[#36] Quick Commerce is the New E-Commerce: What does the future of retail look like?

We’ve all been seeing the news lately. Zepto raised close to a billion dollars in FY24. Interviews of Deepinder Goyal are resurfacing, talking about how Blinkit, and not Zomato will drive the next phase of growth. Everyone, from Flipkart, to almost every D2C brand is getting into Quick-commerce. 

But why? 

I’ll admit. I was a skeptic. When Zepto launched, I was mystified. My own view was that it was a covid escalation, similar to edtech, and even when it launched, grocery delivery apps anyway existed.  Why do Indians need groceries in minutes? “We have kirana stores within 100m,” I reasoned.

Then I got used to ordering, and it wasn’t just the convenience of not having to walk down to the store and get my weekly haul of tomatoes and onions. It was also the ability to plan in advance, and select accordingly. It was also the choice. Suddenly, instead of having to do two separate runs: one to a kirana to get my vegetable staples: potatoes, ginger, dhaniya etc, and one to a Nature basket for the more “exotic” vegetables: bok choy, basil leaves, lemongrass, and certain types of mushrooms and fruits, which while doesn’t make sense for a kirana to stock, is usually available at these upscale grocery chains. 

But even then, something didn’t make sense. I didn’t use more than 2 apps: 1 for my big orders, such as bigbasket, and 1 for immediate needs: while I was initially a loyal user of Instamart, Blinkit’s customer experience, and wider choice selection has made it my number one app. So then what did these guys know that we didn’t? 

It’s clear now. As Zepto expands its partnerships with Decathlon, to ship sports equipment to customers within minutes, and the hype around to some 300 Iphones being delivered by Blinkit in minutes, and even if you look at the selection within these apps: it’s not food anymore, but it’s also shower curtains, and bathmats, and towels. I even saw my expensive dermat recommended sunscreen on blinkit, as well as bluetooth headphones! Quick Commerce (QC) is the new E-Commerce, and that is why VCs are investing like crazy, and big players are all running to own a piece of it. 

The bet seems to be: It’s not the Amazon’s and the Flipkart’s of the world who will be the primary marketplace for discovery and distribution of products. It’s your apps such as Blinkit, Instamart and Zepto, where all this will happen. 

The same factors that drove e-comm in India, will ensure disruption of e-comm by quick commerce: 

According to an article by business standard, the Indian e-commerce market is expected to hit $325B by 2030, with rural India leading almost all of it. And other reports suggest that while the Q-commerce market in India is currently valued at $3-5B, it could hit ~$15-20B by 2032. 

My own sense is that it's probably going to be a lot bigger than $15-20B, because it’ll cannibalize sales that the major e-comm platforms are doing. Think about it. Why did e-commerce become such a big force?

1. Rising smartphone penetration 

2. Low data costs 

3. Digital mobile-first payment methods, such as UPI.

Q-commerce is this, but on drugs. Admittedly, grocery is a tough business. Fresh produce, lack of a cold chain across India, and low margins. But that was just the first category. Eventually all categories will be listed here: electronics, fashion, books, household items, sports equipment and everything else. It’s already started.

Haven’t all of us wondered why it takes 2 days to deliver an item that is probably available at a store somewhere in the same city, probably in the radius of 10km, and if we were less lazy, we’d just go and get it on the same day? And the way e-commerce came and disrupted retail, and traditional ways of selling online is what QC will do to ecomm. 

One example is, evolving from being just a marketplace to building your own brands in categories and products that show promise. This is exactly what Amazon does: Allows 3rd party vendors to list products, and any product that scales / shows high customer stickiness: builds its own, and promotes that instead. 

There’s also another reason why quick-commerce can potentially beat out ecommerce: In Q-commerce, there is a single touchpoint. The darkstore. In E-commerce, there are multiple points of failure. Multiple places where the package is handled, and shipped to the next location, and so, the chance of failure / customer satisfaction not being met is times x. In quick commerce, that is reduced to just 1: the delivery person / dark store where it is picked up. Of course, here the trade-off is selection, but for a lot of standardized and commoditized products, you can use analytics to make pretty good guesses on which items are being sold the most, and leave the bigger players to solve for the long tail. 

