Dunzo is in a difficult situation. Yes, but how difficult?

Hello, fellow Olio enthusiasts! 👋

Happy Hump Day and welcome to the 48th edition of Weekly Olio - your weekly dose of giggles, wisdom, and a sprinkle of intrigue with our tantalizing thought piece (yes, we're talking about Publisher's Parmesan here). 🤭

Today’s Publisher’s Parmesan talks about how Dunzo is changing its ways. The Reliance-backed hyperlocal delivery startup has been struggling to raise capital and is now reworking its business model again.

Exciting, right? 👏

Will come to that, but let’s first start with the curation.

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The Quote󠀢 💭

The Tweet 🐦

India is embracing digital infrastructure, which encourages banks, FinTech companies, and start-ups to create innovative solutions for payments and credit. However, the data needed for credit assessment is currently stored in separate systems, causing delays in lending. The Reserve Bank of India (RBI) is creating a Public Tech Platform for easy credit. This platform is being developed by the Reserve Bank Innovation Hub (RBIH), which is owned by RBI.

The Public Tech Platform will solve this problem by allowing lenders to easily access the necessary digital information. This platform will be open to all financial sector players, allowing them to connect and use it easily.

The Infographic 💹

This chart provides a comprehensive overview of an astounding span of 3.4 million years, during which technological advancements have been rapidly accelerating. It is truly remarkable that we are fortunate enough to exist in an era where the world around us can undergo profound transformations within the span of our own lifetimes.

The Short Read 📝

Meaningful metrics: How data sharpened the focus of product teams - by Erin Gustafson

Erin Gustafson is a lead data scientist working on assessment, learning analytics, and educational data mining. She holds a PhD in linguistics with a specialization in cognitive science.

Many companies grow through paid marketing, but Duolingo’s strategy is a little different! As of early 2023, approximately 80% of its users were acquired through various means such as word-of-mouth, referrals, and organic growth. Duolingo further hopes that eventually, learners will not only find immense value in using Duolingo but also derive such immense satisfaction that they willingly choose to invest in a set of premium features.

The Long Read 📜

Braid is dead, long live Braid - by Amanda Peyton

Amanda Peyton is a technology entrepreneur and enthusiast and currently, the CEO and Founder at Braid.

Braid was a consumer payments company that was around from 2019-2023. It designed and shipped a brand-new multi-user financial account called a money pool, and raised ~$10 Mn in venture capital from investors. Braid took ~2.5 years to find product-market fit, and after that, it grew sustainably and quickly.

Publisher’s Parmesan 🧀

Dunzo is in a difficult situation. Yes, but how difficult?

Dunzo, the Reliance-backed hyperlocal delivery startup, is currently undergoing significant transformations in its operations. Previously faced with challenges in raising capital, the company has now taken the initiative to revamp its business model once more.

According to recent reports, Dunzo is closing down many of its dark stores, where it stored inventory for grocery deliveries. Instead, the startup is now opting to deliver Dunzo Daily grocery orders through local supermarkets.

The startup has undergone various transformations and tried out diverse concepts, yet has failed to yield substantial income. In the middle of last year, Dunzo aimed to raise funds but garnered minimal attention owing to apprehensions regarding its profitability and valuation.

The Bengaluru-based company has switched its focus to reducing costs. In recent months, it has laid off employees, shut down dark stores, increased delivery times, and reduced discounts.

How have things unfolded in the recent past?

Dunzo, a delivery company, has undergone significant transformations since its inception. It initially provided a simple pick-up-and-drop service. However, it has now evolved into a versatile platform that enables users to order from registered local stores and offers grocery deliveries with its own inventory.

In August 2021, Dunzo made a strategic move and began investing heavily in rapid household deliveries. This move attracted significant funding from investors and large startups like Swiggy and Zomato. Although it was a late entrant, Dunzo proved to be a strong competitor and raised an impressive $240 million in early 2022, based on its new pitch.

The funding round attracted participation from existing investors Lightrock and Lightbox. However, the primary investor was Reliance Industries' retail arm, Reliance Retail, led by Mukesh Ambani. Their investment of approximately $200 million (INR 1,500 Cr) is a significant move for the largest retail company in India, which deals in groceries, fashion, and electronics. This investment puts JioMart, a service provided by Reliance Retail, in direct competition with other players such as Swiggy's Instamart, Zepto, and Zomato, which later acquired Grofers (also known as Blinkit). Meanwhile, the Tata group had already acquired BigBasket, the leader in online grocery, in early 2021, which further intensified the competition.

