Last fortnight, Zomato acquired Blinkit, hot on the heels of Swiggy shutting down SuprDaily and Zepto raising a $200M round as the quick commerce market twisted and turned.
Fast and Furious Money
In 1999, Louis Borders was like one in twelve Americans trying to build a business.
199 prime internet stocks accounted for $450 billion in valuation with annual sales of $21 billion and losses of $6 billion. The joke that did the rounds was that if you are profitable, you may not get the valuation of an internet company.
The years stoked a fire for entrepreneurship that hadn’t earlier existed amongst the Americans. All the money poured into tech companies allowed the internet to become a solution for everything humans wanted.
What seems like a crazy innovation today, grocery delivery was a prime application of the desktop-to-doorstep model. Louis Borders started Webvan in 1996, almost 30 years ago.
Webvan became the poster child of the e-commerce grocery business. It tried to combine the trifecta of selection, cost, and convenience. Customers could select from a rich variety of high-quality items at affordable rates and choose a 30-minute window for delivery.
Enabling this proposition were large state-of-the-art warehouses with real-time inventory management and delivery vans guided by routing algorithms that optimized drive time. Drivers carried palm tablets to confirm orders or returns.
They bought UPS-style delivery vans in the hope that more customers would want this service and they need to grow big really fast.
The offer was euphoric, valuing the company at $6 billion.
During the dot-com years, companies and their investors over-indexed on the ‘first-mover advantage’ and a website. The pressure to grow big fast often wiped out other considerations such as business models, product-market fit, or unit economics.
In 19 months of proceeding with the IPO, Webvan burned through a billion dollars.
At approximately the same time, two investment bankers were building Kozmo.com – customers could order food, magazines, DVDs, and other basic items and have them delivered in one hour.
No minimum order value or delivery fee.
Bike messengers in Kozmo branding delivered in about 18 US cities. While the company did not build its own warehouses, the point-to-point delivery of small items proved to be an extremely expensive effort to change customer behaviour.
In an attempt to survive, Kozmo began to charge for delivery, increase prices, shut down locations, and even tried to woo the older audience by taking orders over the phone.
These measures were too little and too late and the company had to resort to layoffs and eventually shut shop by April 2001. In exactly the same month, Webvan filed for bankruptcy.
E-commerce and especially quick commerce was a painful business to build and scale profitably.
I Could Sell Fast Rubbers to a Monk
Webvan and Kozmo did become famous for something they won’t be proud of
Webvan tried to combine mass-market pricing with premium selection and quality. They were providing the ability to have organic foods and sushi delivered home but at big-box retailer prices.
While this helped acquire initial customers, it ended up targeting the wrong audience.
The infrastructure required to keep the delivery promise was highly capital intensive and would take years to recoup. Unlike today, hosting servers and data did not come cheap.
Technology and logistics costs shrunk margins even further, in addition to the $0 delivery fee in the case of Kozmo which did not make any sense at all.
The companies neither had premium market pricing nor the cost structure that allowed for low-cost efficiency.
Business models aside, one also begs the question – were these companies ahead of their time? Were customers willing to pay for such a service or buy online fast enough to make money for them?
We would never know. Maybe they would eventually be successful, but in an attempt to get big fast (GBF was the mantra, not MVP), they were burning through millions in multiple cities at a time.
Once the funding taps dried out, they were forced to close.
Among the dot companies that ran the internet race and rushed for fast and easy cash, Amazon was the proverbial tortoise. Founded much earlier in 1994, Amazon was not shielded from the dot-com bust. Its stock price fell from $107 to $7 a share by the end of 1999.
But, the company ‘survived’.
Amazon had some cushion. In early 2000, Amazon sold $672 million in convertible bonds to European investors at 6.9%. While this cash would see it through a tough period, Amazon also employed a different approach.
Basically, the company saw the internet as a way to better distribute products and services and not as a fundamental business model. Jeff Bezos, the founder, focused on cash flows and chartered a slow and steady path to profitability with his ‘It’s still Day Zero’ mindset.
The basic premise was that customers could go to Amazon, to find goods – groceries, toys, electronics, tools – at a relatively cheaper price. They focused on efficient ways to connect sellers with buyers – right from warehousing, and inventory management to delivery, processes were geared to service a low-margin business.
