Quick Commerce in India

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Quick Commerce in India

Despite the decline of quick commerce in various markets and the closure of well-funded startups in recent years, India stands out as an exception. The concept of delivering items to customers within 10 to 20 minutes seems to be successful in India.

India’s quick commerce market has witnessed a staggering tenfold growth between 2021 and 2023, fueled by the sector’s ability to cater to the distinct needs of urban consumers seeking convenience for unplanned, small-ticket purchases. Despite this rapid expansion, quick commerce has only captured a modest 7% of the potential market.

Essentially, Quick commerce in India, is still a novelty feeling for many and all the startup pundits and research houses in the country are trying to figure out, where could this sector actually go.

Today, in terms of players in the fray, Blinkit is suggested to be leading with 30-40% market share, followed by Swiggy Instamart and Zepto. Other players like Dunzo and BBNow (by BigBasket) are also present but have limited market share.

What’s driving this sector’s growth? 

We all have heard that for any quick commerce business model to work, execution is the key. Fair! But there are much more fundamental macros that have to be in place both from a revenue and profitability standpoint. These include:

1. High population density urban centers;

2. A large unorganized and inefficient supply chain;

3. Low rider cost to AOV ratio

Unfortunately, most large global economies lack almost all three, or at least one of them, and hence, quick commerce businesses struggle to thrive in those areas. However, India has all three factors to offer!

Starting with people who use quick commerce, every city in India has pockets of population who appreciate the convenience provided by quick commerce and are willing to pay for it. And as the households become more nuclear with rising incomes, this number is bound to increase.

In terms of the supply chain, India has a large unorganized grocery market, serviced mostly by neighborhood mom-and-pop stores (Kirana stores). This is in stark contrast to other economies which have a high penetration of organized grocery.

A closer look at the pricing of some of the FMCG goods suggests that the prices are 10-15% lower on the quick commerce apps. But how? The lower pricing is due to no intermediaries being present in the online/ organized channel. Additionally, given the scale of these platforms, they can get pricing/ sourcing advantage from manufacturers/ producers.

Apart from the pricing advantage, quick commerce platforms in India have a better assortment vs unorganized retail. Typically, Kirana stores have 1,500-2,000 SKUs, while quick commerce platforms have 6,000-7,000 SKUs, including 20%-30% of such SKUs in non-grocery categories. This provides consumers with a wider range of choices. Delivery times are also comparable to or better than the time taken to purchase the same basket at Kirana stores, taking less than 20 minutes. This eliminates the time and cost of commuting to the store.

This makes it clear that quick commerce platforms could continue taking share from unorganized retail and increase their TAM over time.

What is the real TAM for quick commerce?

The top players in the sector currently operate in 25-30 cities and are expected to expand their reach to 45 to 55 cities within the next 3 to 5 years. While regular customers on these platforms typically order three to four times per month, the retention rates go high as 60% to 65%. Top users, on the other hand, make even more frequent transactions, ranging from 30 to 40 times per month.

Given India’s income distribution, considering SEC A segment would mean 25 Mn households, who could likely spend, on an average INR 4-5K/ month. Hence, the TAM could be ~$18 Bn.

But will quick commerce economics really work?

While the macros mentioned earlier hold true for India, there are two other dynamics that come into play:

1. Average Order Value (AOV) to GDP per capita ratio in India is substantially higher than that for global peers - as quick commerce is predominantly used by only the top 3-4% of Indian population (from an income lens), whereas the distribution in other markets is more broad based.

Since costs are not strictly correlated to AOVs, higher AOVs drive better margins.

2. Rider cost to AOV ratio in India is amongst the lowest in the world.

In addition, there is a meaningful potential for high-margin advertisement income in quick commerce. For context, advertisement income in food delivery currently is at ~3% of GOV, while for quick commerce it is already higher at 3.5%-4% of GOV.

Given the recent focus of brands and FMCG companies on quick commerce as a sales channel, this could potentially translate into an increased advertisement spends.

As quick commerce players grow, they are working tirelessly on the development of efficient supply chains - substantial investments in dark store operations, streamlining inventory management and establishing direct partnerships with FMCG manufacturers and farmers. By circumventing traditional distribution channels, these firms aim to enhance product quality, expedite delivery times, and boost overall operational efficiency.

The rise of quick commerce in India represents a paradigm shift in the retail industry, driven by changing consumer behaviors, technological advancements, and a conducive business environment. With its ability to offer instant gratification and unparalleled convenience, quick commerce is set to redefine the way Indians shop and provide immense investment and growth opportunities for industry players.

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