Speed Thrills But Kills. Hope Zepto Doesn’t Become Another Webvan!

How Zepto is expanding, by colossal funding and cash burning, with no profits, seems to take on a dangerous ride. Before we talk about Zepto, let’s talk about the grocery delivery space as a whole. This space was first pioneered by Webvan, which began its operations in 1999 and desired to wash out the hassle of going to the grocery shop by delivering products to customers’ homes in a 30-minute time slot of their choosing. Webvan raised nearly a billion dollars from investors but went bankrupt after just a pair of years of operations. Webvan’s strategy of “growth at any cost” really hurt it to death.

Now come Zepto, which can be seen adopting the ‘growth at any cost’ strategy. Last week, Zepto raised $350 million in funding, taking its cash haul for 2024 to $1.35 billion and its valuation to $5 billion. Meanwhile, it is important to note that the company’s monthly cash burn rose sharply from Rs 77 crore in March and April to Rs 250-300 crore in October and November. The company has been spending heavily on product discounts, customer acquisition, performance marketing, workforce expansion and dark stores. 

A key part of its strategy involves poaching top talent from its rivals. The company has been offering tempting salary hikes to attract employees from competitors like Zomato’s Blinkit, Swiggy Instamart, and other quick-commerce boys. This aggressive talent acquisition strategy is part of Zepto’s larger plan to remove its competition and solidify its position as a dominant in the space. 

In addition to its talent-focused strategy, Zepto has been spending heavily on marketing, with nearly INR 120 crore of its monthly cash burn allocated to digital marketing alone, which has allowed the company to become the leading app in its category, further intensifying the battle for market share in the quick-commerce sector. 

Despite the high burn rate, Zepto boys remains focused on expanding its presence in key Indian cities, improving its customer acquisition techniques and continues to pursue its ambitious expansion strategy. The company continue to offer gigantic discounts to customers, boosting its market share, ignoring the cash burn, as they have support of their VC Gods! As a result, its daily order count nearly doubled from 4.5 lakh in January to over 8 lakh in November. The number of monthly active users also surged proportionately.

All this may look quite promising till one uses their rationale to dig deeper into the layers. Why we compared Zepto with webvan, let’s see.

The perspective of money.

The Zepto CEO, Aadit Palicha, who is a Stanford University dropout, Spoke at the NDTV World Summit in November 2024,  saying something like, “At a certain point, money becomes inconsequential”. This comes from a person who has never felt the urgency of money as the person comes from a well-paid family. But Mr Palicha might not understand that customers in India are highly money-minded. So money can never become inconsequential for Indian customers, or let’s say, discounts can never become inconsequential.

So, with time, when the funding is over, and discounts are less, the Indian customers will not take a second chance to shift to another startup as they are not brand loyal. Or, if this is the rate at which discounts are given, then the topic of cash burn also exists. So scalability is a tough question, which, if not solved, could force Zepto to follow the steps of Webvan.

Who will be the audience forever for just one core selling point- Convenience?

Quick commerce players who have built dark stores cater to the mid to upper middle-class folks, and also offer an eclectic mix of product, to stay ahead of the race from local kiranas. But do you think this middle class will always be in a mood to spend to buy the product of ‘convenience‘ offered by Zepto and other quick delivery companies? 

Last quarter, Indian wages declined for the first time since the pandemic began, slowing the economy’s rapid growth as consumers curbed spending and business earnings fell. According to Elara Securities Inc. statistics, inflation-adjusted employment expenses for listed non-financial enterprises, which serve as a proxy for real urban wages, fell 0.5% from July to September of last year.

Other figures, such as those from Motilal Oswal Financial Services Ltd., show a consistent slowing in wage growth, as well as an increase in inflation, indicating financial hardship for India’s middle class. Consumers are already cutting back on everything from soap to cars. Some of the country’s top corporations, from Maruti Suzuki Ltd. to consumer powerhouse Hindustan Unilever Ltd., have lately disclosed lower earnings, citing urban middle-class spending has been languishing.

The slowdown would make it difficult for Prime Minister Narendra Modi’s government to deliver on promises to create more jobs. In such a situation, the scalability of quick commerce again finds itself surrounded by a plethora of doubts.