However, Reliance, the largest shareholder of Dunzo, appears to be unhappy with the startup's performance, despite investing in January 2022. It has distanced itself from Dunzo, and the partnership between JioMart and Dunzo has not produced any appreciable outcomes. This lack of progress has led to a decline in Reliance's confidence in Dunzo's potential to establish itself as a sustainable business.

Dunzo is currently facing a challenging situation. The company has experienced a significant decrease in its customer base, approximately 40%, from July 2022 to January this year. This decline has adversely affected the quality of customer experience, resulting in more customers leaving the platform.

Despite raising a substantial amount of capital last year, Dunzo is struggling to sustain itself without significant fund infusions due to a lack of investor confidence. Will Dunzo be able to find a way to reverse this trend and show substantial improvement to regain investor confidence?

The dark store failure

After identifying groceries as the category with the highest demand for its on-demand delivery service, the company focused on expanding its grocery delivery service. This decision was further boosted by the increased demand for online ordering during the COVID-19 pandemic, which made investors more enthusiastic about the space.

Dunzo initiated a modest experiment to pinpoint the most sought-after items that would entice customers to return regularly. The experiment involved working closely with partner stores to enhance the assortment, timing, and quality of the items. Through careful monitoring of these metrics, Dunzo observed a boost in sales for the optimized stores. However, as these were third-party stores, the extent of optimization was restricted.

The startup opted for a strategic move to open its own stores, granting it full control over the inventory, packing, and delivery process to the riders. Following suit, Swiggy adopted a comparable approach with its Instamart service, transitioning from collaborating with retailers to constructing its own dark stores, akin to mini-warehouses. Grofers (now Blinkit) arrived at the same conclusion over five years ago during its rivalry with BigBasket (who had already embraced the inventory-led model).

Dunzo encountered setbacks as it lagged behind rivals like Grofers, Swiggy, and the newer Zepto in providing prompt grocery delivery services. Despite possessing comprehensive industry expertise, Dunzo was not an early entrant to the market. They encountered difficulties in attracting users due to technological inadequacies and other obstacles. Consequently, they spent their initial months striving to catch up.

Dunzo underwent substantial growth after securing funds from Reliance. By March, the company had about 130 stores, which rose to 200 in a mere two months. Nonetheless, despite its best efforts, the unit economics failed to add up. During the initial six months of 2022, the startup incurred a loss of INR 230 on each order it fulfilled. Furthermore, it endeavoured to expand beyond the eight major cities it currently serves by conducting a trial run in Jaipur. However, due to the exorbitant expenses and negligible demand for prompt delivery in Jaipur, the plan had to be abandoned.

The startup aimed to optimize the utilization of its dark stores by offering its services to e-commerce companies. The company attempted to onboard e-commerce firms that provide same-day or next-day delivery, such as Lenskart. For instance, if you are a cosmetics brand with a warehouse in Delhi but require delivery within six hours in Bengaluru, we can offer you storage space and last-mile delivery. A pilot test was conducted, but it necessitated cutting-edge technology. Hyperlocal operates differently than e-commerce, thus it experimented with third-party software as a service (SaaS) providers. Nonetheless, Dunzo abandoned it because developing something new was not their priority.

The company was compelled to alter its expansion plan as a result of investor inquiries and a lack of earnings. Unfortunately, this shift adversely affected the company's primary operations. While the company asserts that only 3% of its workforce was dismissed in the previous month, reports indicate that nearly 200 non-permanent employees were terminated exclusively from Delhi stores between May and November.

The business was also impacted, with one store that was doing 2,000 plus orders per day in March-November last year getting only about 200 orders a day after November. Another store in Hyderabad, which used to get over 1,000 orders in June-August last year, didn’t even cross 400 orders in January.

Dunzo is currently liquidating its inventory with half-priced items and significant discounts due to the closure of its stores. Nonetheless, this strategic decision has resulted in a decrease in market share in the online grocery industry. Even though Dunzo is making efforts to restructure its grocery business, it is also actively pursuing new revenue streams.

A long bet on B2B

Dunzo's latest strategy is to provide last-mile logistics to merchants through business-to-business services. In late 2021, they spun off their B2B vertical and named it Dunzo Merchant Services (DMS).

Reliance invested in the company with the expectation of significantly boosting Dunzo's B2B vertical. The investment was also expected to help JioMart improve its delivery experience. However, despite the initial expectations of a 10x growth in orders within a year, this has not yet happened. As of October of last year, B2B only contributed approximately 10% to Dunzo's overall business, which is significantly lower than the expected 50%.

