A Quick Take on Indian Quick Commerce

-Penned by Jeevan Joseph and Rajdeep Sil

With the imposition of several restrictions on movement due to the covid pandemic, a large section of consumers switched to online ordering of groceries and perishable items. Subsequently, the year 2021 saw the rise of delivery business models which focused heavily on ramping up the ‘convenience’ factor with promises of ultra-fast delivery. The time duration for these deliveries range from 2 hours to as low as 10 minutes, and are hence aptly referred to as quick commerce (Q-commerce).

Introduction

The numbers related to the quick commerce segment appear to show great promise for this sector. A World Economic Forum (WEF) report states that about 78% growth is expected in urban last-mile deliveries by 2030. More than 2 billion people currently buy goods online. Further, the e-grocery, same-day delivery and instant delivery segments show great promise with projected growth rates between 10 and 40%.

One of the major reasons for the adoption of quick commerce systems by online grocery delivery companies can be attributed to the need of these companies to innovate & differentiate themselves from their competition. Another reason could be due to changing purchasing behavior & preference of customers, who demand shorter delivery times and a varied basket of goods.

Growth Drivers

Some of the significant growth drivers for quick commerce are:

a) Increasing willingness & ability to pay premium for superior quality products and faster delivery. This will be more prevalent among the Gen Z – impulse purchasers.

b) Growing market for easy-to-cook foods, driven by convenient & hassle-free experience.

Quick Commerce is estimated to touch $0.3 billion in CY2021 & is expected to grow nearly 10-15x in the next 5 years to become a $5 billion market by 2025 according to a research report by Redseer.

The report also mentioned that the needs of about 20 million households can be serviced by quick commerce in India with an estimated addressable market size of nearly $50 billion.

Players

Companies like Blinkit (erstwhile Grofers), which are backed by giants like Softbank and Zomato, have repositioned themselves from a 10-minute grocery delivery company to delivering all feasible items within a 10-minute window. The company’s executives claim that its stint in the grocery segment has provided it with the invaluable insight that broad quick-commerce is infact a more lucrative space than its earlier category specific model. Its current annual Gross Merchandise Value (GMV) stands at $600 million, with around 4 million orders per month. GMV is defined as the worth of all the goods sold by firms like Blinkit.  The company plans to increase its GMV to $1 billion by March 2022. Currently Blinkit is present in 12 cities but plans to expand to 100 by the end of this financial year. Another industry incumbent, Dunzo averaged 2 million orders per month.

Blinkit accumulated revenue worth 176 crores and posted losses worth 637 crores as of March 2020. While its revenues touched 45 crores, Dunzo’s losses touched ₹770 crores in September 2021. One of the reasons for balance sheets like this is the heavy capital expenditure requirement to set up, plan and operate fulfillment centers. Quick commerce companies are therefore looking to partner with players in the logistics industry to support them in building capabilities in warehousing and last-mile delivery.

The table below provides some insight into the funding, valuation and promised delivery time of some prominent quick commerce companies.

*Valuation of Swiggy

Business Model

At a broad level, the quick commerce market operates in one of the following segments :

a) Third-party delivery platform : In this scenario, the companies deliver products (mainly grocery items) from third-party retail stores to the customers. Thus, companies operating under this model earn through commissions from these retail stores and through a delivery fee from the customers. Dunzo operates using this model.

b) Vertically integrated models : Companies following this model generally operate out of their dark stores. Operations of picking, packing & bagging are performed at these dark stores and ultimately dispatched to be delivered to the customers. Blinkit, Zepto, Swiggy Instamart are operating through this model. The prevalence of dark stores is rising and has a big role to play in the success of the q-commerce companies.

Dark Stores are hyper local warehouses, which has a highly automated & organized mechanism to perform the operations of picking, packing & bagging in the most optimized manner. These dark stores are created with an intention of servicing nearly a 5km radius. In fact, use of dark stores allows these companies to follow an inventory led wholesale approach as well as a hyper-local procurement strategy. The inventory led wholesale approach allows for catering to the high order fill rates & products with a higher shelf life.

These quick commerce companies also maintain a lesser number of SKU (Stock Keeping Unit) generally in the range of 1500-2500 to ensure quick & efficient handling of the products. To make sure that these dark stores are being used at their optimum potential, it is important to perform location engineering to understand the consumer behaviour in that area. This would give crucial information regarding the order density of that area, as well as the purchase frequency.

10 Minute Delivery

As soon as the order is received, the picking, packing & bagging of all the products in the order is completed within 50 – 80 seconds, courtesy the organized planning of the dark store. The completed order is then immediately handed over to the delivery partner

With the dark stores catering to a very localized area, it is found that a delivery partner has to travel on an average 2 – 3 kilometer per order. This ensures that it doesn’t take more than 6 – 7 minute to deliver the order. This system ensures delivery within the stipulated deadline of 10 minutes.

