Dunzo Delays Salaries Again: What’s Going Wrong With The Startup?

September is here, and the nation is gearing up for one of the country’s biggest festivals, aka Ganesh Chaturthi. But this festival may not seem significant for the Dunzo employees as ‘Bappa’ may not help them remove obstacles in getting their unpaid(some) salaries. August’s salary will be paid in September as usual. However, employees have been informed that their July pay will be paid in October. Around 15% of employees had not received their June salary, which will be paid in October as well.

According to a source, Dunzo, the homegrown quick-grocery delivery service, has postponed salaries yet again to the first week of October due to a lack of funds. The startup had promised to make payments on September 4, a date pushed back from July 20. The quick-grocery delivery service has also offered employees an interest of 12 per cent per annum on the salary component it has kept aside since June. Earlier this month, it reportedly negotiated with its existing investors, including Lightbox and Lightrock, to raise $80-100 million in its series G round.

Why is Dunzo not able to pay its employees? What is the reason for the cash crunch?

The battle of words revolving around valuations.

Dunzo’s existing investors are in discussions to raise fresh capital at a 50% discount to the startup’s previous valuation of almost $800 million. However, Reliance Retail, the company’s largest investor, who had given a $200 million cheque in January 2022, is opposed to such a drastic drop. Reliance had made a $240 million investment in the now-troubled business. A debate among shareholders over the amount of Dunzo’s valuation fall is proving to be a barrier to new funding for the ailing rapid commerce firm.

Reliance said a substantial drop will entail a big value erosion for the telecom-to-retail conglomerate’s $200-million investment in Dunzo. Reliance Retail paid $200 million for a fully diluted 25.8 per cent ownership in the Bengaluru-based business. This investment increased Dunzo’s valuation to $775 million in March 2021, up from $300 million earlier.

This is not the first time Dunzo has had difficulties in raising funds. On July 18, it was reported that the business had only been able to raise roughly $45 million of a targeted $75 million fundraising via convertible notes after a hunt for equity investment alternatives had failed late last year. 

An insight into mismanagement.

At the start of the year, there were multiple internal talks about whether Dunzo ought to drop all other locations and focus just on Bengaluru, where it could be successful. However, the firm continued to manage its challenges while expecting new funding, which led to the company incurring further debt. Looking back, it is a fundamental problem.

Amid the current cash constraint, Dunzo has been experimenting with greater order values for free deliveries and restructuring pricing for its pick-and-drop service and other services. In these turbulent times, hope this pilot testing doesn’t exaggerate the problem. In this scenario, a valuation drop may be inescapable.

According to some insiders, the additional financing is intended to “just survive” the present wave of issues and plan for a more solid future — but on a much lesser scale.

The harmful waves of legal notices.

Google India, Nilenso, Clover Ventures, Facebook India Online Services Private Limited (FBI), Cupshup, Koo, and Glance have all given legal notifications to Dunzo. Dunzo’s outstanding vendor debts account for around Rs 11.4 crore, roughly double the previously projected Rs 5-6 crore. This is again a substantial problem amid this tech crunch.

Last month, Dunzo attempted to seek a lifeline through debt restructuring. The company had talks with its debt investors about restructuring the terms of its credit. 

A brief about losses.

• Dunzo continued to bleed throughout the previous fiscal year, with losses more than doubling to Rs 460 crore. 
• Delivery-related expenditures were for 25.2% of total spending in FY22, up 4.6X to Rs 134 crore from Rs 29.4 crore in FY21. 
• Dunzo’s marketing expenses increased 5.9X to Rs 64.4 crore.
• Dunzo’s yearly spending and losses grew in lockstep with income, ballooning 2X to Rs 532 crore and Rs 464 crore, respectively, in FY22.
• In terms of ratios, the EBITDA margin and ROCE are -645.64% and -31.95%, respectively. In the fiscal year ending March 2022, Dunzo cost Rs 9.8 to earn a rupee of operational income.
• Dunzo also set an aggressive revenue target of Rs 2500 crore in FY23, which is about 50 times the amount collected in FY22. However, no official revenue milestones seem to be in sight to signify such tremendous growth.
• Dunzo Daily, the company’s primary operation, was also hit hard financially, losing Rs 230 on each order delivered in the first half of 2022. These financial difficulties caused substantial difficulties for the firm. According to sources, Dunzo was in the process of liquidating 25-30% of its dark shops in Delhi-NCR and other locations in November 2022.

How do the losses affect the employees at Dunzo?

1. In January 2023, Dunzo laid off around 3% of its workforce in the first round of layoffs. While the corporation did not specify the exact number of employees laid off, sources stated the company laid off 60-80 individuals.
2. In April, the Bengaluru-based business sacked 30% of its staff, affecting about 300 positions. The corporation made this decision to assure profitability during the following 18 months.
3. Dunzo formally informed its employees on July 21 of the third wave of layoffs, which is expected to impact 150-200 individuals. 

The era of competition.

Zepto.

