In 2020, the concept of quick commerce didn’t
exist in India. The existing model of e-commerce at the time, was slow and fragmented. You had to
wait for days to get basic things like groceries and packaged foods. And this was because
Indian companies at the time followed a model that was taken from the US, and it was called the
warehousing model. Under this, you store products in a massive warehouse on the outskirts of a city
and then deliver them to the customers from there. And this model was fundamentally
flawed for the Indian market, simply because we have Kirana stores at every nook
and corner of our streets. And instead of waiting for 2-3 days to get things like vegetables, we can
simply walk and get them in less than 10 minutes. This was the same problem that Aadit and
Kaivalya thought about during the early days of the pandemic. They were
inspired by Instacart in the US, and soon realised that if they wanted
to replicate the same business in India, the fundamental thing they would
have to solve for is ‘time’. This insight led to the birth of
quick commerce in India, a market that is already more than 3 Billion dollars
in size and is growing by 25% each year. The idea that was started by two
teenagers is now being replicated by almost every e-commerce company in India. Zepto, which was started just three
years ago, is already valued at 3.3 Billion dollars, and the founders want
to make it the next DMART of India. So in this video, let’s understand how Zepto
made it all possible. What did they do right and what are some challenges they would
face to become the next DMART of India? Aadit and Kaivalya started Zepto as a
passion project. During the pandemic, they were stuck in Mumbai at their
apartment and noticed something interesting happening. People there couldn't
go out to get groceries due to the lockdown and the online grocery delivery companies took
days, to get the groceries delivered. And so, with nothing better to do, two of them started
helping their neighbours get the groceries. This simple idea soon grew from a few neighbours
to creating a WhatsApp group and they now started delivering groceries for the entire neighbourhood.
Once they hit the limit of 256 people, the number of people WhatsApp allows in one
group, they thought they could scale it up, so they built an app and named it Kiranakart.
Why Kiranakart you might ask, because they wanted to make an Indian version of ‘Instacart’,
which by the way is a massive company in the US, more than 10 years old, $13 Billion
valuation and is also into grocery delivery. So, this was the vision, of building
an Indian version of Instacart, and the way they differentiated themselves from
other grocery delivery companies like BigBasket, was quick delivery. It wasn’t 10 minutes at the
time, but it was under an hour, and that really appealed to people. Within 5-6 weeks of launching
the app, they started getting close to 300 orders a day, which was pretty significant, and the
founders realised they were onto something. And once the number of orders increased, the
founders thought of hiring more people and started looking for funding. They applied
for a student-focussed VC fund called Contrary Capital and got 50 thousand dollars
in funding, at a 2.5 Million Dollar valuation. So, this was great news for two-17-year-olds,
they thought they would scale KiranaKart, but then something happened, that forced
them to rethink their entire plan. The customers told them, that they a
re using their service just during the lockdown, once it’s lifted, they
won’t need them, as they can just go down and get groceries, so why
wait an hour to get it from them? This was a huge wake-up call for both the young
founders, but it was also an insight at the same time. At that moment, they understood why online
grocery delivery companies weren’t successful in India - people wanted faster deliveries. If they
had to wait for days or even hours to get their groceries, what’s the point? They could just
get it themselves. Most of these grocery items were right outside their homes at a Kirana store
down the street - it took them just 10 minutes. This was the key insight,
it’s not the accessibility, it’s the speed which is important here. With this new focus, KiranaKart
rebranded to Zepto in April 2021, and why Zepto you might ask. Well
Zeptosecond in physics terms, is the shortest amount of time ever
measured. And it’s written like this. So with this rebranding, speed
became the key focus for the company, and this was the origin of
10-minute delivery in India. Zepto, by now, had decided that they
would deliver groceries in 10 minutes, but they didn’t really know how to do it.
If they continued to follow their old model, of sending a delivery person to a grocery
store, and then getting it packed from the shopkeeper and delivering it to the customer,
it wouldn’t be done in 10 minutes. There were just too many touchpoints, and if anything
gets delayed, the order will get late. And so, Zepto needed a new model, and this
was made possible because of this guy. His name is Suvir Sujan, the co-founder
of Nexus Venture Partners. He was the one who suggested the dark-store model to Zepto
founders. And Suvir is not your regular VC, without any experience in building startups.