Moreover, about the NDTV summit mentioned before, Mr Palicha envisions quick commerce as a massive job creator, surpassing even Indian Railways. Aadit Palicha says, “in the next two to three years, companies like Zepto, Zomato and Swiggy will create one and a half, two million jobs. Today, the Indian Railways employs between 1.2 and 1.4 million people. We will create more jobs than Indian Railways and we should celebrate that. This is wage accretive. This is a net job creator, and it is part of expanding consumption”. Isn’t this statement over-exaggerated?

If the economy is slowing down, the government itself may find it in the mud-deep waters of creating jobs; then who will be the job takers of Zepto and others?

Seems like Mr Palicha have not been aware of India’s employment situation! Finance Minister herself admitted that 1 in 2 graduates are unemployable. As these young folks lack proper formal employment, what will they earn and what will they spend on convenience shopping? So, as asked, will there always be a customer for buying Zepto’s only offering- The convenience?

Similar things can be seen in the case of Webvan as well. Webvan rose to prominence as the face of the e-commerce grocery industry. It attempted to hit the trinity of selection, cost, and convenience. Customers may select from a large selection of high-quality things at reasonable prices, as well as a 30-minute delivery window. However, Webvan gained fame for an unflattering reason. Webvan attempted to blend mass-market price with superior variety and quality.

They offered the option of having organic groceries and sushi delivered to your house at pricing comparable to big-box retailers. While this helped attract initial customers, it ultimately targeted the wrong audience. The infrastructure necessary to maintain the delivery promise was extremely capital-demanding and would take years to recover. This hints that Webvan failed to gauge consumer habits.

So, initially when lockdown happened, customers getting onboard on Zepto app was justified. But as everything become normal today, expecting similar thing is quite questionable! Moreover, as Zepto will try to enter in smaller pockets of the country, things may go even more disturbing. 

Things are very different in less urban or smaller towns. 

• First of all, these communities have far greater distances between individual residences and grocery stores, which reduces the effectiveness of delivery systems (more time spent delivering items). 
• A deliveryman may have to spend time bouncing between stores to locate all the things needed because many of these stores do not have a comprehensive inventory. 
• Entertainment-starved residents of these areas genuinely like grocery shopping and are, therefore, less likely to place orders through online apps. 
• Unlike online retailers, many of these customers receive discounts when they buy from local kiranas.
• Many of these locations lack adequate internet connectivity, making it difficult to establish online habits.

The dependence on dense infrastructure pushes smaller towns and cities behind, resulting in a gap in accessibility. The time-based delivery race, despite its great speed, rips holes in India’s broken logistics network, particularly when compared to more developed economies. Is the Indian city prepared to handle the logistical challenges that will arise as Quick commerce grows? The situation may not be as rosy as some platforms would have users believe. This somewhat resembles the fact that Zepto needs to gauge consumer habits in smaller downs before moving in, or else the point of survival will rise!

What Zepto solved- Nothing. It just cashed out the opportunity of pandemic. It is all just the bubble!

Palicha and Vohra, Zepto founders, were stuck in their Mumbai homes as the second wave of COVID-19 swept the country. The lockdown stopped them from going out and buying essentials. Online grocery companies were taking three to four days to deliver the orders due to the restrictions. The teenagers sensed a gap they could plug, and that’s how Zepto was born. So, one may think that there is definitely no way to look back. But wait, there exists a similar failed story- PepperTap.

PepperTap was once India’s third-largest online grocery delivery business. Milind Sharma and Navneet Singh, both IIM graduates, started PepperTap in Gurugram in 2014 with the goal of transforming the grocery delivery sector. The concept was conceived when Navneet’s wife asked for him to accompany her food shopping. But all Navneet wanted was for someone to deliver the huge list of products to his door, maybe within a few hours.

So, Navneet decided to launch a business based on this concept. After a brief investigation, the two concluded they were on to something significant. They raised an incredible 51.2 million USD in just one year, going from seed fundraising to two series B rounds! The founders went above and beyond in an effort to build up rapidly and with such large capital. They had already established themselves in 25 cities by the end of 2015. Every day, PepperTap delivered nearly 20,000 orders. At first glance, PepperTap was rapidly growing into new cities, creating the appearance that it had an infinite supply of money. 

