THIS Is How Zepto & Blinkit Will Be Profitable | Explaining Quick Commerce

Summary

The transcript discusses the rapid growth of quick commerce in India, with platforms like Blinkit and Zepto aiming to surpass traditional e-commerce giants. Quick commerce, which began as a COVID trend, has continued to thrive, threatening established players like Flipkart and Amazon. The business model revolves around 'dark stores' for rapid delivery, but profitability remains a challenge. Companies are tackling this by increasing order values, expanding store density, and leveraging advertising revenue. Zepto, with its strategic store placement and focus on operational efficiency, is positioned to lead the race towards profitability in the quick commerce sector.

Takeaways

• 🦈 Deepinder Goyal, founder of Zomato, predicts that its quick-commerce brand Blinkit will surpass Zomato in size within a year.
• 🚀 Aadit Palicha, the 22-year-old founder of Zepto, aims to scale the company to Dmart's level within the next 2 to 3 years.
• 🔥 Quick commerce, which started as a COVID fad, is proving to be a lasting trend, even threatening established giants like Flipkart and Amazon.
• 🌍 Quick commerce penetration in India is notably high, at 13% compared to 3% in Europe and 7% in China.
• 📈 Zepto has seen a significant increase in Monthly Active Users, growing from 1.8 million in 2022 to 4 million in 2023.
• 💰 Both Blinkit and Zepto have reached over 1 billion dollars in gross annual sales runrate.
• 🛒 Quick commerce platforms contribute significantly to e-commerce sales of FMCG companies, with some like KRBL witnessing a 1500% growth in sales on these platforms.
• 🏪 The business model of quick commerce revolves around 'dark stores'—small, employee-only stores located in convenient areas to enable fast delivery.
• 📦 Dark stores are stocked with around 1500 SKUs to meet most daily customer needs and are strategically placed to serve a 2 to 4 km radius.
• 🛵 Quick commerce delivery agents operate from these dark stores, ensuring fast delivery within minutes of an order being placed.
• 💼 Despite the rapid growth, quick commerce companies face profitability challenges due to high delivery costs and low margins on certain products.

Q & A

What is the current market share of Blinkit in the Quick Commerce segment?

Blinkit currently has a market share of 35% in the Quick Commerce segment.

How has Zepto grown its Monthly Active Users from 2022 to 2023?

Zepto has increased its Monthly Active Users from 1.8 Million in 2022 to 4 Million in 2023, adding 2.2 Million users in a single year.

What is the significance of the term 'dark stores' in the context of Quick Commerce?

Dark stores are mini stores, roughly 3000 sq ft in size, accessible only to store employees, strategically placed to minimize the distance between them and customers for quick delivery.

Why are giants like Flipkart and Reliance interested in the Quick Commerce segment?

Giants like Flipkart and Reliance are interested in Quick Commerce because it is a growing market that offers speed and convenience, threatening their traditional e-commerce models.

What is the average profit margin for groceries and FMCG products in Quick Commerce?

Groceries have a higher profit margin of 18% to 40%, while FMCG products like oil or rice have a margin of 4% to 15%.

How do Quick Commerce platforms plan to increase their profitability?

Quick Commerce platforms plan to increase profitability by increasing the Average Order Value, improving store density, and generating advertising revenue.

What is the role of Average Order Value (AOV) in the profitability of Quick Commerce companies?

Increasing the Average Order Value can significantly improve profitability. For example, if the order value is increased from Rs. 300 to Rs. 700, the profit margin becomes Rs. 140, which is much higher than the initial profit.

How does store density impact the profitability and efficiency of Quick Commerce platforms?

Higher store density, such as having more stores per city, can decrease delivery times and increase the number of deliveries per hour, which contributes to profitability.

What is the potential of advertising revenue for Quick Commerce platforms?

Advertising revenue can be a significant source of income for Quick Commerce platforms, as they can charge companies to advertise on their apps, which results in almost pure profit.

How does Zepto's expansion strategy differ from its competitors?

Zepto focuses on having a higher store density in fewer cities, which allows for faster delivery times and improved profitability compared to competitors with a broader but less dense presence.

What are the current market shares of the top Quick Commerce players in India?

