchers.

Most companies in quick commerce have started this service only in the top five metros where each of them have around 20 dark stores now and about 40 later. In the next five cities, they are treading cautiously by setting up 5-10 dark stores first and expanding their operations in the next couple of years. Each of these dark stores may cost Rs 40-60 lakh depending on which company you ask.

“Today, we have 60 such warehouses and plan to reach around 500 in the next 24 months. That would require Rs 250-300 crore, which is not a lot of money for setting them up,” said Biswas of Dunzo.

“But you need a lot of money to get a dark store from laun­ch to profitability. That would require another Rs 300-350 crore for inventory, delivery, wastage. That means it would take roug­hly $100 million (Rs 750 crore) to launch and make 500 fulfilm­ent centres profitable. Then co­mes user acquisition for which we would need around $150 mi­llion (Rs 1,125 crore). So, we would invest at least $250 million (Rs 1,875 crore) in total,” he added.

Interestingly, $250 million is the exact funding amount that Dunzo was reportedly in talks with Reliance Jio to raise in October. The company did not comment on the matter.

Siddarth Pai, managing partner of early stage VC firm 3one4 Capital, said: “This business model requires large-scale investments in dark stores, maintaining inventory levels and data. There is no customer loyalty and product differentiation to begin with.”

For this reason, investors are not keen on betting on new start-ups doing quick deliveries. How­ever, the capital going into quick commerce companies is expected to have a positive impact on ot­her segments. “Areas like dro­nes for quick delivery, automated dark stores, electric vans will benefit from the capital going into quick commerce,” said Pai.

Aditya Somani, a former vice president executive at Premji In­vest and an angel investor, is co­n­cerned about the larger impact. “In this model, a rider can make only one delivery at a time, whi­ch means more carbon emissi­ons. The speed of deliveries cou­ld lead to more accidents. Any investor who takes ESG (environmental, social, and corporate governance) goals seriously can’t put their money here,” he said.

“All said and done, the neighbourhood kirana in most Indian cities can always send its staff and club more orders together to deliver in a more cost-efficient way than a hyperlocal delivery company. Therefore, quick commerce companies are fighting a game of capital and not efficiency.” he pointed out.