Unit Economics

At a broad level, the unit economics of quick commerce companies can be modelled as :

Principal revenue source:Product sales
Plus:Delivery fees
Plus:Courier tips
Minus:Product costs
Equals:Gross Margin
MinusOperating associate costs
Equals:Contribution Margin

As per Kabeer Biswas, CEO & Co-founder, Dunzo “On an order basis, we don’t lose money, gross margins are positive, and in Bengaluru, our biggest market, we are breakeven on an EBITDA basis.

Zepto did not reveal any financial numbers. However as per Adit Palicha, CEO & Co-founder, Zepto, the AOV (Average Order Value) of grocery is generally 20% higher than that of the food delivery business.

If we observe Zomato’s AOV it stands at around ₹408, thus the AOV for a quick commerce company can be around ₹490. Further, with ₹25-₹30 being the industry standard for delivery costs, it can be very well understood that the quick commerce companies are also operating on thin margins. With players like Zepto offering to give free delivery, the unit economics does not seem to be in a good shape.

Performance Metrics

Since Q-commerce is a form of E-commerce itself, the metrics to measure the success of Q-commerce remain quite similar to that of E-commerce. Here is a list of the significant metrics which would be of importance for quick commerce.

a) Gross Merchandise Value (GMV): Measures the total value of sales over a certain period of time. It is a good metric to measure how much you are growing, but does not tell whether any profit is made or not.

b) Average Picking Packing & Bagging Time: This metric can be used to understand the efficiency with which the operations within the dark store are taking place & could also indicate the need to optimise.

c) Fill Rate: Measures the percentage of customer demand that is met by immediate stock inventory.

Along with the above-mentioned metrics, metrics such as sales conversion rate, customer lifetime value, customer acquisition cost, average order value and many more.

Implications

a) For delivery partners: The delivery partners are one of the most important stakeholders for the Q-commerce business. However there has been a lot of hue & cry over the working conditions in which they are working to deliver the orders in such short times.

An interesting take by Mr. TN Hari, Head-HR, Bigbasket : “Let’s not raise an outcry and say delivery boys are exploited because what were these delivery boys doing before this? They were working on farms at subsistent wages.”

While it is true that the rise of q-commerce companies will definitely create employment opportunities for many, it is equally important to ensure that the safety & dignity are not compromised by these employers.

b) For the retail (kirana) stores: With the Q-commerce companies initially targeting metro cities, the kirana stores in these cities are likely to observe a waning customer footfall. However, kirana stores in the tier-2 & lower cities are not likely to face any competition now or in the near future.

However, the Q-commerce companies can also partner with these stores, and explore the possibility of adopting a hybrid model of operating out of the kirana stores in combination with the dark stores model. For example, Dunzo has partnered with grocery stores in addition to its plans to open micro-fulfillment centers.

Currenc-I’s take on the Sustainability of Q-commerce

The burning question at this juncture is whether or not Q-commerce can sustain itself in the long run.

Research conducted by Coresight helps us understand some of the important factors which consumers look for while choosing a rapid delivery surface. It can be seen that consumers looking for fastest delivery as an important factor is just 40%, while people preferring low or no delivery fee is 60%. This shows that people would rather wait a little longer for their delivery than pay delivery charges. It seems quite obvious that going forward, these Q-commerce firms will definitely charge higher delivery rates to remain competitive. This puts a serious question mark on these firms’ intention of monetizing customers’ ‘over-convenience’, since people are willing to trade off some delivery speed for low or no delivery charges & competitive product pricing.

Further the number of consumers who have the acute need of groceries within a 10–15 minute window & who are willing to pay the premium for the same are not significant enough to make it sustainable. In addition to this, the chances of Q-commerce making a mark in the tier-2 & lower cities seem bleak as well, considering the comfort that the people of this cities enjoy with the kirana stores as well as unwillingness to pay for a service that is already considered to be a right by the consumers.

If we look at the unit economics, most Q-commerce firms have a negative contribution margin apart from Dunzo. Even then, Dunzo is not profitable and is burning good amounts of cash. Following the influx of new entrants, the Q-commerce space is looking unsustainably over supplied & profit challenged. While these companies claim that they will definitely become profitable in the future with more orders & greater basket size, the growing competition on top of the increasing labour & transportation costs could hinder profitability.

Therefore, a big question with this quick commerce model is whether these firms can maintain the pricing power and stand on their own once the VC (Venture Capitalist) money dries up.

References

Aishwarya | Ayush | Bhavya | Jayati | Shivika | Varshita

Apoorva | Jeevan | Priyank | Rajdeep | Sakshi | Shelly | Varnika

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