Blinkit leads with a 35% market share, followed by Swiggy’s Instamart with 28%, and Zepto with 25%.

Outlines

00:00

🚀 Quick Commerce's Rapid Growth and Market Penetration

The script introduces the burgeoning Quick Commerce sector in India, highlighting the ambitions of Deepinder Goyal, founder of Zomato and Blinkit, and Aadit Palicha, founder of Zepto. It discusses the unexpected resilience and growth of Quick Commerce post-COVID, contrary to initial predictions. The script details the market penetration statistics, showing India's significant lead with a 13% penetration rate compared to Europe's 3% and China's 7%. It also mentions the impressive growth of Zepto's Monthly Active Users and the substantial sales run rate achieved by Blinkit and Zepto. The impact of Quick Commerce on FMCG companies is underscored, with platforms like Zepto and Blinkit contributing significantly to their e-commerce sales. The script sets the stage for an exploration of the business model behind Quick Commerce's success.

05:02

🏪 Understanding the Dark Store Model of Quick Commerce

This paragraph delves into the operational aspect of Quick Commerce, focusing on the concept of 'dark stores.' Dark stores are described as small, employee-only warehouses strategically located to serve a 2 to 4 km radius, enabling ultra-fast delivery times. The script explains the rationale behind dark stores, their size, product range, and location advantages. It contrasts the Quick Commerce model with traditional e-commerce giants like Amazon and Flipkart, which rely on large fulfillment centers serving vast areas. The unit economics of Quick Commerce are simplified, with a focus on the profitability of individual dark stores. The script outlines the costs, margins, and the challenges faced in making the Quick Commerce model profitable, including the high cost of delivery relative to order value.

10:02

📈 Strategies for Increasing Profitability in Quick Commerce

The script discusses three main strategies that Quick Commerce companies are employing to increase profitability. The first strategy is to increase the Average Order Value (AOV), which can be achieved by introducing low-cart fees for small orders and expanding product categories. The second strategy involves increasing the density of dark stores to reduce delivery times and increase the number of deliveries per agent per hour. The third strategy is to generate advertising revenue by leveraging the large customer base on their platforms. The script provides examples of how companies like Zepto and Blinkit are implementing these strategies, with a focus on expanding their SKUs and introducing their own brand labels to increase profit margins.

15:04

🏁 The Race for Quick Commerce Dominance and Future Prospects

The final paragraph examines the competitive landscape of the Quick Commerce sector, highlighting the market shares and growth strategies of the top players, including Blinkit, Instamart, and Zepto. It emphasizes Zepto's rapid growth and its focus on operational efficiencies and strategic expansion. The script points out Zepto's higher store density in the cities it operates in, which contributes to faster delivery times and potentially higher profitability. It also mentions the company's plans to increase its dark store count and the expected timeline for achieving profitability. The paragraph concludes with a look at the future of Quick Commerce, with predictions of market growth and the potential for these companies to reshape the online grocery market.

Keywords

💡Quick Commerce

Quick Commerce refers to a business model that offers rapid delivery of goods, typically within minutes of an order being placed. It is central to the video's theme, illustrating the growth and impact of this sector in the Indian market. The script mentions that Quick Commerce started as a fad during COVID but has continued to grow, challenging giants like Flipkart and Amazon.

💡Blinkit

Blinkit is a quick-commerce brand mentioned in the script as being owned by Zomato. It is highlighted as a significant player in the Quick Commerce space with a 35% market share. The script notes that Blinkit started as Grofers, pivoted to under 15-minute delivery, and was rebranded as Blinkit before being acquired by Zomato.

💡Zepto

Zepto is another key player in the Quick Commerce industry, founded by two Stanford dropouts. The script emphasizes its rapid growth, increasing its Monthly Active Users from 1.8 Million in 2022 to 4 Million in 2023 and its potential to become a Dmart scale company within 2 to 3 years.

💡Dark Stores

Dark Stores are a critical component of the Quick Commerce business model. They are small, strategically located stores that are only accessible to employees and used for storing and dispatching orders. The script explains that these stores enable the 10-minute delivery promise by being located close to customers.