They raised an incredible 51.2 million USD in just one year, going from seed fundraising to two series B rounds! The founders went above and beyond in an effort to build up rapidly and with such large capital. They had already established themselves in 25 cities by the end of 2015. Every day, PepperTap delivered nearly 20,000 orders.

At first glance, PepperTap was rapidly growing into new cities, creating the appearance that it had an infinite supply of money. They had to roll back all of their efforts after the aggressive expansion. PepperTap stopped operations in ten cities, including Mumbai, Chennai, and Kolkata. It also had to go through several rounds of layoffs. Finally, in April 2016, they had to shut down permanently. PepperTap is a prime example of “growing too quickly without establishing a sustainable business and finally failing.”

Zepto also seem to follow similar steps- they believe that they have enough money, but forget to ascertain that one day this money will vanish.

Quick commerce or grocery delivery is not an easy game!

Quick commerce in India = a unique combination of low worker costs + strong investor support, allowing for quick deliveries.

But is it sustainable? It’s like running a marathon at sprint speed, which can be utterly exciting but ultimately exhausting. “As markets mature, pressures to turn profits, growing salaries, and altering investor expectations could cause a potential slowdown, or at least stagnation. Infrastructure, legislative shifts, and socioeconomic variables all play a role in the long-term viability of quick commerce in India. Maintaining speedy delivery may grow more costly as urban congestion, increased labour costs, and future gig economy rules take effect.

Investors are counting on Quick Commerce as the shape that will revolutionise the face of e-commerce, although such platforms operate on razor-thin margins. This need for ongoing external funding to meet operating costs can place doubt on the long-term viability of many quick commerce players. In the end, the quick commerce or the 10-minute delivery has no unit economics, is wisely said by market pundits and startup founders. Therefore, the survival of Zepto without colossal funding and cash burning, in the long run, is something to watch!

The end.

Why investors are giving petrol (money) to speed Zepto like anything?

Experts’ Opinions on Profitless Growth Strategy: CAIT National President Mr Praveen Khandelwal cited last year about significant operating costs of hyperlocal delivery applications. He says that most of these companies are not concerned with profits or losses; rather, they are playing a “Valuation Game” in which the more subscribers they have, the greater their Gross Merchandise Value (GMV), which increases the company’s valuation.

“In this valuation game, there is little difference between whether the company is profitable or losing money as cash burns. What matters to players is how many individuals use their platforms. The more subscribers they have for their apps is directly proportional to the higher GMV. This shoots the valuation of the companies. This is why, despite their losses, these companies continue to attract investors.

Mr. Ashish Jain, another startup specialist, stated that Blinklt, Zepto, Swiggy, BBNow, Dunzo, and Ola (some are now shut down) used to deliver groceries in 10-30 minutes. However, it does not cover unit economics.

Why does this speed have a tendency to kill?

According to multiple sources, the total addressable market, or TAM, for quick grocery delivery is in the millions ($300 million in 2022) and is expected to increase to billions ($5.5 billion by 2026). However, there is no viable quick grocery delivery business that is both profitable and sustainable. People in India do not mind going to the store and buying groceries.

Having groceries delivered to your doorstep is more of a luxury. The main reason people use grocery delivery apps is to get discounts or in case of an emergency. Now, the basic strategy of these firms was to provide discounts until users became addicted to the ease of these apps and then scale back the discounts. However, this may occur at all, which is a point of doubt.

Nitin Lodha, Principal Advisor of chitrangana.com, an e-commerce consultancy, is doubtful about the future of Q-commerce. “Honestly, the existing quick commerce paradigm in India will not endure forever. The concept of cheap labour is more of a temporary benefit. We expect wages to grow dramatically in the near future as the market stabilises and firms react,” he says. When the dust settles on the war of words over quick commerce, it will be up to the existing participants to prove their critics wrong by delivering lucrative businesses.

Compared with Webvan’s fate, the story of their failure typifies the desperate business tactics of many disastrous Dotcom Bubble companies, which were based on quick expansion at all costs. Businesses were created with little planning and the misguided belief that the key to e-commerce success was a catchy website name and a “First Mover Advantage” in an internet niche. Many of these enterprises, including Webvan, were not necessarily “bad ideas.” They were just ahead of their time since consumers’ internet shopping habits did not change quickly enough to make these firms lucrative. Hence, we hope that the strategy of Zepto’ growth at any cost doesn’t push its fate to what happened with Webvan once.