By early 2000, Amazon allowed third parties to list products on its online store or create a co-branded store on the website. Established brands like Target and Toys R Us would pay Amazon a fixed fee for fulfilling orders. This boosted selection and spiked transaction volume.
Alternatively, merchants could have their own URL on a platform provided by Amazon with the option for order fulfilment. Delivery times could range between 1-5 days.
In contrast to other delivery companies, Amazon was starting to use its technology and logistics infrastructure as a revenue driver. Amazon Web Services (AWS) was born when they began to sell computing software that would be cheaper for companies than building their own server farms.
It was not until 2005 that Amazon announced its $79 per year program that promised free two-day shipping on any order. Prime, which would grow to be one of their most valuable assets came at a time when Amazon had 100 million customers.
The dot-com years also saw the rise of e-commerce powerhouse eBay, an online auction platform that hosted items ranging from automobiles to antiques and gold. eBay earned commissions on matching buyers with sellers and popularized digital lingo such as ‘Buy it now, ‘Seller rating’ and ‘Best match.’
A few years after the bust, the online commerce boom ensued, and established offline retailers rose to fill the gap created by online businesses that shut shop. Target and Walmart began to alter their online selling strategies giving rise to multichannel retailing.
In 2008, it seemed the era of delivering instantly was over in 2001. But was it?
Don’t Matter if You Win by an Inch or a Mile, Winning is Winning
In the decade that followed, shoppers were warming up to the convenience of online shopping.
By 2010, eCommerce made up 7.2% of U.S retail sales, growing significantly faster than retail as a whole.
Online retailers began to offer search engines that optimized product selection, personalized recommendations and quickened checkout times. Customers could select delivery times and have non-perishables delivered even when they were not at home.
Young shoppers valued the convenience and cost-sensitive ones and used the online channels as a way to compare prices while they eventually went to a physical store. Either way, the online model could not be ignored and with rising internet penetration and digital awareness, the online pie was poised to grow.
At the turn of the decade, new e-retailers began to hunt for a competitive edge. They set out to make convenience even more affordable.
In 2013, goPuff promised delivery within 30 mins of ordering online, almost like a reincarnation 17 years later.
They delivered items such as ice creams and chips to toasters and smartphone chargers all day, even until 2 am. ‘Just-in-time’ manufacturing on the shop floor was taking the form of ‘instant delivery’ in the retail space.
Unlike its predecessors, the company did not burn through cash in a couple of years. Only orders above $49 had free delivery. goPuff initially started with a limited product range for college students. It eventually expanded to stay-home customers and professionals with busy routines.
The quick delivery supply chain started to take shape. Micro-fulfilment centres (today known as ‘dark’ stores) in different locations stocked ‘instant need’ items and enabled delivery in 30 mins. The company used automation and routing software to enable efficiency.
goPuff was bootstrapped initially and raised sizable funding rounds by 2016 and steadily expanded operations to other cities. With many companies, including Amazon (Fresh, Go) and 7-Eleven diving into quick delivery, inventors were willing to bet on the business.
Some argue that goPuff’s success can be credited to its choice of business model and focus on customer segmentation and delivery efficiency. The founders acknowledged, however, that the company benefited from a culture change to ordering on a mobile phone.
Customers were always at an ‘arm’s length’ away from their phones and hence, a potential order.
By 2015, many startups set out to solve the delivery problem by aiming to create an efficient on-demand delivery infrastructure. Postmates, for instance, raised more than $138 million to connect customers to couriers who could deliver anything from a restaurant or store in minutes.
Money and technology started to be used to satiate instant gratification. Different business models started to emerge and consumers could buy anything quickly again.
Too soon, Indian E-Commerce Junior
Many miles away, 2015 was a very different year for the Indian startup ecosystem.
Everyone was trying to go after a customer, who was just getting used to shopping online on Flipkart. Customers still preferred “Cash on Delivery” as the way to make payments as trust on online channels was still very low.
Adoption would have taken time given the nascent nature of Indian customers. But people saw potential and they wanted to take a bet on the future.