💡SKU (Stock Keeping Unit)

SKU stands for Stock Keeping Unit, a unique identifier for each distinct product and service that can be purchased. In the context of the video, it is mentioned that 90 to 95% of a customer’s daily needs can be fulfilled by the same 1500 SKUs, highlighting the importance of product variety and inventory management in Quick Commerce.

💡FMCG (Fast-Moving Consumer Goods)

FMCG refers to products that are sold quickly and at a relatively low cost. The script discusses how Quick Commerce platforms contribute significantly to FMCG companies' e-commerce sales, with an example of KRBL witnessing a 1500% growth in sales on these platforms compared to a 10% growth in Kirana stores.

💡Gross Annual Sales Runrate

Gross Annual Sales Runrate is an estimate of the total revenue a company could generate in a year if its current sales rate continues. The script mentions that both Blinkit and Zepto have hit over 1 billion dollars in gross annual sales runrate, indicating their scale of operations.

💡Average Order Value (AOV)

Average Order Value is the average amount spent by customers per order. The script discusses how increasing AOV is a key strategy for Quick Commerce platforms to improve profitability, with examples of how Blinkit, Zepto, and Instamart have increased their AOV from 2022 to 2023.

💡Store Density

Store Density refers to the concentration of stores within a given area. The script explains that increasing store density can lead to faster delivery times and higher profitability, with Zepto having a higher store density than its competitors.

💡Advertising Revenue

Advertising Revenue is income generated from advertising on a platform. The script highlights how Quick Commerce companies can monetize their user base by offering advertising space to brands, with Zepto generating hundreds of crores in advertising revenue annually.

💡Operational Profitability

Operational Profitability refers to the state where a company's core operations generate profit, excluding any extraneous income or expenses. The script notes that Blinkit aims to achieve operational profitability by early 2025, indicating a strategic focus on sustainable growth.

Highlights

Deepinder Goyal, founder of Zomato, predicts that its quick-commerce brand Blinkit will surpass Zomato in size within a year.

Aadit Palicha, the 22-year-old founder of Zepto, aims for his company to reach Dmart scale within 2 to 3 years.

Flipkart is considering entering the quick commerce segment due to the strong FOMO in the market.

Quick commerce started as a COVID fad but has continued to grow, threatening giants like Flipkart and Amazon.

India has one of the highest quick commerce penetration rates in the world, at 13% compared to 3% in Europe and 7% in China.

Zepto increased its Monthly Active Users from 1.8 Million in 2022 to 4 Million in 2023, adding 2.2 Million users in a single year.

Blinkit and Zepto have both achieved over 1 billion dollars in gross annual sales runrate.

Quick Commerce platforms contribute between 30 to 50% of the e-commerce sales of FMCG companies.

KRBL, the brand selling India Gate rice, experiences 1500% annualized growth in sales on quick commerce platforms.

The business model of Quick Commerce revolves around dark stores, which are mini stores only accessible to employees.

Dark stores are strategically placed to serve a 2 to 4 km radius, ensuring quick delivery to customers.

The profitability of Quick Commerce companies depends on making individual dark stores profitable.

Increasing the Average Order Value is a key strategy for Quick Commerce platforms to improve profitability.

Quick Commerce companies are expanding their product categories to increase the average order value and customer base.

Zepto, Blinkit, and Instamart are planning to increase their dark store count to improve delivery times and profitability.

Advertising revenue is a significant profit driver for Quick Commerce companies, offering a high margin of profit.

Zepto is expected to become profitable in 2024, while Blinkit aims for operational profitability by early 2025.

Zepto has been growing its daily active users rapidly and is on track to achieve profitability earlier than its competitors.

Zepto's strategy of having a high store density in top cities contributes to its fast delivery times and customer satisfaction.

Transcripts

Deepinder Goyal, the famous shark from Shark Tank

and founder of Zomato, recently declared that its

quick-commerce brand Blinkit will be bigger than

Zomato in one year. And Aadit Palicha -

the 22-year-old founder of Zepto, recently suggested

that they could be a Dmart scale company within the

next 2 to 3 years. And the FOMO is so strong right

now that Flipkart is also looking at entering into this

Quick Commerce segment.