In his early days, Suvir had built Baazee, one of the earliest e-commerce marketplaces
in India, which was later acquired by eBay. After selling Baazee, Suvir started Nexus Venture
Partners with two other co-founders and has since followed India’s e-commerce sector very closely.
And Suvir had understood that this Kirana delivery model has thin margins and the only way to solve
this, is by building a full-stack model and taking a tech-first approach. Basically, controlling
the entire process involved, and for this, he suggested setting up dark stores, where
they could store all the products, and then deliver them to the customers from there.
And once, Zepto founders agreed to pivot to this model, Nexus Partners invested 6.5
Million dollars in its Series A funding round. Now, as soon as Zepto raised that big Series
A round, other companies in the sector started adopting the same quick delivery model,
and for a while, it looked like Zepto would be eaten by the other sharks. It was a new
company, with two 17-year-old founders, and they were against these decade-old giants
with billions of dollars in their bank. But in the last three years, not
only has Zepto survived in this cut-throat market but is also thriving.
At the time of me filming this video, Zepto has a 21% market share in
India’s quick commerce market. In terms of revenue, Zepto made over
2000 Crore Rs in revenue in FY-23, which was more than 14 times of the previous year.
For FY-24, they haven’t revealed their revenue, but according to Aadit Palicha, their monthly
revenue run rate is 400 Crore Rs, which means their annual revenue for FY-24 could be around
5000 Crore Rs, which if we compare with Blinkit, is more than double. Even Swiggy Instamart’s
projected revenue for FY-24 is less than that. So now, let’s see what Zepto has
done right, to get to this point. The biggest reason for Zepto’s
success is its ‘efficiency’. Take a look at this graph by the Morning COntext.
It shows that Zepto is doing 5,20,000 orders per day from its 360 dark stores, which means they are
doing around 1450 orders per day from one store. Compare this with Swiggy, which
is doing 6 lakh orders from 490 stores. This comes down to 1225
orders per day from one store. Now let’s calculate how much revenue
these stores are making. Let’s say the average order value for both is
400 Rs, which means Zepto is making 5 lakh 80 thousand Rs daily per store, and
Swiggy is making 4 lakh 90 thousand Rs. Now, let’s scale this number. Let’s say
both of them are running 1000 dark stores, then this difference goes up
to 9 Crore Rs a day per store, which translates to 3,285
Crore Rs in the entire year. This is a massive number, and it shows
what efficiency at scale looks like. This focus on efficiency has helped
Zepto make most of its dark stores operationally profitable. In fact, 75% of its
360 dark stores today are running profitably. But Zepto doesn’t intend to
stop growing anytime soon, they plan to double the number of
dark stores to 700 within a year. And this is because they’ve cracked
the profitability model - earlier it used to take them 23 months to make one dark store profitable from the day of start,
but now it only takes them 6 months. But how are they so much more efficient than
their competitors? What’s their secret sauce? Well, to me it looks like it’s in their DNA. As
I mentioned in the intro, Zepto was built at a time when the funding in Indian startups
was declining. And if they wanted money, they had to prove they could solve
this problem better than anyone else. And the same thing is said
by Suvir Sujan of Nexus, “Palicha can tell you the margin profile
for the week. He knows how much he can save by moving to EVs. He looks for every
2-4 rupees benefit day in, day out.” And let me tell you about something very
interesting I found out related to this. Zepto has redesigned their delivery bags to save 1
rupee on every delivery - that’s how much focused Zepto founders are on efficiency. They know
that every rupee adds up. Right now for eg, they are doing 520,000 deliveries
a day - that’s 520,000 extra rupees in the bank every day and that’s
more than 18 crore rupees per year. Next, their warehouses are also designed in a way that makes it quicker for
them to pack the products. Their technology even tells their packers
exactly which product needs to be packed first and so on - so they are not broken
while packing or at the time of delivery. And finally, for delivery partners, they hire
people who live in the same neighbourhood where they deliver - making their deliveries
quicker as they are familiar with the area. They’ve literally thought of everything. And this obsession with efficiency is the main
reason behind Zepto’s extraordinary growth. The next thing they are doing right is launching
private-label brands. Just six months ago, they launched the fresh meat brand ‘Relish’ and
it has already reached to a revenue run rate of 500 Crore Rs. And according to Aadit, it will be
a 1000 Crore revenue company in the next one year. And just for context, Licious, which is a
9-year-old brand, is sitting at an 850 Crore run rate. This is a crazy growth for Zepto. After
seeing the success with Relish, the company will surely look at other fast-growing categories
