French commerce

Startups: Can fast-paced commerce startups ride out the recession?

IOn its earnings call last week, Zomato said, in few words, that it would scale back its instant delivery aspirations. Just a year ago, fast trading, which aims to get groceries to people’s doorsteps in less than 20 minutes, was one of the hottest investment areas in VC (venture capital) . It attracted $12-13 billion in funding, globally, in just one year.

In India, Zepto, a startup founded by two 19-year-old Stanford dropouts, raised a total of $360 million (about Rs. 2,754 crore), catapulting its valuation to $900 million in record time. Dunzo Daily, another fast trade player, received a $200 million (Rs 1,488 crore) investment from Reliance Retail in exchange for a 25.8% stake in January. Around the same time, food delivery giant Swiggy also raised $700 million (Rs 5,225 crore) in new funds led by US investment firm Invesco to bolster Instamart, its instant grocery delivery.

Even Zomato took a 9.3% stake in Blinkit (formerly Grofers), a 10-minute grocery delivery service, for $100 million (around Rs 745 crore) in convertible notes in March. While it was a financial investment with no impact on Zomato’s operations, speculation swirled that the food delivery giant would take over Blinkit and integrate its operations into its own. But Zomato remained evasive about it.

“At this time, we are aggressive on conserving cash,” said Deepinder Goyal, founder and CEO of Zomato, in a letter to shareholders released just ahead of the earnings call. The company, he said, would not make any new investments other than the $400 million it had previously earmarked for fast trade space to be spent on CY22 and CY23.

But he also said Zomato was optimistic about the long-term prospects for fast trading. “We think there is a market [for quick commerce] and this model is more efficient than the Kirana model. Zomato, which had also experimented with 10-minute food deliveries around Gurugram, will continue these pilots without further scale-up.

“Management reiterated that they remain optimistic about the fast trading space and see definite synergies,” said Pranav Kshatriya, equity analyst at Edelweiss. “We believe a rapid foray into commerce may be a concern, so management’s decision to have an outer limit of $400 million of investment implies that capital allocation is prudent.” Additionally, he says he is “comfortable” with management’s evasive stance on the Blinkit takeover. “Any deviation that delays profitability would be a key risk,” he said.

So what has changed?

First, fast-paced commerce took hold during the height of the coronavirus pandemic when people were cooped up in their homes and needed to get groceries. Globally, startups have taken advantage of this and made a foray into the space. In India, similarly, Swiggy, Blinkit, Zepto and Dunzo Daily have embarked on fast delivery services, transporting groceries from small urban warehouses or “dark stores” to customers’ doorsteps. But in a post-pandemic world, the same urgent need for delivery is not there. “I would say the need for a 10-minute delivery service, even back then, was debatable. And the value of such a service – in terms of risking passengers’ lives to deliver the goods on time – was also questionable,” says Padmaja Ruparel, President of the Indian Angel Network.

Second, the macro environment has changed. Capital was easy to raise and valuations soared in the past year, prompting many to make “opportunistic” bets in the fast-trading space, an investor said on condition of anonymity. “Let’s just say most didn’t have the best intentions when they entered space. They were there to make a quick buck.

Deploying fast-paced commerce—think owning and operating dark stores—requires an upfront investment in real estate and logistics. It is a capital-intensive operation, unlike traditional food delivery. And the unit economy is far from convincing. According to Edelweiss’ Kshatriya, grocery delivery generates a negative contribution margin compared to food delivery (approximately 5%) after adjusting for variable costs such as supply chain costs, delivery fees and discounts. If we take into account the fixed costs of dark stores, the margins are even more red.

Can fast trade startups ride out the recession?

Now that cheap capital is scarce and investors are turning away from cash-hungry companies, will we see other fast-trading players also pull back like Zomato? Or maybe even fall back?

“Yes, we will most likely see some churn,” Ruparel says. “This is a high capex game and when these companies started the mood was not what it is today. Investors look more scrupulously if a company is stable and sustainable in the long term. .

In many ways, today’s fast-paced commerce space is reminiscent of the food delivery space in 2015-2016, when multiple players jostled for market share, prioritizing growth over profit. Eventually most folded or were snapped up and the market settled into a duopoly with Swiggy and Zomato.

Globally, fast-trading companies are faltering. In the US, Softbank-backed GoPuff was eyeing an IPO at a $40 billion valuation in January. In March, it suspended plans for an IPO and investors struggled to sell their shares for as little as $15 billion. DoorDash, another US-based food delivery platform that ventured into super-fast grocery deliveries in December 2021, saw its stock price drop from around $245 at the time to around 70 dollars in early June, a drop of 70%. Similarly, Germany’s Delivery Hero, listed on the Frankfurt Stock Exchange, saw its price plummet from 128 euros in November 2021 to around 36 euros at the time of writing. In Europe, there were 30 companies competing in the super-fast, hyper-comfortable space in September 2021, according to Euromonitor. Since then, they have consolidated frantically: GoPuff bought the British Fancy and Dija, the Turkish startup Getir acquired the London company Weezy and the Barcelona company Blok, and the Berlin Gorillas bought the French company Frichti. In Australia, Send, an instant grocery provider, collapsed in June due to lack of cash.

“We are seeing investor exuberance for fast trading wane,” says one analyst, who is not authorized to speak to the media. According to him, Swiggy’s Instamart is leading the fast trade pack in India and will likely continue to do so due to synergies with its core food business and existing delivery fleet. “But we will see a jolt among the Zeptos, Dunzos and Blinkits,” he says.

However, according to RedSeer, fast trading is here to stay. In fact, the consultancy expects the market to grow 15-fold from around $300 million currently to $5.5 billion by 2025. “In grocery shopping, we have seen strong habit formation among customers. [because of the pandemic]. They are actually moving their kirana purchases and scheduled online deliveries to fast commerce platforms because of the convenience involved,” says Rohan Agarwal, Partner at RedSeer.

Can fast trade startups ride out the recession?

According to him, fast trading has seen significant adoption in markets like Bengaluru, Chennai and New Delhi. Average order values ​​(AOV) are around Rs 350 compared to Rs 1,050 for scheduled delivery players like Amazon Fresh. Interestingly, the latter steered clear of fast trade, instead promising deliveries within two hours in cities like Bengaluru and Delhi.

Over the past six to eight months, the share of quick-trade in total online grocery shopping in India has risen to 20%, from an earlier figure, says Agarwal. The figure is expected to rise in the long term, he says, but in the short term players will be “conservative on the spending side”. Dark store extensions, for example, will slow down, discounts will be streamlined, and customers may incur shipping costs. On the other hand, companies will look to improve their margins by switching to categories like fresh fruits and vegetables which have margins of 20-25%, as opposed to food staples which operate on margins as slim as 7%. at 8 %.

Meanwhile, Zomato may have retired its fast trading game for now, but others are moving in. BigBasket, owned by Tata Group, India’s largest online grocer, has announced the launch of BBnow to offer 10-20 minute deliveries of over 3,000 products. “They have the firepower to sustain the business and weather the downturn,” Ruparel says. Warpli, a Gurugram-based startup, promises to deliver fashion, beauty, electronics and home furnishings in less than 30 minutes. It was launched earlier this year by Saurabh Kumar, who previously co-founded Blinkit.

“At the end of the day, it’s a want more than a need. Pampered singles will want and use the service, but most others won’t. In India, how far are you from a store selling bread, eggs or a cigarette?” said the investor. “Ten minutes.

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