Quick commerce and 10-minute delivery actually started out as a fad during COVID,

and experts believed that it would fade away once

things opened up, similar to what happened to the

Ed Tech sector. But they were wrong -

Quick commerce is going nowhere but upwards,

and it is now even threatening  giants like Flipkart

and Amazon. In fact, quick commerce penetration in

India was already among one of the highest in the

world by 2022 - While its just 3% in Europe, 7% in China,

India was way ahead at 13%. Zepto alone has

increased its Monthly Active Users from 1.8 Million in 2022,

to 4 Million in 2023 - adding 2.2 Million users in a single year,

and both Blinkit and Zepto have hit over 1 billion dollars

in gross annual sales run rate. In fact, the impact has

been so monumental that Quick Commerce platforms

like Zepto, Blilnkit, and Instamart, are now contributing

between 30 to 50% of the e-commerce sales of

FMCG companies. The head of the domestic market of KRBL,

the brand that sells India Gate rice, says that they are

witnessing an annualized growth of 1500% in sales

on these quick commerce platforms, while in Kirana stores

it it just 10%. Now you might be wondering, how are

these companies able to deliver goods to your home

in just 10 minutes, how are they ever going to make a

profit with a business model that seems inherently flawed,

and why are giants like Flipkart and Reliance so eager to

get onto the Quick Commerce train? To understand this,

you first have to understand how the business model of

Quick Commerce really works. The arena is currently

dominated by 3 major players - The 3rd biggest player

with a 25% market share is

Zepto - the poster boy of Quick Commerce in India.

Founded by 2 teenagers who dropped out from Stanford,

Zepto has left behind strong players like Dunzo and BigBasket,

even though it began operations  much later than them in April 2021.

On the 2nd number is Swiggy’s Instamart - as the name

suggests, it was launched by Swiggy in August 2020,

and it has been able to capture 28% of the market so far

by tapping into Swiggy’s existing customer base.

And finally, the leader of the table is Blinkit.

Blinkit initially started in 2013 as Grofers and had a

business model similar to Big Basket -

They provided slotted deliveries, within a few hours

or on the next day. But in 2021, Grofers made a pivot

to under 15 minutes delivery, and rebranded itself to Blinkit.

Then in 2022, it was acquired by Zomato for almost

4500 crore rupees in an all-stock deal.

Blinkit has a market share of 35%.

At the bottom of the table is BBNow, which was

bought by Tata, which has a market share of 9%.

Until recently, there was also Reliance-backed Dunzo

but it has been struggling and scaling back recently.

Now, all of these Quick commerce companies work on

a similar business model which centers around dark stores.

See, the only way to deliver items within 10 minutes of you

placing an order is by having those  items stored very close to you.

And this is where dark stores come in. These are mini stores

that are roughly 3000 sq ft in size, and they are accessible

only to the employees of the store - not even to their delivery

agents. 90 to 95% of a customer’s daily needs basket

consists of the same 1500 SKUs. SKU is short for

Stock Keeping Unit, or simply the number of products

in layman's language. These stores are densely stacked

to ensure they can store all these 1500 SKUs and more -

So they have everything that a person might need at their home.

And since they do not need to be in front of customers,

the stores are usually located in back allies or basements.

So think of dark stores as your regular departmental stores,

except that only employees can access them and they are

way less spacious and optimized for maximum space usage.

These dark stores are strategically placed in different

localities to minimize the difference between them

and the customers, and each dark store usually

serves a radius of about 2 to 4 kms around it.

So when you select your location on the Zepto app,

it automatically selects the dark store that is nearest

to your location and shows you the products available

in that store. When you place an order, it is sent to

that particular dark store. Each dark store has a

fleet of delivery agents that are waiting in the store.

So when the dark store receives the order,

it is packed as quickly as possible,

picked up by a delivery agent right there,

who immediately leaves for your house and

arrives as soon as possible.

Since the distance between the dark store and

your home is so small, the driver is able to easily

make it within a few minutes even if he drives at a

modest speed of 15 to 20 kms per hour.

So this is the business model of quick commerce –

Speed and convenience for items that are in high

demand and have high rotation frequency.

This is in contrast to how e-commerce companies

like Amazon and Flipkart work - They have giant,

multi-acre fulfillment centers that cater to several cities

in a radius of hundreds of kilometers.

