Zepto To Blinkit: Consolidation Inevitable In India’s Quick Commerce Sector, Says UBS

Consolidation is the “end game” in the quick commerce sector to achieve efficient utilisation of dark stores and delivery fleets, according to UBS.

“A company will be able to enjoy efficiencies only when it has almost full control over a catchment area and its dark stores have 80-100% utilization,” the investment banking company said in an April 13 report citing its conversation with a sector expert, who was part of the founding team at one of the leading delivery platforms in India.

If, however, there are multiple players competing in the same geography, the market gets split, the utilisation comes down and fixed costs go up, it said. Also, other costs like of customer acquisition have advantages of scale, which they will not be able to enjoy. “Therefore, consolidation is inevitable, with one or two players expected to survive.”

At current offerings, the companies are unlikely to generate positive contribution margins per order. But a combination of factors, according to the report, can help unit economics improve quicker. They are:

• Higher order density and batching, which can bring down delivery costs.

• More automation and quality control can reduce wastage and refunds.

• Advertising revenues can increase through innovative brand partnerships.

• Delivery times are kept to a reasonable level.

• Customers are willing to pay a higher delivery fee for convenience.

Who Is Best Placed To Succeed?

Swiggy, Zomato: Food delivery platforms have large fleets that can be used for both food delivery and grocery delivery. This results in higher fleet utilisation and lower delivery costs. Their customer acquisition costs are also lower as they can leverage their large existing customer base to add additional services.

BigBasket, Blinkit: Existing e-grocery platforms have the advantage on sourcing with existing warehouses which could be used as hubs to stock dark stores. From an operations perspective, BigBasket is well placed as it has large mother hubs and established operations, but it does not have the two-wheeler delivery fleets that the others have ramped up.

Zepto, Dunzo: The companies that are purely focused on quick commerce have the advantage of a sharper focus, but could also suffer from lower efficiencies in delivery costs and inventory management.

Key Risks To The Sector

• Lower-than-expected internet penetration.

• Unfavourable government regulations.

• Failure of e-commerce companies to ramp up logistics and fulfillment facilities.

• Changing consumer behaviour.

• Weakening currency, adverse global economic events.