to open more private-label brands. This is something that Amazon did very well, once
they had the data about which products and categories sell the best, they started
their own private label brands to sell them. So far, I’ve talked about
what Zepto has done right, but now I want to focus on what are
some areas where they are struggling. Before I talk about anything else, I want
to talk about their delivery fees. See, Zepto has a subscription service called Zepto
Pass, and one of its benefits was ‘free delivery above 99 Rs’. But the way Zepto implemented
this was not something users liked. Here, even if you add items worth more than 99
rupees to your cart - you still have to manually remove the delivery fee - which is not
easy to find in the first place. You have to go down and click on this “To Pay” segment to see
how much delivery fee is being charged and then remove it manually by clicking on the Apply
button for “Free Delivery on this Order”. Not something you’d want to do after paying for
a pass that claims to offer free deliveries. And this has pissed off a lot of users
including me. It could be a business tactic but it’s not a smart one if you want
to earn your users' trust in the long run. Next if we talk about Zepto Pass itself, right
now the company sells these passes for anywhere between 9 and 39 rupees per month for different
users. This is way cheaper than the delivery charges the users would have to pay for a single
delivery - so it’s a no-brainer that people are buying it in big numbers. But you see, these
passes are actually priced at 149-299 rupees per month for different users. Right now, they
are giving discounts by burning investor’s money. So, the question is - Will people buy these
passes when the discounts go away and they have to pay the original price for these? That’s
a big question that Zepto needs to figure out. And let me give you Swiggy’s example for
context. Back in 2022, Swiggy Instamart was offering free deliveries to their customers
on orders above 99 rupees - this was a benefit they added for all their Swiggy One members.
But cut to today, Swiggy has increased the cart value for free delivery from 99 rupees
to 199 rupees. Also, their membership fee has increased from 299 Rs for three months
to 1299 Rs for three months for some users. And the result of this? Their market share
which was 52% in 2022, has come down to 32%, now that all discounts have gone away and
the company is moving towards profitability. So, I’m sure a lot of people who
earlier used Swiggy Instamart, are now using Zepto since it is cheaper. And
that is something Zepto has to think about. Also, this isn’t the only thing they’ve taken from
Swiggy’s playbook, Zepto is now experimenting with Zepto Cafes - where they deliver quick snacks
like tea, coffee and samosas in 10 minutes. On the face of it, it looks like a good idea
- a way to increase average revenue per user, and higher profitability as these products have
higher margins compared to packaged goods. But again, other players have failed to do so.
Swiggy had started ‘Instacafes’ which they later shut down as it involved
high expenditure costs and they weren’t getting as many orders as
they’d hoped to make it a success. And not just Swiggy, even Zomato had tried
this 10-minute food delivery and quit. So again something which will be interesting
to see, is how Zepto navigates it in future. And talking about the future, Aadit and
Kaivalya have big ambitions with Zepto. They want to be the next DMART of India and
want to do it, in the next 18-24 months. This in my opinion is very difficult to do.
To put it in context, DMART right now is a 37 Billion Dollar company, Zepto on the other
hand was valued at 3.6 Billion dollars in their last funding round. This means they
have to grow 10 times in just two years. Next, they want to do so just by focusing on
groceries, which it turns out, is a massive category. According to Aadit, the Indian grocery
market would be worth $850 billion by FY29, of which $400 billion would come from top-income
households, which is Zepto’s target market. Another fact that really surprised me during
the research is that almost 40% of consumer spending goes into groceries. So in terms of
TAM which is the total addressable market, Aadit and Kaivalya have picked the right sector. In the end, I just want to say that the
journey of Zepto till now has been nothing short of exceptional. They picked a
boring sector and made it exciting, not just for themselves but for the
entire e-commerce sector in India. The phenomenon of quick commerce
that two teenagers thought of is now being replicated by almost
every e-commerce company in India. About their vision of becoming
the next DMART of India, I can’t say when, but they
will surely reach there. Financially the company is at a comfortable stage, they just raised 665 Million
dollars, and the money according to Aadit, is enough to take them
to the IPO stage in the next 2-3 years. Let me know what has been your takeaway
from this case study. Do you think Zepto is on the right track to becoming
the next DMART or are there some fundamental issues with the company
that will inhibit it from doing so? Share your thoughts in the comments
and I will see you in the next one.