While having a single, giant center brings down costs,

it obviously increases the time - The order is picked up

from the fulfillment center, then sent to a smaller hub

of your city, followed by the delivery center of your locality.

Here, it is picked up by the delivery agent along with

several other orders, and then he follows a route,

delivering all the orders one by one.

And this factor of the number of deliveries completed

by an agent per day or per hour is the single biggest

pain point of Quick Commerce. To help you understand

this better, let me simplify the unit economics of this

Quick Commerce model. The central entity in the

profit and loss equation is the dark store -

Profitability of a quick commerce company depends

on making individual dark stores profitable.

Let’s say a dark store receives an order of Rs. 300.

Depending on the contents of the order,

Zepto can have a margin of anywhere between 5% to 40%.

Groceries have a higher profit margin of 18% to 40%,

while FMCG products like oil or rice have a

margin of 4% to 15%. So let’s say that this is an

average order and the profit margin is about 20%.

That means the cost of the products is 80% of Rs. 300,

or Rs. 240. So the margin left is 60 rupees.

Now, out of this 60 rupees, you have to take out the

fixed costs for the dark store as well, like salaries,

electricity, and rent. For a dark store of Blinkit or Zepto,

rent is almost nothing, because the revenue per square foot

for dark stores is the highest for any commerce format.

Not only are these stores small in area, but recall that

they are also located in back allies or basements,

where rent is already very low. Then, on top of it,

the revenue generated every day is very high -

Zepto alone is doing 1 Billion dollars of annual sales

run rate with just 330 dark stores - That would convert

into roughly 1.8 crore rupees of revenue per dark store.

So the fixed costs for the dark stores are

less than 10% (<10%)* of the revenue, and this covers

everything including rent, electricity, and employee

salaries. So 10% of 300 or another 30 rupees goes to

fixed costs, and now the margin left is just Rs. 30.

But it does not end here - Zepto pays Rs. 50 per delivery

to the delivery agent, which means that they are

essentially losing Rs. 20 per order.

And then, there are corporate employees on their payroll,

server costs, and taxes. In other words,

the business is simply not profitable.

Blinkit lost Rs. 1,078 crores in 2023, while

Zepto lost Rs. 1,272 crore. So does this mean that

Quick Commerce will never be profitable?

Well, not exactly. You see, these companies

can be made profitable, and for that, they

have 3 levers. Number 1 is by increasing the

Average Order Value. Coming back to our example,

if the order value is increased from Rs. 300 to Rs. 700,

then the profit margin becomes Rs. 140, but the fixed

costs and the delivery cost remain the same at

Rs. 30 and Rs. 50 respectively, so the final profit per order

turns out to be Rs. 60 per order.

With 4 lakh orders a day, this can turn into 2.4 crore rupees

in profit every single day, and if you increase the

average order value even further, then the final

profit percentage increases exponentially.

This is the lever that all these platforms are

prioritizing right now - In 2022, the average order value

was Rs. 553 for Blinkit, Rs. 400 for Zepto,

and Rs. 500 for Instamart, but by 2023,

this had increased to Rs.635 for Blinkit,

about Rs. 500 for Zepto, and about Rs. 550 for Instamart.

Now, you must be wondering, how are they increasing

their average order value, right? Well, one way is by

introducing a low-cart fee and a higher delivery

fee for small orders. The driver of sales continues

to be the core categories, and to avoid the delivery-fee,

customers end up adding items from adjacent categories.

But this only goes too far - Blinkit, Zepto, and Instamart

applies this small cart fee on orders below Rs. 99 only.

So while this can uplift the minimum order value,

it can definitely not thrust the average order value

over Rs. 600 or 800. So the strategy that they are

employing instead is adding more  categories to their offering -

Initially, these Quick Commerce companies relied

on the fact that 90 to 95% of a customer’s basket

consists of the same 1500 SKUs, but they have

been steadily adding more and more categories.

For example, you can now easily buy beauty and

makeup products on Blinkit and Instamart as well -

Something they were not selling earlier.

Blinkit recently started delivering Playstation 5

in under 10 minutes on their app as well.

So they have expanded their SKUs to over 6000 for now,

as they continue to add newer categories -

They are now planning to add fashion, electronics,

and apparel as well. and this increase in the

number of SKUs on the app,  is driving a corresponding

increase in the average order value as well,

simply because now there are more products

that a customer buy while placing an order.