The customer will be owned by Q commerce apps. 

Q-commerce apps will own the customer, and define biz models

Ecommerce, in my opinion, will become broken into Q-commerce, which will be in densely populated, tech first, which is your metro and tier 1 cities. This is a customer who wants the product immediately, and doesn’t really care about paying Rs 100 per order to get the product. And then products where the delivery happens in hours / days. I see this model operating in two ways: 

Q-commerce Led: Manufacture own brands and leverage partnerships

1. Q-commerce apps with their own brands and warehouses delivering the product: e2e control of the discovery, acquisition and purchase process 

2. Q-commerce apps which have tie ups with various stores, chains, and possibly even with the warehouses of Myntra, Amazon, and Flipkart, where if the product doesn’t exist with the Q-commerce app, they are able to source it from within the city, and deliver it, if not in minutes, then atleast in hours. So here, the product is sourced from a different brand, but the delivery is taken care of by the Q-commerce app. In some cases, it could be taken care of by the brand from where the product is sourced: Amazon for example for some products has same day delivery. 

Ecommerce will have to win in rural & Tier 2/3/4 cities

And then your traditional e-commerce, through Amazon, Flipkart, Myntra, and Nykaa, which will be in areas where the economics of setting up dark stores, and having a hyperlocal delivery fleet doesn’t make sense, and the willingness to pay Rs 100 per delivery is low.

It’s possible that the discovery still happens through your q-commerce apps. But it’s purely for discovery and convenience. The supply chain, and order fulfillment may still have to happen through the supply chain set up by the big marketplaces. And that is what Amazon / Flipkart will have to focus on. Flipkart and Amazon, to retain share, will have to figure out how to compete in this space, which they are already doing. Flipkart for example is getting into Q-commerce with its service called Minutes, and Amazon is reportedly planning to roll out its quick commerce service in the first quarter of 2025 (link). 

It’ll become a category play:

Commoditized and standardized products will be dominated by Q-commerce, while products requiring some personalization will be through e-commerce / instore.

Categories that will still have their own apps or will have some sort of store / multiple day shipping experience will be luxury / premium / personalized items.

Ex: Clothes: I work out, and for me, my athletic clothes need to be very comfortable and fit well, I usually prefer to shop for these in person, in a store. Others may have that hang up about other items: 1 common feedback I’ve heard is that people prefer to buy electronics & home decor for the home in-store, because they’re able to get an idea of the dimensions, so they can plan for how that product will look in the house

I’ve taken a look at some top categories, and tried to compare the QC vs e-commerce fit for each. Wherever selection & personalization matters, is probably where e-commerce will still maintain a significant presence, since I’m not sure how selection will be managed in a darkstore.

Ex: Food and grocery, healthcare, medicines (painkillers etc) are usually instant needs, and will be dominated by QC. But items such as books, electronics, apparel and footwear, there will be some split. If it’s completely standardized, and low cost (this is relative, the thresholds will take time to be figured out), then I’ll buy through QC. If selection matters, then QC may not be able to solve for the long tail, and I’ll probably go e-comm. And if personalization and fit matters, then I’ll go in-store to buy. 

Below is (based on my understanding), how I think things will play out. 

Scale:

1. Green: Winning this category

2. Yellow: May not win, but will be able to serve a certain %

3. Red: Minimal play here

What do the economics look like? 

I had done an analysis on Zomato’s quarterly earnings report for Q1 FY25, you can check it out here.

The unit economics at a Contribution margin are looking good. While from a revenue perspective, each store is making ~ INR 1.5 Cr per quarter now, the contribution margin has increased at a faster rate: from losing ~3.6L per quarter, stores are now making ~31L per quarter!

That’s to be expected. From a revenue perspective, Blinkit has figured out that for a customer who wants products immediately, paying extra per delivery is no big deal. Quick commerce on makes money through the following: 

1. Commissions from orders listed on the marketplace: 8-15% 

2. Handling Fee: Rs 4 per order 

3. Delivery Fee: Rs 16 - 30 per order. It is reduced from Rs 30 to Rs 16 if the AoV of the order is greater than Rs 199. 

4. Advertising revenue 

And this can increase based on surge / demand at the time of placing the order, so there is a lot of potential to make money, based on the customer urgency, and the demographic being served.