Like during every startup funding boom, hyperlocal or “trying to deliver fast” became hot again.
Investors pumped money like there was no tomorrow. Grofers raised a mega $120m round valuing the company around $400m within 2 years of inception.
Snapdeal backed Peppertap to get a hold of grocery space. Amazon/Flipkart already had their eyes on this space.
Big Basket which started in 2011 and had learned the business well over years, fine-tuned its business model as well and raised the right amount of funds to fight off competition through two rounds of funding in the 2015/16 period for a total of $200 million.
In the US Instacart was valued at close to $2 billion when it raised a $220 million funding round.
A similar fight for supremacy and funding boom happened in delivery food. Players like Zomato, TinyOwl, Swiggy, Uber Eats, Ola, and FoodPanda were fighting to get a share in the online food delivery market.
There was not enough space for all. Adoption was slow. But they had money.
The best way to grow was giving more discounts, without any delivery fees or a commission on the seller side. Focus on GMV and order count, not on unit economics.
This meant high burn for high growth. It had side effects that everyone understood by 2016.
After a year of mega funding rounds, there was winter and people were back to discussing unit economics and profitability.
This meant a change of course for the startups and not all could survive. Many hyper-funded cash-guzzling hyperlocal startups died of indigestion.
Peppertap and Local Banya had to shut shop burning more than $50M. Grofers had to change its business model and control burn drastically to stay in the game. Online grocery as a space lost its charm and only Big Basket to an extent could manage to stand its ground.
Food tech was equally bad. TinyOwl had to shut shop in a manner that nobody expected would ever happen.
Other players like FoodPanda started scaling down their operations. Consolidation began to happen in the space to form a virtual duopoly of Zomato and Swiggy.
By 2017, all these changes brought one change. Fewer players meant shifting focus from fighting competition to delighting customers. The players who managed to survive became stronger than before.
Quick commerce was in hibernation again.
Quick Commerce Ain’t even Been Invented Yet
The two biggest players in the ecosystem began to pick up the slack of hyperlocal deliveries themselves.
Zomato, which has been around for almost a decade, knew how to navigate such a complex situation. It innovated on its key offering of restaurant discovery to add online food ordering as a service.
Online food delivery was operationally heavy but a much bigger space. It also carried the threat of disruption as Swiggy was focused just on moving food parcels from point A to point B and
Zomato had to build this space to stay in the game.
They built it really well and also came out with other offerings like Hyperpure for backward integration or Zomato Gold – adding a use case for users to open the Zomato app every time they step out for dining and a big win for them!
Swiggy, on the other hand, was focused on building a delightful product. Features like live order tracking were new and loved by the customers. Their post-order delivery experience was reliable and ordering was seamless.
Swiggy also started moving into similar businesses launching Genie or buying out Supr in 2018 to build a next-day delivery grocery business.
Both Zomato and Swiggy managed to balance the growth and customer experience.
Over time they managed to increase order frequency, and average order value while adding delivery or subscription fees for customers. The validation that consumers were fine to pay for delivery was the biggest win for both.
On the seller side, they started charging commissions to restaurants as well as charging for ads to boost restaurant discovery.
They could survive and scale as they burnt money not to fund discounts but to build great ‘habit-forming products’ that resulted in the online food delivering market leapfrogging to ~$5b by 2019.
Customers were now starting to value convenience and discount was no more the only reason for going online. The behaviour was different from 2015 where customers were in the trial phase and paying for convenience wasn’t heard of.
Foodtech was showing signs to the ones trying to restart quick commerce.
You might wanna keep your eyes on the road, Playboy
As India entered 2020, the world many miles away was beginning to quickly innovate again
In Turkey, Getir was taking shape as the founder felt that they could bring cabs to people vis-à-vis BiTaksi – all within three minutes. That made him wonder whether they could do the same for groceries and other convenience products.
In the US, Rafael Ilishayev and Yakir Gola faced the problem themselves.
Having started GoPuff around 2013 and kept building slowly. It came into the limelight in January 2019 when it raised $750 million.
In Germany, it was Gorillas trying to deliver groceries in 10 minutes while Weezy was doing it in the UK.
