The Indian Q-Com market has attracted a total of around $ 4280 million in investments, since the start of FY21, representing increased PE confidence
India’s quick commerce (Q com) market is expected to witness a 15 times growth by 2025, reaching a market size of close to $ 5.5 billion, according to Reedseer reports. Additionally, an increase in consumer demand to fulfil top-ups, along with impulse purchases, is driving the growth and expansion of this space, as per the analysis conducted by Grant Thornton Bharat.
Most of this demand is generated by millennial and Gen Z consumers in mid to high-income households (Rs 5 lakh to Rs 2 crore) in metro and tier 1 cities.
Q-com players currently service around three lakh orders daily. It is no surprise that most of the established Indian fast-moving consumer goods (FMCG) companies have reported a higher share of sales in the e-commerce model picking up pace. The Indian Q-com market has attracted a total of around $ 4280 million in investments, since the start of FY21, representing increased PE confidence. As of now, three companies offering Q-com in their portfolio have achieved unicorn status.
The Kirana Q-Com Model
Kirana stores (traditional retailers) have often been associated with friendly neighbourhood shops. These stores had to face stiff competition from the new Q-com platforms that are equipped with better technology, a deeper supply chain, superior inventory management practices, and deep pockets for offering discounts. Discussions with some of the Kirana store owners highlighted how they are mastering their unique version of a Q-com model.
Traditional retailers have set customer expectations at 30-45 minutes for delivery of their products.
Most retailers use around 30% of their existing staff for home deliveries.
60% of the said delivery service and continued customer loyalty helped them compete with the new Q-com players.
Most traditional retailers have witnessed a 7-10% increase in their revenues by offering their own model of Q-com.
Around 75% of the stores did not see a cost increase on account of delivery service.
Almost all the stores that were interviewed kept a track of orders through a phone call booking system and 67% of them tracked orders through WhatsApp. Various progressive retailers plan on digitalizing their order processing interface through WhatsApp Business. Kirana stores are adopting suitable operating models to put up a good fight to retain and grow their consumer base.
The Cost Angle
Unlike the traditional e-commerce business, where the supply chain can be configured for the least cost with an optimum service equation, Q-com players target the best service (delivery time) at optimum cost, thus changing the equation used to design supply chain networks.
Q-com players have tried to replicate the model used by food delivery platforms by partnering with retailers. However, this model has not taken off in India on account of the maximum retail price (MRP) regulations and the margin profile of products. These players then started establishing their own micro warehouses (known as dark stores) to facilitate quick product delivery. This strategy has made Q-com players invest significantly in establishing localized networks of stores for last-mile connectivity.
This business model typically involves a mother hub, distribution centre, last-mile delivery stores, or dark stores. Dark stores are usually 800-1,000 sq. ft. warehouses that house around 1,000-1,500 SKUs.
Given logistics constraints across most Indian cities, these stores need to be located within a three-kilometre radius of dense consumption areas.
Even with a conservative estimate, the cost of operating a dark warehouse is Rs 1.5-2 lakhs a month. The average basket size across most Q-com orders is valued at Rs 400, making the retailer spend anywhere between 50% and 70% of the gross margin on delivery costs. With the increasing frequency of buying smaller quantities in every order and maximizing deliveries, increasing the scale to offset unit economics becomes a critical lever for profitable operations.
A rider expects earnings in the range of Rs 1,000 on a day and usually ends up doing ~30 orders. Hence, the delivery cost is usually in the range of Rs 35-45 per order. The typical margin for orders on Q-com would be 12-15%, working out to Rs 50-60 on a Rs 400 basket size.
Indian consumers are adopting Q-Com into their daily lives; however, their buying preferences and habits are yet to mature fully. Consumers are price-conscious and discounts/ offers play a deciding factor for them. This poses a big challenge for a sustainable model for the players. Small ticket sizes, no delivery charges, and limited stickiness are some of the other pressure points for Indian Q Com players. On the positive side, the potential of this model is huge given India’s consumer demographics.
Will it work?
The success of Q-com companies will depend entirely on how efficiently they are able to manage their delivery infrastructure in a cost-effective manner using technology and artificial intelligence (AI). The model has delivered returns to investors and it is going to become a more dynamic space. Players are likely to focus on the six themes explained above and follow the road to profitability.
Going forward, we foresee some consolidation happening in the market with key acquisitions. Since consumers are price-conscious, this poses a challenge to the long-term sustainability of Q-com players. On the positive side, the potential is huge, given India’s consumer demographics and segmented demands.
The article is written by Naveen Malpani, Partner and Consumer Sector Leader, Grant Thornton Bharat, and Viswanath P, Partner, Grant Thornton Bharat. It first appeared in the Sept-Oct issue of the Phygital Magazine.
