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Will Quick Commerce Businesses Crack The Profitability Code In 2023? To improve unit economics, the companies in the space are expected to start offering offer localized assortment, promote high order value SKUs, and charge a delivery fee, among others

By S Shanthi

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With the demand for online grocery delivery multiplying due to the global pandemic, many business models have started emerging within e-commerce.

Quick commerce or Q-commerce is one such business model that has raised many eyebrows in the recent past. While some experts feel that the startups in the space are solving a problem that never existed, others say that quick deliveries for groceries will have a product/market fit (PMF) due to their convenience factor, at least in the metros.

As we get closer to the end of 2022, let's look at how promising the sector will be in the near future and if the quick commerce players can crack the profitability code in 2023.

Will habit formation lead to profitability?

Quick commerce players believe that with customers getting habituated to ordering on their platforms, profitability is around the corner. "The inherent business model which sets the foundation of quick commerce involves faster turnaround times (TAT) coupled with low margins and higher delivery costs which leads to excessive cash burn for companies. Therefore in order to stay afloat in the competitive quick commerce landscape the companies require deep pockets, and they must be capable of running on negative EBITDA for years. Due to competition and the customer acquisition race, these companies are focussing majorly on driving top lines and working with unstainable margins of 1-2 per cent, which clearly does not lead to profitability," said Shashank Ramdev, cofounder, 100X.VC.

While fresh assortments (F&Vs, meat, dairy) and indulgence categories (chocolates, biscuits) seem to be driving demand in the initial phase, grocery staples, cooking essentials, medicines, among others are also some of the categories that are likely to pick up as habit formation becomes stronger.

However, these platforms may not be able to survive just on habit formation. "Can we live without quick delivery? Yes. Are we still wowed by a 10-minute delivery of our orders? We almost certainly are. One could argue that it is indeed a forced behavioral change, and we will eventually be left wondering how we ever lived without it. It is agreed that increasing the number of orders and transactions is critical to improving profitability. However, in order to build a self-sustaining business model, these platforms will need to pull multiple levers," added Ramdev.

Alterations to be the way forward

Even as funds are drying up for these companies, only some of them, including Flipkart Quick, Dunzo, Fraazo are scaling down. Many like Zepto are sticking to the plan, but with some tweaks in their offerings such as increasing the charges for speedy deliveries, and the threshold for free orders, among others.

Will these alterations become favorable moves for these companies? "For most Quick Commerce players, AOV is presently ~INR 350-400 while gross margin is ~15- 18 per cent. However, operating expenses are significantly exceeding revenue. To improve their economics, these companies should offer a localized assortment, promote high-order value SKUs, charge a delivery fee and have a higher free delivery threshold. Sourcing directly from brands/FMCG producers and offering private label with higher margins would aid in lowering COGS," said Randev.

Randev suggests alterations such as improving AOV; lowering COGS; optimizing operations by reducing warehousing and transportation costs through optimized fulfillment center infrastructure (warehouses, hubs and cross-docking); lowering last mile cost by enabling multi-drop (batched) deliveries, optimizing route planning for delivery partners, cross training delivery partners to do multifunction deliveries like food delivery, medicine delivery etc to improve profitability.

Quick commerce is expected to transform customer buying behavior and is expected to become more common, provided significant alterations are made. "I feel that in the current scenario, there is a need to find innovative ways to stay profitable. With some quick delivery partners, the one challenge that I see is that they require real estate in the prominent areas of a city. This reduces their margins more and therefore they could eventually consider franchising dark stores. This would be a different business model but they need large volumes compared to someone like BigBasket, which is a platform that aggregates orders on a slot and area basis and delivers at a go. This makes their margin percentage higher to turn profitable. Now Zepto is now trying to route orders to kirana stores, which is a lead management model and deliver service and can help add to the margins," said Ankit Kedia, founder and lead investor, Capital A.

Further, experts suggest the addition of other revenue streams such as advertising income from brands and subscription fees for loyalty programs and optimization of the supply chain to reduce last-mile delivery costs.

Time for consolidation

Experts watching the space believe that the companies which are currently in this space will eventually experience consolidation. "Only serious players who are committed to developing a successful model that prioritizes the needs of the consumer and have their P&L in order will eventually persist and emerge as long-term winners, which would eventually lead to an oligopolistic market and improve profitability. To summarize, in order to enjoy full efficiencies and build sustainable businesses, consolidation is inevitable," said Randev.

An intense phase of consolidation over the next few years, similar to that seen in food tech, is expected, leading to an oligopolistic market and improved profitability for survivors.

Quick commerce in 2022: A sum up

"Only serious players who are focused on building a profitable customer-centric model and have their P&L in order will be able to sustain and win in the long run. It is critical for these players to focus on the basics of a fundamentally sound business i.e., attractive profit margins and excellent customer satisfaction. The question that needs to be asked to the new-age players is what kind of long-term moats have they built — currently, who is burning more cash is the trend. However, for a profitable and sustainable business model, the kind of moat these companies build will be crucial for their success in the longer run," said Randev.

According to RedSeer management consulting, quick commerce is estimated to be a $30 Mn market in 2021 and is expected to grow up to 15x to reach $5 Bn in 2025. "Overall, we are seeing a lot of consciousness for the quick commerce space. However, the total addressable market or TAM is lesser than estimated and therefore, the road to profitability might be a long one. No doubt, the quick commerce model is revolutionary but the path to profitability is a long one," said Kedia.

Despite the current development spike, fast commerce in India still only accounts for 7 per cent of the entire online grocery market, and it still has a long way to go. In addition to that, the quick delivery model may not be able to penetrate as well in Tier 2 and 3 cities. "Again, similar to any enabler business that takes significant time to achieve scalability with razor-thin margins, the quick delivery model will also take a long time to turn profitable," sums up Kedia.

S Shanthi

Former Senior Assistant Editor

Shanthi specializes in writing sector-specific trends, interviews and startup profiles. She has worked as a feature writer for over a decade in several print and digital media companies. 


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