Quick commerce finds it footing amid funding winter, now needs to scale

The sector has fared well both on the fund raising front and on operational performance

While the funding winter has impacted startups across sectors, one area that was expected to take the biggest hit, but surprisingly managed to survive and thrive is the quick commerce segment.

As far as funding goes, the segment managed to garner sufficient investor interest. According to data from market intelligence platform Tracxn, the quick commerce sector raised $1.1 billion across three deals between January and November this year. This amount is close to the $1.3 billion it raised in four deals during the same period last year.

The second parameter is actual operations. Since Zomato is the only listed entity in the quick commerce space, a look at Blinkit's performance explains this aspect. In the second quarter of FY23, Blinkit’s gross order value (GOV) grew 26 per cent sequentially to Rs 1,482 crore while revenue was up 44 per cent QoQ. Adjusted EBITDA loss in quick commerce narrowed to Rs 259 crore from Rs 326 crore in the previous quarter (Q1FY23), leading to an adjusted EBITDA of -17.5 per cent of GOV in Q2FY23 (-27.8% in Q1FY23).

But more importantly the company said it has been able to use Blinkit to ramp up its Hyperpure services.

According to a recent report by Jefferies, Instamart grew 15x YoY in H1CY22, with a gross merchandise value (GMV) of $257 million.

The report added that the firm’s rival, Zomato-owned Blinkit, also grew at “an impressive pace” with a GMV of $270 million.

“Quick commerce is an attractive market. Before businesses achieve scale, they will have to prove that the model is profitable on a city level. The addressable market is very large for quick commerce and there is a lot of investor interest for this segment. But there is definitely an outlook of creating efficiency and reducing burn at the moment,” said Vinod Murali, Managing Partner at Alteria Capital.

However, experts believe this is a long-haul game and profitability will come as companies scale up their businesses.

“The three factors that help in the success of a quick commerce company are selection of the right micro market, right assortment selection and efficient logistics. Each micro market has its own set of nuances and so quick commerce firms, though moving along, needed time to understand these nuances and build offerings to cater to them,” said Anand Ramanathan, Partner, Deloitte.

“With better understanding, quick commerce companies have been able to close some unviable dark stores in recent times. The losses recorded are expected to reduce as we go forward,” he added.

Growth despite funding chill and muted demand

According to media reports, some quick commerce businesses, such as Reliance-backed Dunzo and e-commerce giant Flipkart’s quick commerce arm Flipkart Quick, have scaled down their dark stores in the past few months amid muted demand. But many said these were one-offs and more of a strategic decision than impact of funding.

“We do not really have any short-term requirements of capital at the moment and can sustain operations for quite a few years at this rate, while maintaining a healthy growth trajectory,” said Aadit Palicha, co-founder and CEO of Y Combinator-backed Zepto.

The firm, which raised $200 million in May this year, hasn't scaled down operations like some of its competitors.

“Many of our dark stores are now on the path to profitability. Day by day, we are seeing better unit economics because our supply chain execution is so good and we are launching dozens of dark stores every quarter,” said Palicha.

Food aggregator Swiggy’s quick commerce arm Instamart also claims to be sufficiently funded after the firm raised an enormous $700 million at the start of the year.

“We witnessed a 16-fold increase in orders between June 2021-June 2022 and continue to see strong growth month-on-month. We believe we have only scratched the surface of quick commerce grocery in India and there is plenty of headroom for us to grow and delight users,” said an Instamart Spokesperson.

According to a report by ICICI Securities, the Blinkit business reported strong growth in Q3 FY23. “Blinkit business performance surprised positively with 17.6 per cent QoQ improvement in the number of orders and 7.6 per cent QoQ improvement in average order value,” the report said.

Reliance-backed Dunzo, which raised $240 million this January, also claims its dark stores are turning profitable.

“In the last few months, our stores/micro-fulfilment centres that have completed six months of being online have turned profitable. As more centres turn profitable, we will take those profits and invest them back into the business leading to growth across other centres, which will turn profitable at a higher scale,” said a Dunzo spokesperson.

Profitability depends on scale

However, the quick commerce model is yet to prove it can be profitable at scale. In order to reduce burn, many businesses have put in place measures to drive revenue, such as miscellaneous charges and slowing down delivery times.

According to reports, both Dunzo and Zepto have begun charging Rs 3-7 per order as handling charges, depending on the location. They have also increased their threshold for free deliveries.

Experts believe that profitability of the quick commerce model depends on scale.

Murali of Alteria Capital, a venture debt firm that has made investments in Dunzo added that businesses need to improve their revenue while concurrently improving margins as well. “These can be improved by having a more efficient supply chain of goods, improving logistics and warehouse management, and by managing distribution channels better.”

Kannan Sitaram, Partner at Fireside Ventures says that this is a long-haul game. “The industry is still nascent and it will take quite some time to become profitable. It is a game of scale and therefore, investors are putting in money to generate that scale,” he said.

The path ahead

Going forward, there will be some consolidation among businesses. “This is a battle of attrition. Right now, there are four or five players in the market. Like the food aggregator market, which has come down to two major players, we might see some exits in quick commerce as well,” said Sitaram.

Murali also believes that we will see consolidation over time. “We will see an intersection of strategic incumbents with new age quick commerce players, and a sharper focus by businesses on unit economics and profitability. But it is going to take some time,” he said.

He added that whether this will take a few months or few quarters depends upon factors such as market conditions and execution capabilities of various businesses. “This is not a winner takes all market. There will be a few winners over time and those winners will be extremely valuable.”

“The customers have caught on to quick commerce and the rapid delivery commerce is definitely here to stay. The companies able to build a sustainable model will be able to reap benefits in the long term,” said Ramanathan of Deloitte.