Dunzo started the pilot with JioMart in September last year and was doing around 5,000 orders a day for Reliance’s online grocery service in November, which is around 5-7% of JioMart’s orders. (It’s worth noting that JioMart is in 200 cities while Dunzo is only in eight.)

The current state of the discussions between Reliance and Dunzo is uncertain. Reports indicate that around July, Reliance started to doubt Dunzo's capability to run the business profitably due to concerns about the high burn rate of the company. Since then, the connection between the two companies has weakened, and it appears that Reliance has withdrawn its backing for Dunzo. They had intended to combine operations with Reliance retail, but that proposal was also discarded.

Furthermore, there were discussions of a possible fundraiser with Dunzo, but that too appears to have fallen through. Consequently, the relationship between Reliance and Dunzo seems to be increasingly distant.

Dunzo has achieved success with small and medium-sized businesses but currently doesn't have any large enterprises as their customers. Scaling up the business volume for these categories is challenging. Hence, Dunzo is taking its time to build it gradually. Additionally, the delivery fleet is the same for both business categories, posing a challenge. Dunzo Daily might eventually become a client of Dunzo's Delivery Management System (DMS).

The struggle

The pandemic triggered a significant increase in demand for the quick commerce sector. As the situation gradually improved, the sector's profitability has declined, despite the persistently high order volumes. Many investors and companies have started to acknowledge that the growth rate has reached a plateau. For instance, Swiggy Instamart's daily order processing used to be approximately 200,000, and during its peak, it reached 425,000 orders. However, it has now dropped to 350,000-370,000 orders per day. Similarly, Blinkit is also encountering a comparable trend.

The closure of the dark store dealt a significant blow to Dunzo, with its co-founder and CEO Kabeer Biswas now holding less than a 5% stake in the company. Moreover, apprehensions have arisen regarding Reliance's track record of procuring struggling firms. As a result, Dunzo's recent restructuring seems to be its ultimate attempt to attain profitability and increase its appeal for acquisition.

The move to rely on local supermarkets instead of a chain of dark stores is what Grofers played and failed at during the online grocery contests of 2015-16.

The model seems quite promising since it helps the company avoid the need for owning or managing fixed assets like stores or warehouses. Additionally, it helps improve capital efficiency by enabling the business to offer the same level of service to customers through stocks held at partner supermarkets.

It is tempting to enlist external vendors to assist with a dark store, but this strategy usually yields unsatisfactory results. Relying on external vendors can lead to a decline in service quality. Given the nature of a dark store, orders must be delivered within a specific timeframe. But what if a customer is waiting in-store? Will you prioritize the online order or the customer order? Additionally, purchasing products in bulk from retailers helps reduce costs. However, the already slim margins mean that relying solely on commissions given by stores is not a sustainable business model.

As Dunzo endeavours to attain profitability, its rivals in the industry are targeting bigger orders. They are offering bulk packs of up to 30 kg and complimentary gifts for orders exceeding Rs 999 to gain a bigger share of the market. The objective is to elevate the average order value, thereby augmenting the revenue generated for each delivery. This strategy is logical since the delivery cost stays the same irrespective of the order size.

Blinkit holds an edge over Instamart because its frequent users are accustomed to placing larger orders, resulting in a higher average order value. However, Dunzo, despite being known for its speed, seems to have lost sight of its AOV.

It appears that the companies within this sector are not implementing any distinctive strategies to gain a competitive edge. This leads to the inquiry of whether the market can sustain more than four enterprises. There is a possibility of merging occurring, potentially leading to a duopoly. Zomato (which possesses Blinkit) and Swiggy have the upper hand as their primary operations involve food delivery, with rapid groceries as an added vertical. Zomato also profits from its Hyperpure supply chain, which helps the firm vend fresh produce to restaurants and helps its Blinkit grocery enterprise.

Dunzo generates most of its revenue from its grocery delivery service, which is heavily relied on by customers. Although the courier service is also offered, it's not as popular as the grocery service. Hence, Dunzo's market positioning is pivotal for its triumph. The main uncertainty is whether the company can form a business alliance with Reliance. Even though an acquisition may not be feasible, Dunzo could greatly profit from utilizing Reliance's store networks and supply chain.

The startup, however, doesn’t seem to have an answer yet.

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The Climate Party is a platform which brings together ALL Climate stakeholders, regularly, to cross-pollinate ideas for building climate solutions.

Think of it as India's LinkedIn for Climate but in the physical world. From a 20-ish member meetup in February 2023, The Climate Party is emerging as a celebrated force with ~400 people having been a part of 8 editions of climate parties across 3 cities (Gurgaon, Delhi & Mumbai).

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