How Zepto Revolutionized Quick Commerce in India

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.