Six months after the birth in September 2020, Mumbai-based Zepto raised $160 million, 2X its valuation to $570 million. The two 19-year-old Stanford scholars Aadit Palicha and Kaivalya Vohra had started KiranaKart, which worked on delivering groceries within 45 minutes. Later, the firm crunched it to 15 minutes for customers who lived close to pick-up points. The founders decided to finetune this idea to deliver groceries in under 10 minutes, and thus Zepto was born. 

The firm has managed to crack the 10-minute delivery model by achieving a median time of roughly 8 minutes 47 seconds for completing deliveries. It achieved this by drilling down the delivery distance (average) from the pick-up point to the drop location and keeping deliveries within a 2 km radius.

Blinkit.

Blinkit, formerly Grofers, is another significant competitor in the rapid commerce area. While Gurgaon-based Grofers was started in 2013, it was renamed Blinkit as a 10-minute delivery service in December 2021. It was eventually bought by Zomato in an all-stock deal for Rs 4,447 crore ($569 million) as part of the latter’s effort to enter the online grocery retail market, which witnessed exceptional growth during the pandemic. 

Blinkit, which is currently operating in 20 cities, has also maintained its 10-minute delivery track record even in Tier II cities and is hopeful of gaining more clients in the future. 

Blinkit had the most fabulous discount among the rapid commerce firms, at 11%, with a discount of 22% in the home care space, 15% in basic essentials, and 14% in personal care. According to Jefferies, Zepto and Dunzo offered a 7% discount on this sample basket.

Previously, Dunzo appeared to be the most restrictive of the rapid e-commerce sites, with no option for free delivery. 

According to Clootrack, Zepto appears to be the apparent winner in terms of delivery time. Zepto, which just funded $200 million, has received a Brand Equity score of 8.9 out of 10 for the delivery time, over 2 points higher than the second-placed Dunzo. Hence, competition is one of the hurdles for Dunzo’s growth.

What is the anticipated roadblock in the rapid e-commerce industry?

The difficulties encountered by Dunzo and other rapid commerce startups, such as Blinkit and Zepto, raise fascinating issues regarding the feasibility of the quick commerce model in the Indian startup environment. While the fast commerce model looked promising at first, it has hit barriers, causing financial and operational issues for most enterprises. However, in some circumstances, the fast commerce model, which focuses on hyperlocal and on-demand delivery of products and services, might be a viable business strategy.

It offers clients the ease and quickness they seek in today’s fast-paced society. However, like any business model, various obstacles and concerns may make it inappropriate or impossible to sustain in specific circumstances. 

Warehousing and personnel are two crucial aspects determining quick commerce startups’ cost structure and profitability. Fast commerce companies must keep strategically placed warehouses or dark shops to store merchandise and ensure prompt deliveries. The expenses of creating and running these storage facilities, as well as inventory management, are substantial. 

Furthermore, to execute orders rapidly, quick delivery firms rely mainly on delivery employees, needing a colossal workforce or workforce.

Is the e-commerce industry expected to grow?

With mobile applications, we have everything at our fingertips. People find it easier to buy online with only a few clicks, which has increased delivery services. With rising demand, tens of thousands of new jobs are being generated. With this pandemic, rapid commerce firms such as Zepto, BlinkIt, Dunzo, and others are exploded. With the onset of COVID-19, consumer behaviour has shifted. Due to societal distancing conventions, consumers favour online delivery as a safer and more convenient option. 

With a shutdown in 2020, online grocery delivery has increased by 80%. By 2025, India’s rapid commerce sector is expected to reach $5.5 billion. It is expected to expand at a CAGR of 37.1%. With the change in consumer habits, the tech-savvy youth, and the COVID-19 pandemic, this untapped market has risen immensely.

Dunzo’s downfall: from rising star to sinking ship? 

Dunzo’s enormous drive to create an ultra-fast grocery delivery platform, competing against rivals like Swiggy’s Instamart, Zomato’s Blinkit, and Zepto, failed last year. Soon after, the firm began to change its business model, signalling that its unit economics for grocery delivery in 19 minutes (the company’s product promise) were not working.

Worryingly, the market has become wary of investing in startups, let alone in a cash-hungry area such as quick commerce. Dunzo chose to call it quits on its expansion plans, whether for Dunzo Daily or its business-to-business product Dunzo Merchant Services (DMS).

Compared to other e-commerce businesses, the quick-commerce company had limited cash and needed to invest in and build the business to receive further funding. Slowing the growth helped, but only somewhat. Given the limited resources and financial winter, it was evident by the end of 2022 that Dunzo Daily couldn’t function even on a smaller scale.

Conclusion.

Startups are collapsing due to their inability to commit time and money to projects without immediate impact. As the digital winter has arrived, investors are becoming increasingly hesitant to provide funding, causing most Indian businesses to struggle. And the most affected by these events are the employees, either in the form of layoffs or not getting paid. It’s ironic how an employee who gives their sweat and blood to keep the wheels of the startup moving faces the most painful wave when the losses are witnessed.