Investors hate Quick Commerce, but love Zepto, why?

Between 2020 and 2022, the business world was all about three words: "Unicorn," "Start-ups," and "Funding." In those years, we saw a whopping 44 new unicorns in 2021 and 21 more in 2022. But 2023 arrived, and by August, not a single unicorn had made an appearance.

Then came Zepto, a grocery delivery company, and it became the first Unicorn of 2023. They secured a massive $200 million in fresh funds and were valued at a whopping $1.4 billion. 

This came as quite a shocker because most companies in the Quick Commerce industry were on their deathbed.
 

Quick commerce companies, if you're not familiar, are the speedsters of the grocery world. They promise to bring you everything you desire in just 10 to 30 minutes.

Fancy some instant noodles? You can have them in ten minutes. Craving ice cream? No need to step outside; it'll be at your doorstep in under 10 minutes.

In the spotlight in 2021, these companies surged in popularity. After the triumphant rise of food delivery giants like Zomato and Swiggy in India, Quick commerce firms like Zepto and Blinkit convinced us all that grocery delivery was the next big thing.

A Redseer report in 2022 even foretold that India's Quick commerce market would swell to a massive $5.5 billion by 2025, growing 15 times its current size, and outpacing markets like China in terms of customer adoption.

The opportunity in Quick Commerce seemed so big that big shots like Flipkart, Reliance, Swiggy, and Ola went all in to conquer it.

Swiggy pumped in money. Instead of focusing on its primary food delivery business, it allocated a whopping $700 million (that's a staggering ₹5,500 crores) exclusively to its Quick commerce arm, Instamart.

Ola introduced its very own 10-minute delivery promise with Ola Dash. 

Even Reliance joined the race with JioMart Express, promising deliveries within 90 minutes.
 

Quick rise to Quick decline 

But let's fast forward to 2023 – Quick commerce companies are in dire straits.

Reliance Industries' JioMart closed down its high-speed grocery delivery service, Express.

In December of the previous year, Flipkart scaled back its Quick commerce service, Flipkart Quick, in a bid to figure out a sustainable business model.

Dunzo, a Quick commerce start-up backed by Reliance, had to let go of 30 percent of its workforce (about 300 people) and shut down 50% of its dark stores.

Ola went a step further by entirely shutting down its Quick commerce venture, Ola Dash.
These were thriving companies just a year ago, but today, they're teetering on the edge of extinction.

So, what went wrong with quick commerce?

First, let's talk about the Funding situation. Right now, the economy is not exactly on fire, and investors are being cautious. Earlier, the plan was simple: forget profits, spend big, beat your competition, and become the top choice. Once you're the boss in the industry,you call the shots. Because once people are hooked on ordering groceries from their Sofas there’s no going back. 

But the times got tough in 2023, when everyone started shouting recession in the west.All the investors and VCs started asking the question: when will the profits show up?

For these companies, the solution was to improve their profit per order. You see, unlike the Food delivery business, the order value in the Quick commerce business is quite low. However the costs incurred in delivering an order in ten minutes is quite high as you need to have thousands of dark stores in different localities and a big fleet of delivery staff to deliver an order in ten minutes

So, it's kinda difficult to bring in profits in the quick commerce business. 

Ashneer Grover, ex CFO of Grofers ( Now Blinkit ) quoted in an interview,

“People are delivering groceries in 10 minutes. They'll never turn profitable. I attempted a 90-minute delivery, but even that was a challenge. With a 10-minute promise, they're losing money on every single order. Some business ideas, like quick commerce, will never sense. The unit economics in quick commerce will never get better. As funding becomes scarce, the industry will naturally correct itself, and companies will refocus on their core operations. When money is abundant, everyone starts thinking they can do the impossible."

The question is,

When Reliance, Flipkart the companies that swim in cash are shutting down their quick commerce businesses and the entire industry is on the brink of collapse, why on earth VCs and investors love Zepto. 

Because you see when Zomato acquired Blinkit, its stock tanked 41%.

So, what’s special about Zepto? You ask?

Well, they kind sensed the winter in the funding ecosystem and took some tough measures to improve their profitability.

For starters, they started dealing directly with the farmers and brands to skip the wholesalers. This led to two things - Improved quality of fruits and vegetables and improved margins.

Second thing they did was to invest in cold storage units, which reduced the refunds drastically.

In an interview with The Ken,

 Zepto’s CEO Aadit Palicha said,

“We did a cost-benefit analysis and saw that if refunds cost us X, cold storage would bring that down by half. On the other hand, the cost of cold storage investment was a tenth of X… that really brought down our refund and wastage costs and kept it low,”

The company also claimed that most of its dark stores are already store-level EBITDA positive, inclusive of all variable and fixed costs, which is a feat most quick commerce companies couldn’t achieve.

It also claimed that its ARPU is currently about Rs 1,500–2,000, and has increased 60% over the year, and its monthly transacting users have increased by over 100%.

The quick commerce start-up has quickly steered its focus to profitability and taken some innovative decisions to cut down its costs.

Zepto is planning on giving what investors love, a high growth business with some real profits. Well, its CEO believes execution is what makes them different. We’ll have to wait to see if the Quick commerce start-up will deliver the profitability on time?