This theory is confirmed  by the increase in average

order value for all these platforms from 2022 to 2023,

coinciding with them adding more and more SKUs

to their offering in the same time period -

So it is clearly working as well. This, by the way,

is also why quick commerce companies like Zepto

are directly competing with the likes of Flipkart -

Someone who earlier used to buy clothes from

Flipkart or Makeup from Nykaa, would now directly

purchase it from Zepto or Blinkit and get it in under 10 minutes

instead of 1 to 3 business days.

They can increase profits even further by introducing

their own brand labels for different items -

For example, Zepto has launched its own meat brand

by the name Relish, where they can have a 5% to 20%

higher profit margin than selling meat from

another brand like Licious. So this is how these

companies are using the first lever to increase profits,

which is by increasing the average order value.

The second lever that they can and they are utilizing

is increasing the density of these stores.

See, the time taken to deliver an order depends on

the distance between the dark store and the customer.

If the maximum distance between a dark store and

a customer is brought down to 2 kms from 4 kms,

then a delivery agent could even double the number of

deliveries that he can do per hour. Zepto, Blinkit, Instamart -

all of them are planning to increase their dark store count

by upto 40% quite soon, but these stores will be opened

in the same cities - which will result in an increase in

the density of their stores - Eventually, there might be

no area in Mumbai where a Zepto dark store would

be farther than 2 kilometers. But note here that this

lever only works in densely populated areas like metro

and tier-1 cities, because otherwise, the number of

orders per store would not be high enough,

and a dark store needs at least 1500 orders

per day to be profitable.

And the third and final lever to  profitability is advertising revenue.

Getting millions of customers on their app means that

these Quick Commerce companies can now

charge companies to advertise on them.

If you are searching for chocolates on Blinkit,

then it makes sense for Cadbury to advertise there and

push Dairy Milk to you. Setting up and advertising platforms

for brands costs almost nothing on this scale,

and it results in ad revenue that is 95% to 99% pure profit -

Zepto is now clocking hundreds  of crores in advertising

revenue every single year. So this is how a handful of

companies have managed to increase the value of

the online grocery market from  about 10,000 crores in 2019,

to almost 1 Lakh 20 thousand crores in 2024.

While Zepto expects to become profitable this

year itself in 2024, Blinkit says it will achieve

operational profitability by early 2025.

Now the final question that you may be

asking yourself now would be - who is winning

this race? Well, I did a lot of research regarding this,

and the results were quite surprising.

As I already said earlier, Blinkit is already the market

leader with a market share of 35%, while Instamart

and Zepto are almost neck to  neck at 28% and 25% respectively.

But while Blinkit certainly has more customers than Zepto,

Zepto has been growing its daily active users much,

much faster than any of its ompetitors.

After launching in mid-2021, they had managed to

capture 13% of the market share in less than a year

by March 2022, and then, in about 1 year, they

managed to almost double this share to 25%.

And what really blew my mind was how they are

actually doing this. While you definitely have to

give it to them for maximizing the operational efficiencies

to make the logistics as seamless as possible,

their expansion strategy also tells a lot.

When you look at the top 3, Zepto actually has

a lower number of stores than others. But then,

when you look at the number of cities where it is

currently present, it is also much lower than others -

They are present in just the top 10 cities of India.

So what this means is that while Blinkit has a store

density of about 17 stores per city, Instamart has

about 18 stores per city, Zepto has a store density of

33 stores per city - that is almost 2 times more than

its competitors. And recall that I explained earlier

how store density is a crucial factor in attaining profitability -

So by having more stores per city, Zepto is able to

considerably decrease its delivery times and increase

its profits. This could be a major reason why Zepto is

on track to achieve profitability much earlier than any

of its competitors. And this delivery speed has the

added benefit of increasing customer satisfaction -

A survey revealed that quick commerce users in India

perceived Zepto to be the fastest delivery option available.

So to me, it looks like Zepto is ahead of the curve,

at least for now. If you made it this far, please let me

know in the comments which is your  favorite quick commerce brand.

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Until I see you in the next video, goodbye!