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10 Minutes to Delivery, Definitely Not to Profitability

The pandemic transformed customer behaviour in countless ways. One of the remarkable ones was the proliferation of delivery. This too rapidly evolved to include the so-called quick commerce.

This was popularised in India by Zepto, with 10-minute delivery. Investors have been pumping money into this space globally. VCs invested nearly US$4 billion in this market in 2021. In 2020, this space attracted investments of only US$500 million, according to PitchBook.

But how does this actually work?

The concept it pretty easy. Dark stores (small storage houses) are placed in hubs with a limited variety of goods. Data and patterns bring predictability into what kind of inventory needs to be stored here. The delivery fleet then simply run between these dark stores and customers.

Is it economical?

These companies are capital-intensive.

  1. Dark stores have to be rented out

  2. Inventory has to be kept at these stores, and replenished

  3. To change consumer behaviour, these companies have been offering deep discounts

The infrastructure is costly, relative to normal delivery, which picks up from existing stores and delivers to customers.

On the other hand, there are several positives too.

  1. Less delivery time implies more deliveries per hour, and hence better economics

  2. Unlike food delivery, grocery delivery doesn’t have peak hours clot around meal times

  3. Inventory is limited to a focused set of high-demand items, and patterns are supported with data and intelligence

  4. Introduction of private labels can further elevate margins

  5. Customers do not scout for deals/discounts. Purchases are usually for unplanned urgent consumption, so customers are willing to pay a premium for faster delivery

And then came Zomato

This ideas can be expanded beyond just grocery deliveries. Zomato recently shocked the markets with it’s announcement of 10 minute food delivery service.

It already has plans of investing up to US$400 million cash in quick commerce over the next 2 years.

With an 8% stake in this market with Blinkit (previously known as Grofers), now an exclusive 10-minute delivery app, Zomato has some Quick-Commerce experience.

How will Zomato make it work?

Zomato Instant will store bestseller items from various restaurants in “housing stations” that will work as assembly stations. This will based on demand predictability and hyperlocal preferences.

Each station will target a radius of 1-2 km, looking to capitalise on densely populated areas. There will also be some robotics involved to optimise the food preparation time.

What’s the scene globally?

In the US, several companies have entered the space - Fridge No More, Buyk, Gorillas and Jokr to name a few. However, now investors’ appetite for unprofitable players in this market has waned. A path to profitability has been a rising demand. Closings have begun and market consolidation has started.

The concept is not. Gopuff in the US has been around since 2013. London too is one of the first markets to see new entrants flooding, and battling it out fiercely. Getir and Gorillas have both been offering deep discounts, and the race to win customers has been blazing. In fact, the market in London is so crowded, that there at least a dozen players in the arena right now.

In both these markets, the number of companies fighting out has been the largest concern, and this has pushed profitability far away. Amidst habit building, discounts, rents, delivery costs and inventory management aren't supportive of profitably, especially given the low-ticket size.

India’s still a baby; but a promising one

Compared to the dozen players in global cities, the Indian market is pretty nascent. Post Zepto, multiple companies have started offering quick delivery. While free delivery has been a great selling point so far, discounts on purchases haven’t reached levels seen globally.

There are some advantageous differences in India though:

  1. Labour costs are lower compared to global peers

  2. Population density for Indian cities is very high; Mumbai has twice as many people per square kilometer as NYC

  3. Overall, India has twelve times the population density of the United States

This means that each dark store can serve more customers per square kilometre. As a result, this concept is much more feasible in India, both financially and in terms of time.

Back to Zomato

Zomato has dealt with an industry-problem, which is common to all food delivery players globally. Delivery fleets run inefficiently because of clustered meal times. Adding groceries has been a natural extension to services to better optimise business. And that’s where Zomato’s investment in BlinkIt may appear to be a good hedge.

Additionally, to improve unit economics and beat competition Zomato's move into quick delivery does appear to be a bold step. However, given the investment required, and competition yet to get fierce, financial sustenance and profitability will be interesting nodes to look at.

But then, India is a large market, and the party is just getting started. The quick commerce market is expected to grow to US$5.5 billion by 2025 from US$0.3 billion now.

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