But what is also really interesting is that Blinkit, while obviously playing the revenue / order game, and being able to tack on these extra charges, has also been able to streamline its costs a lot. Take a look at the growth rates: while revenue per quarter has grown from between 22 - 31%, and the direct cost growth has also been fairly consistent, and seems to have grown linearly with the number of stores (has stayed consistent at a direct cost of 1-1.2 Cr / store per quarter), the operating expenses growth rate has reduced dramatically. From a Q1-Q2 FY24 growth rate of ~35%, it grew only 3% from Q4 FY24 to Q1 FY25. And this is when the number of stores grew by 21%. So from an operations point of view, they have been able to definitely scale operational costs down, and therein lies the hope.

Q-comm needs to solve what E-comm has solved for already:

The Amazon supply chain has been developed, where Amazon has its own Fulfillment centers, and its delivery fleet. And with 55% of its worldwide orders being sold by 3rd party sellers, and smaller 3rd party sellers, FBA (fulfillment by Amazon makes more sense). A product comes in either from an amazon warehouse, or from 3rd party vendors. They’re then stored, and when the order comes in, the order is packed and shipped out. Of course, this is a simplistic view, at a high level. Amazon has invested in robots, analytics, storage & packaging strategy, and its own delivery fleet  - Amazon Air (flights) as well as its Amazon Delivery fleet to ensure that they can deliver on 1-2 day shipping promises. 

The speed, and type of need Q-comm is serving may change, but the basics remain the same, such as dark stores, which are the Q-comm version of warehouses, and the delivery fleet.

Dark store and delivery fleet investment becomes key here: Which is why companies like Blinkit are targeting scaling to 2000 dark stores by FY26.

A Blinkit dark-store for example, is stocked daily based on predictive analytics, and customer behavior. But since it is solving for hyperlocal delivery, the problem is finding real estate in the right areas (close to demand), so that delivery can happen within 10 minutes. But multiple things have to fall into place here:

1. Dark store location, and cost of real estate:  

It is hyperlocal delivery, so these dark stores have to be close to population hubs / wherever orders are the highest, usually close to housing complexes, or building facilities. These dark stores need space, usually 2000 - 4000 sq feet. This is getting expensive. Long term lease / outright buying of this real estate requires significant capex, which is probably why Zepto has raised so much money, so it can quickly buy up all the available space. Blinkit seems to have adopted a franchise model to get around this, where the franchisor locates the store, and pays close to ~80L in upfront costs to get set up (link to article here). In its current form, it’s a payback period of 3 years (at ~2L monthly profit), which may not really be all that lucrative for a franchisor.

2. Partnerships with other brands for access to inventory:

Such as Zepto & Decathlon. There aren’t too many public details on how this is being orchestrated, but I assume that there is some agreement on the products that will be listed - based on customer trends, and ease of delivery, and Zepto can directly pick the product up from decathlon stores in “Dunzo” style, or Decathlon warehouses / storage units. If it’s warehouses, I’d assume there is a separate “Zepto x Decathlon” section to pick up and package the product easily. 

I’m not too sure if this can happen within 10 minutes, but this is something that will be figured out as this scales. I expect more brands to have these sorts of partnerships with QC Apps, feeding into the hypothesis that the QC App will own the customer. 

3. Manufacture products:

Eventually, the dark-stores / warehouses will store products manufactured by themselves, similar to how Amazon did it.

I’ve tried to visualize the possible models that QC could evolve to in the below diagram, with all discovery and acquisition happening through the QC App.

There are problems that exist, which will only be amplified by this change, and need to be solved for

Problem 1: Incessant calls from delivery, package being delivered at wrong address, and unable to find locations.

1) Automation is an obvious solution here. Amazon is already piloting drone delivery. Swiggy & Zomato between 2020 - 2022 seemed like they were keen on this space, but regulation is yet to come in, and Indian infrastructure at this point may not be able to support something like this just yet.

2) Another solution is deeper integration: For example: Mygate has integrated with Zomato and Swiggy to allow customers to pre-approve orders at the gate once they have shipped but before they have arrived, to remove the last minute panic around approving the order. This also reduces the calls that the delivery person has to make, requesting approval for entry.

