Endless troubles: What is happening at quick commerce platform Dunzo?

Quick commerce player Dunzo is struggling not only with financial losses but also with keeping its operations afloat

India has the world's third-largest start-up ecosystem, and it is growing with each passing quarter, giving birth to new start-ups and aspiring unicorns. Despite this surge of promise, a significant portion of these unicorn or soon-to-be unicorn start-ups are losing money. Dunzo, a quick commerce start-up founded in India in July 2014, is one such example.

Surprisingly, Dunzo is struggling not only with financial losses but also with keeping its operations afloat. Among its formidable challenges are massive layoffs, delayed salaries, non-payment disputes with Facebook, and the closure of some of its dark stores. A dark store is a retail distribution centre that caters exclusively to online shopping.

 

Many are perplexed by Dunzo's ongoing struggles, especially given its impressive valuation of $757 million and the support of prestigious companies such as Reliance Retail, Google, Blacksoil India, and Blume Ventures.

Dunzo's endless troubles

Despite securing late-stage funding from Reliance Retail and Google, which had previously invested millions in the company, Dunzo ran into a series of problems in 2022.

In January 2022, Dunzo successfully raised $240 million in a round of funding led by Reliance Retail Ventures Limited.

Reliance Retail spent $200 million to acquire a 25.8 per cent stake in the Bengaluru-based firm on a fully diluted basis. This investment led to Dunzo's valuation increasing to $775 million in March 2021, up from $300 million previously.

Meanwhile, even after the substantial funding, Dunzo faced financial losses in FY22. The quick commerce firm reported a twofold increase in losses, reaching Rs 464 crore, while revenue from operations increased, reaching Rs 54.3 crore during the fiscal year that ended March 31, 2022.

By June 2022, Dunzo had incurred an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) loss of over Rs 176 crore, highlighting the start-up's financial difficulties.

Dunzo Daily, the company's core business, also suffered a significant financial strain, losing Rs 230 on each order delivered during the first half of 2022. These financial challenges posed significant challenges for the company.

In November 2022, Dunzo was in the process of closing 25-30 per cent of its dark stores in Delhi-NCR and other regions, according to reports.

This restructuring effort affected both permanent and contractual employees, indicating a difficult period for the company. However, a company spokesperson stated that they only closed a few stores in low-demand areas to improve efficiency and cut costs.

Dunzo in more trouble

Dunzo's difficulties continued further into 2023.

In April 2023, Dunzo reportedly laid off 30 per cent of its workforce, affecting nearly 300 people. The reason given was the need to cut costs in the midst of the "funding winter", which had been affecting other late-stage start-ups as well. 

Despite raising $75 million through convertible notes, Dunzo still faced financial troubles. The struggle to achieve financial stability persisted, forcing difficult decisions such as layoffs.

In July 2023, Dunzo's salary problems exacerbated the situation. The company decided to defer 50 per cent of certain employees' salaries in manager-level positions and above.

Additionally, the payment of salaries for June and July was delayed, causing concern among the workforce.

Previously, Dunzo had capped the June salary payment at Rs 75,000 and assured employees that any outstanding amounts would be paid on July 20.

In an internal communication, Dunzo informed its team members that the pending June and July salaries would now be paid on September 4, 2023, along with the August salary.

However, the situation remained uncertain, leaving employees concerned about their financial security.

Dunzo's legal trouble over unpaid dues

To make matters worse, Dunzo was sued by Facebook India Online Services Private Limited and Nilenso, a Bengaluru-based software consulting firm.

Moneycontrol reported on July 20, 2023, that the legal notice was for non-payment of dues.

According to sources, Dunzo had made partial payments to Facebook but owed the social media giant approximately Rs 1.5 crore for advertising services.

Adding to the complexities, Google, Dunzo's second-largest backer, issued a legal notice demanding the payment of unpaid dues.

India's quick commerce market

The challenges faced by Dunzo and other start-ups in the quick commerce space, such as Blinkit and Zepto, raise intriguing questions about the viability of the quick commerce model in the Indian start-up ecosystem.

While the quick commerce model appeared to be promising at first, it has run into roadblocks that have resulted in financial and operational difficulties for most businesses.

However, in certain contexts, the quick commerce model can be a good business model, which focuses on hyperlocal and on-demand delivery of goods and services.

It provides customers with convenience and speed, which are highly valued in today's fast-paced world. However, as with any business model, some challenges and considerations may make it unsuitable or difficult to sustain in certain situations. Warehousing and manpower are two critical factors that influence fast commerce start-ups' cost structure and profitability.

Challenges faced by quick commerce businesses

Quick commerce businesses face the challenge of maintaining strategically located warehouses or dark stores to store inventory and ensure timely deliveries.

The costs of establishing and operating these storage facilities and managing inventory can be quite high.

Furthermore, quick delivery companies rely heavily on delivery personnel to fulfill orders quickly, necessitating a large workforce or manpower.

Despite these efforts to provide quick and convenient services, the average customer is generally unwilling to pay more (premium) for faster delivery on online purchases. Instead, they prefer to shop in physical stores. As a result, compared to traditional online grocery and food delivery services, quick commerce businesses frequently struggle with narrow profit margins.