Irrational exuberance? Quick commerce firms may face challenges in scaling past top markets, per Blume’s Indus Valley report

Quick commerce firms may face challenges in scaling past top consumer markets, shows Blume report

Although India’s quick commerce market is growing at a scorching pace, companies such as Zomato-owned Blinkit, Zepto and Swiggy Instamart, may find it challenging to keep up the growth momentum in the medium to long term, per the Indus Valley 2025 report by venture capital firm Blume Ventures.

Quick commerce firms are likely to face hurdles such as a low total addressable market (TAM), tapering growth in monthly transacting users (MTUs), and increased competition from e-commerce players, as they look to scale beyond the top consumer markets, the report said.

This report comes amidst heady projections by several analysts, which indicate exponential growth in the quick commerce market over the coming years.

In fact, a recent report by Bernstein stated that the market is expected to continue to grow at a rapid pace of 75-100 percent year-on-year (YoY), much ahead of traditional retail.

Notably, Blume Ventures was one of the earliest backers of beleaguered quick commerce firm Dunzo, which is struggling to stay afloat after a spate of layoffs, founder exits, and unpaid dues.

The Bengaluru-based startup’s aggressive expansion strategy, particularly via its quick commerce arm Dunzo Daily, led to unsustainable cash burn and mounting losses, making it a cautionary tale for rapid scaling in the quick delivery space.

Irrational exuberance

According to the Blume report, quick commerce is taking off because India is a poor market for modern retail, whose share is just six percent compared to 80 percent in the US and the UK. This, coupled with low labour costs and high-density cities, make quick commerce unit economics work for India.

The quick grocery delivery market has grown from just $300 million in FY22 to as much as $7.1 billion in FY25, with a 24-fold increase in gross order value (GOV) during the same period. As per an equity research report from a leading brokerage house, the industry is projected to hit $89 billion in FY31, from $7.1 billion in FY25, the Blume report was quoted as saying.

However, keeping up this growth momentum may be a tall order for firms operating in this space, given the low TAM due to India’s low per capita income. The Blume report, therefore, suggested that there may be “irrational exuberance” regarding the growth prospects of quick commerce.

Quick commerce MTUs, as per analyst estimates, are expected to grow from 26 million today to 128 million by FY31. This is especially ambitious when India’s affluent consumer base, termed India1, is not widening fast.

“Much of India’s consumption is led by India1, and within that there is a subset we call India1 Alpha, which is about 8-10 million households large who are true super consumers. This class is growing slowly. The growth in MTUs will thus attract marginal users, not power users, and hence orders more than doubling will be challenging,” the report read. 

“Like rideshare, food delivery, and even e-commerce, we will see MTU growth tapering – it is unlikely that quick commerce is immune to this,” it added.

This comes at a time when Swiggy and Zomato have been facing a slowdown in their core food delivery businesses, and have been reporting slower growth over the past few quarters as onboarding new customers and increasing order values have been a challenge.

The slow growth rate in food delivery is in contrast to earlier estimates by analysts, which projected food delivery MTUs to increase exponentially.

“July 2021 estimates by Jefferies projected 32.6 million users for Zomato by FY25, but the current trajectory points to 20.6 million users in FY25 – a reminder about user growth forecasts in consumer internet sector consistently fall short,” the report said.

Blinkit is the current market leader in the quick commerce space with a share of 46 percent, ahead of Zepto which has captured 29 percent of the market. Swiggy Instamart is third among major players accounting for 25 percent, as per a recent report by Motilal Oswal.

Unrealistic dark store expansion 

Quick commerce firms may not only face challenges in acquiring new users, but also in expanding their dark store footprint. Dark stores act as hyperlocal warehouses, to enable faster deliveries and better inventory management.

Quick commerce firms have recently been on an expansion spree, rapidly setting up dark stores to corner higher market shares in an increasingly competitive market.

As of FY25, quick commerce operators have together set up as many as 3,400 stores across the country, which is expected to reach 11,150 by FY31, analyst estimates suggest.

However, the Blume report deemed this target “a tad unrealistic” as only 965 of India’s 19,300 pincodes are affluent enough to sustain dark stores.

“A proxy for affluence is presence of over five organised retail stores, which per a Bernstein study is seen in only five percent of India’s pincodes. These pincodes serve 11 percent of the population. The challenge is that there are not many of these in a country with per capita income below $3,000,” the report said.

Presuming each of Blinkit, Instamart, and Zepto have two dark stores per pincode, and rounding off to 10 dark stores per pincode, this would translate to 9,650 stores, not 11,500, the report added.

Per an HDFC Securities study, only 63 of India’s 780 districts have a per capita income of over Rs 1.5 lakh and a density of 500 people per square kilometre. These span 90 million households across all income levels and can support a maximum of ~7,800 dark stores.

Rising competitive intensity

This, coupled with increasing competition from traditional e-commerce players like Flipkart and Amazon, which have also stepped up their efforts in offering faster deliveries, may throw a spanner in the works for quick commerce firms.

“E-commerce players have already started reacting, and while it is not guaranteed they will be able to counter quick commerce players, the increased competition will have some impact on the industry profit pool,” the report said.

Both Flipkart and Amazon have also announced forays into quick commerce, with Flipkart Minutes and, more recently, Amazon “Tez”.

Regardless, quick commerce is still a nascent market in India and continues to grow rapidly, much ahead of traditional retail. Several legacy fast moving consumer goods (FMCG) as well as direct-to-consumer (D2C) brands are seeing quick commerce emerge as their highest volume digital channel for sales. How the market will grow over the long-term remains to be seen.