While this is a promising trend for India’s internet ecosystem, there is scepticism about its long-term viability. Quick commerce hasn’t worked in the advanced global markets. Also, as a big-city business model that’s focused on essentials, won’t it hit the growth ceiling very soon? Can a profitable firm be created out of 10-minute deliveries? And lastly, if the opportunity is truly promising, what’s to keep retail and e-commerce giants away?
Unlike in developed markets, more than 95% of grocery spend in India takes place at local kirana stores. While these are easily accessible, their limited, dated selection and poor purchase experience could be a pain point for India’s new-age consumers, particularly Gen Zs and millennials in big cities.
In contrast, retail spend in developed markets typically takes place either through large retail chains (Walmart, Costco, Kroger etc.) or modern convenience stores (7-eleven, Circle K etc.), which have a wide selection of products and a good purchase experience.
As a result, quick commerce, with app-based ordering, a wide selection of products, and rapid doorstep delivery, has a stronger value proposition in India. Additionally, the dark-store fulfilment model is more viable in high-density cities such as Mumbai, Delhi and Bangalore than their Western counterparts.
Three elements will determine the headroom for quick commerce growth in the near future: cities, consumers and categories. Roughly 90% of quick commerce business currently comes from the top eight cities. Within the metros, Gen Zs and millennials comprise about 90% of the monthly transacting users, as they tend to be relatively unplanned in their buying behaviour and are willing to pay a premium for convenience.
In recent times, quick commerce has expanded beyond groceries. One can now buy beauty and personal care items, mobile phones, earphones, smartwatches, home décor products, t-shirts, and even toys on quick-commerce apps. This means quick commerce is targeting the $250 billion retail market in the top 50 cities. Its current penetration level is slightly more than 1%, so there’s immense headroom for growth. Most of this target market is serviceable, barring the categories with bulky products (large appliances, furniture etc.) or those that require a wide selection (fashion), as well as consumers above 45 years of age.
At the outset, quick commerce seemed like a business model destined for a long struggle for profits, thanks to a small average order value (AOV), thin grocery margins, discounts, high cost of delivery and the cost of running and replenishing dark stores. However, with time, the leading platforms have taken big strides towards profitability by pushing products with a high average selling price (ASP), optimising the brand mix, rationalising discounts and optimising the expansion of dark stores.
Additionally, their expansion into non-grocery categories allows them to increase their order values and margins. Lastly, ad monetisation has been a major win, given their well-targeted ads product which makes them a good option for direct-to-consumer and smaller brands. While we’re yet to see a profitable quick-commerce company, the early results are encouraging.
Given the promising market potential, one could expect increased competition in the space and disruption by retail and e-commerce incumbents. But it will be a tough nut to crack, particularly because of the complex logistics. It has also been seen that quick-commerce customers are loyal to their preferred platforms and could be less open to experimenting than one might think.
However, a few concerns will have to be addressed to catalyse growth in the sector. One major area is funding dependency. While companies are moving towards profitability, there is still a long way to go on this. Also, retail and e-commerce giants will be able to achieve better margins and thus offer better value to consumers.
But if all goes well over the next couple of years, India could emerge as the world’s first success story in quick commerce.
Kushal Bhatnagar is associate partner, Redseer Strategy Consultants
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