Is it so improbable to suggest that in the future, we will have Blinkit / Instamart / Zepto powered QR codes? These codes can be mapped to communities or apartments, where the delivery person can match the delivery QR of the person placing the order, against the community QR, (through some sort of scanning mechanism) and check, not just if they are in the right place, but if they are not, how far they are from the correct location? Example: Zomato / Blinkit will have visibility on which QR’s are placed where, so when the delivery person reaches the location, they can either give a “match” or they can map the delivery QR against wherever on the map is the community / house QR, and give clear instructions on getting there.

What about signage? In places where there is high traffic, and orders booked, these QC apps have an incentive to put up signs themselves to direct their delivery fleet, thus saving time, reducing time per order, increasing the number of free delivery persons, which allows for more deliveries, and better customer experience.

Problem 2: Product selection, I want to be able to buy more products, and get them delivered quickly. 

This is tough to solve from a darkstore perspective, and I’m not sure if this will ever be able to solve for the long tail. This is where e-commerce platforms can still win, and where I feel, they will have to invest, maybe not in hyperlocal delivery, but same day / two day shipping, to at-least keep themselves competitive. And as QC grows to other categories, this problem becomes bigger. I don’t see the sq footage of dark stores growing, due to the location, so that limits the number of items that can be stored, and at the end of the day, things such as daily essentials and grocery is what is driving this category. 

Problem 3: Handling product returns:

Zomato launched a Food Rescue policy earlier this month, where if a customer cancels an order, but the order is out for delivery, it can be relisted, and delivered to another customer at a nominal fee. From a food perspective, this was met with an outcry and rightly so - not sure how quality control will be managed here.

But other products: clothes, shoes, let’s say books, and other items, how will that be solved? Will the product be returned on the same day, or will standard e-commerce rules apply to product pick-up? But that doesn’t make sense: delivery in 10 minutes, and pick up in two days. Will it be picked up by the delivery fleet, or some other process will be in place?

And in the case of these products being sourced from a partner store / warehouse, will there be processes put in place there for quick drop and pick-up? 

Problem 4: Delivery partner visibility on package content

In Amazon deliveries, because all products (from 3rd party sellers, as well as those which are completely fulfilled by Amazon) are shipped to the fulfillment center, where they are packaged, and then sent. The delivery person does not know what package they are delivering: which is important. What if the order is a high value order? The delivery partner is incentivized to make off with the package themselves, if the value is high enough. As QC scales, how will that be managed here? If the delivery partner is picking up the package from the store directly, then what prevents them from making off with the phone?

So big questions that still need to be solved.

So what is needed for QC to REALLY challenge e-comm, and what needs to be done to win?

1) To win in quick commerce game, investment in dark-stores, and delivery fleet is a must. And building deep partnerships with D2C brands and figuring out logistics around the same is important to solve for the limited selection problem. And being able to do all this with an eye on customer delight, since the whole point of QC is customer experience.

2) Regulations around ownership & employment structure is sorely needed: Things such as employee welfare: are they full time, or gig workers, needs regulation around it. The government is anyway also deep diving into the ownership structure of the dark stores. India’s foreign direct investment rules don’t allow foreign-funded online marketplaces to own inventory or control sellers on their platforms. Because of these restrictions, the dark stores are not owned by the quick-commerce platforms themselves, because of foreign VC investment, but instead owned by separate entities, but this is also a gray area. (link here)

3) Identify and bet on categories with QC promise: I expect this to evolve into a category specific play: Healthcare, personal care, sports equipment (standardized), apparel and footwear (standardized) and even some categories of books & daily use stationary, some of which has already started being available on these platforms. But quick experiments, understanding customer behaviour, and pivoting will be required.

So it’s a tough space to be in. But the economics of Blinkit are promising. And maybe thats why companies like Swish (raised $2M from Accel) have been able to raise money, even though this is a crowded market, with players who have deep pockets.

And when you look at QC with the e-commerce lens on, that $20B market by 2030 suddenly grows 15x to ~$325B, and starts looking a lot more lucrative. And thats probably why Zepto is attracting the investment it is, and investors are snapping up Swiggy’s pre-IPO shares.