10-minute delivery was back as “quick commerce”
A value proposition that is so good that, if executed right and profitably, can make next-day or slot-based grocery delivery seem old-school soon enough.
India was not going to be left behind and quick commerce looked ripe to make its comeback by the 2020s again.
But before that could happen, something else did.
By March 2020, Covid had hit the world and the entire country was in a state of lockdown. This led to a massive change in consumer habits.
Thanks to Jio’s mobile revolution in India from 2016 onwards, there were more than 300 million internet users in India. During the lockdown, online adoption leapfrogged as users started searching everything online.
As modern trades shut shop, lockdown meant people had to depend on online players like BigBasket for all their needs. This adoption helped to build consumer habits and soon they found online grocery delivery as a convenient option.
The timing seemed perfect for Quick commerce as the adoption of online grocery ordering signalled a possibility that consumers might be ready to try out super fast delivery of their daily needs.
What used to be a single planned purchase for the month by visiting a value retailer, started unbundling into multiple unplanned purchases.
The experience of getting that chips, cold drink or bread delivered within minutes of ordering are exceptional.
It unlocked new use cases.
Imagine your cook is at home and finds you are short on vegetables to cook today’s lunch. You are feeling lazy and can’t go down so you ask him to make tea and get things ready while you punch in an order. Delivered by the time tea is ready.
This use case could never exist in a 90-minute or slot-based delivery.
Investors could see this trend at a global level. They knew, sooner or later, it would come to India.
They were ready to fund this next big thing.
You weren’t anyone’s friend
The onset of the pandemic along with social distancing and work-from-home norms changed the way people shop for groceries.
Convenience and busy lifestyles have prompted a majority of people to shop online.
Mid to high-income households in most Metro cities were now increasingly replacing Kirana stores and self-service supermarkets with quick commerce platforms like Dunzo and Instamart.
The Q-Commerce space, estimated at $0.3Bn in 2021, was expected to grow 10-15x by 2025 to a value of $5Bn. QC’s overall share was also zipping fast. It is at 7% currently but is expected to grow to 12-13% by 2025.
Quick commerce is part of the delivery spectrum going from days to minutes. The evolution of e-commerce, food and grocery over decades has created a fast cousin.
This opportunity was quickly spotted by newcomers and industry heavyweights alike, who wanted a piece of the new vertical.
The space saw disruption towards the end of ‘21, with the entrance of Zepto, promising a 10-minute delivery service. Zepto, founded by two Stanford dropouts, was established with the goal of proving that the QC model, successful in America and Europe, would thrive in India as well.
Grofers also rebranded as Blinkit and offered a similar service. Blinkit set up around 300 partner stores across the country in cities where it offers its 10-minute delivery service. It also pulled the plug in many areas where it wasn’t able to meet this goal.
Quick Commerce poses a threat to larger players, who have invested heavily to stay relevant. If people get used to 10-minute delivery, then companies with 24-hour deliveries would be forced to reduce their own timelines.
There was a classic tradeoff in SKU variety offering vs. delivery timeline crunching play working now.
Swiggy also invested $700Mn in its express delivery service Instamart, in an attempt to bring the delivery time down to 15-30 minutes. Instamart saw around 1Mn orders weekly in the first quarter of 2022.
Google-backed Dunzo, also backed by Reliance Retail, was planning to delay its IPO. It aimed to raise $250Mn in funding in an attempt to pull out all stops to become the No.1 player in quick commerce space.
Dunzo saw its AOV increase 4x and orders across perishable fruits and vegetables increase 3x compared to pre-covid levels.
But in the mad rush to deliver fast, a funding freeze could give a severe cold to these companies
Just don’t cheat on Profits This Time
A survey revealed that post the pandemic, 70% of users in metro and Tier-1 cities prefer unplanned small purchases as opposed to planning large monthly purchases.
This fueled the rise of Q-commerce, now almost 10% of the online grocery pie, and expected to breach 40% in the next 5 years.
With numbers like this, businesses were dashing to become the top player in what has been dubbed the dark store expansion rush.
Swiggy onboarded one seller-run dark store almost every day over the past few months in an attempt to bring its delivery time down. Blinkit added over 200 stores since the start of the year, as it aims to cross 1000 such centres by mid ‘22.
As quick commerce exploded in India, the model has also led to innovation in other sectors. StanPlus, a health-tech startup, recently raised $20Mn, as it aimed to offer an 8-minute ambulance service in Tier 1 cities.
But quick commerce is also a cash-guzzling space with dark store setups, consumer cashback/ discounts, and rider incentives. Historically the sector’s performance globally has been subdued against a glorified potential.
Is that what investors are starting to realize or is it just that the golden tap is finally running dry?
After a phenomenal 2021, Indian startups are now feeling the heat of a subdued-investment climate. Global headwinds due to the Russia-Ukraine conflict, the recent tech stock crash in the US, crude oil and interest rate hikes have caused a ripple effect on the Indian ecosystem as well.
Casualties were fast.
On Mar 22, two q-commerce startups in the US – Fridge No More and Buyk shut shop while Doordash which had entered into q-commerce pulled the plug on it.
In India too, Swiggy shut down SuprDaily, their subscription-based daily milk delivery service, in 5 out of 6 cities, and SwiggyGenie in 3 metro cities, citing ‘restructuring and operational stress’.
Boardroom conversations have shifted to extending the runway, cutting costs and showing a sustainable path to profitability.
This could be their biggest challenge to date.
Most online grocery startups are already operating on paper-thin profit margins of 10-12 per cent. This number reduces even further with the additional cost of delivering groceries in under 10 or 15 minutes.
With no minimum order value, companies like Swiggy, Blinkit, and Zepto have started charging delivery fees or surge fees in an attempt to break even.
There is also an emphasis to get consumers to order fruits and vegetables which have gross margins of 30-40%.
As delivery charge becomes commonplace after a few orders it will be interesting to see consumer acceptance akin to food delivery startups and the cohort level performance as companies continue to scale up.
The Q-Commerce model had gone from hot, to neutral to questionable in the span of 2 years.
Mistake is Thinking You have a Goddamn Choice Boy
Significant growth brings significant challenges.
Blinkit has already begun feeling the heat. It recently laid off 5% of its workforce and has been delaying vendor payments. They’ve also shut down most of their ‘unused’ dark stores, the same ones they acquired earlier this year, stating heavy cash burn and cost-cutting.
History doesn’t repeat itself, but it rhymes.
Zepto, meanwhile, after its recent $200Mn fundraise, is foraying into quick cafes, to deliver chai and snacks. This is the same Zepto that is burning $10-15Mn monthly. One thing they’ve made clear is that this is a ‘cafe format’ and not food delivery.
This clarification is all the more important after Zomato’s failed 10-minute food delivery experiment. It was met with displeasure by customers and restaurants alike, who questioned the quality and hygiene of the food, and more importantly, the safety of the delivery partners.
This brings us to yet another concern. As Indian startups race to reach your door earlier than others, the delivery partners face huge personal risks.
In March’22, the Chennai traffic police logged 978 violations by delivery executives working for Swiggy, Zomato, and Dunzo (collectively).
Given the condition of roads in most metro cities and the snarling traffic, there is a strong case for partner safety. The attrition rate of partners is generally 18-20% monthly; such conditions indicate that this number will only continue to increase.
There is no doubt customers want things faster, in a greater variety and at a lower cost.
Why quick commerce is so popular is that it actually is what customers want. The trouble is that economics work in a fairly optimistic case of 20%+ margins, 300+ AOV, and 1,000+ orders.
There is no doubt quick commerce will exist, but it will likely be a feature for a larger suite of products. It is at best a hook to get into e-commerce. Given its excellent value proposition, players can use it to build trust and sell anything.
Once you have trust, you can sell anything.
Large players who execute in the space, or newer upstarts who leverage it to widen their offerings will win. There is little wonder why a Swiggy has only a separate vertical called Instamart, or Zepto is planning to get into all sorts of e-commerce.
Both know this is only a piece of the puzzle in a larger story of retail e-commerce.
Quick commerce is a solution, but it is only a piece solving a very large problem.
Writing: Abhinay, Raghav, Rajiv, Keshav and Aviral Design: Blair and Omkar