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More gas than substance: 19-year-old founder of Zepto on rivals promising 10-min grocery

Dec 21, 2021 04:53 PM IST

Barring one player, the rest are just noise, says Aadit Palicha on competitors offering 10-min grocery. At the end of the day, the bottom line is execution, he adds.

"We can have high-level conversations about life, liberty, and the pursuit of happiness and our launching 10 dark stores every day, which is like all nonsense. The reality is that we're executing really well on the ground. Out of the three to four guys (competitors), I think one guy is executing pretty well, that's what we're focused on, everybody else is just noise."

These words may come across as wisdom spouted from a hard-bitten entrepreneur who has been through multiple cycles of competition, scale, and survival.

But no: these are words of a 19-year-old called Aadit Palicha who happens to be the founder and chief executive of Zepto, and who dropped out of Stanford only to square up with much larger rivals in the quick commerce space -- such as Bigbasket, Swiggy's Instamart, Zomato-backed BlinkIt, and Google-backed Dunzo, apart from Amazon and Flipkart.

His brainchild Zepto, valued at over half a billion dollars, has already turned heads by delivering groceries in 10 minutes and in some cases even five over the last few months. 

The company raised $100 million in a round led by YC Community within months of securing $60 million in its first institutional round.  And now, in an interview with Moneycontrol, Palicha talks about the need for speed, competition and plans to expand.

Besides mincing no words about how competitors are ruining market perception by not meeting the promised 10-minute delivery, he offers his take on the poaching of delivery riders and the high order numbers currently facing the market.

Edited excerpts:

Besides YC Continuity, who all participated in the round?
We had Breyer Capital, besides angel investors like Nilam Ganenthiran who is the president of Instacart, the $20-billion online grocery company in the US. We have got Ravi Inukonda, a senior executive at DoorDash. We also saw all our existing investors doubling down.

It is interesting to see executives from global quick-commerce firms Doordash and Instacart investing in the company. They are coming in their personal capacities. We have got tremendous respect for how they've operated.

Where would you use the money?

Most of the capital is going to be used to fuel growth. We're expanding coverage as fast as possible across all major cities. We also want to scale up the team very, very quickly. Currently, we have a 400-member team. We're planning to scale that up substantially from a corporate level.

How many people will you hire?

Probably about 600-800 people in six to nine months.

How many dark stores have been launched? How many more do you plan to set up?
We currently have 100. Each dark store can handle about 2,500 orders per day. So, it's a much higher scale per store than most other equivalents in global markets. This is a better thing for unit economics.

On expansion, I do not have a number. But for us, it is not about the number of dark stores but about how much scale you can put through each dark store.

Blinkit and Instamart have claimed that their weekly order volumes have crossed one million. How many orders is Zepto delivering right now?

We don't like publishing internal numbers. What I can say is that, at this rate of growth, we should comfortably surpass most competitors and probably be market leaders in four to five months.
In terms of the numbers that I see floating around, we've got some competitors we respect. On the other side, we're seeing a lot more gas than substance. When you actually dive deep into some of those volume numbers, you start realising, wait, where is this volume coming from? Which cities? Who's ordering? What's the AOV (average order value)? What's the fraud rate?

You claim that you will surpass competitors in four to five months. What will drive this growth?

We have a growing order of a magnitude faster than anyone currently out there. The guiding element of our growth is going to be expanding coverage to as many cities as possible, as quickly as possible, and also deeply penetrating the micro markets. Across all micro markets, we have a pretty decisive leadership.

A lot of the other folks have, what I call, cheap scale. They launch a store and they just want to quickly scale numbers to impress investors. So the radius in which they launch that store is much larger than what will actually be needed for a 10-minute delivery. They increase the radius so they can get more scale even though the higher radius gives them like 30, 40, 45-minute deliveries.
Swiggy at least says that. When you open a Swiggy app, they might say 30-45 minutes or 15-30 minutes, depending on the place you're in or the day's traffic, etc. But there are a lot of other players which just increase the radius and put a lot of performance marketing even though the core promise is being breached. We think that's a very short-term thought process.

It's just ruining the perception that these guys actually get deliveries done in 10 minutes.

How are you ensuring that your company stands true to the promised 10-minute delivery?

This model is an incredibly intense, detail-oriented business. You need extremely strong operating and technical discipline to pull off a 10-minute delivery done consistently.

We are in that phase of the innings where we are operating with a TinyOwl or Foodpanda-like business. There are a lot of random players who stay up for no reason, other than for just posturing and chest-thumping.

For us, the negative is that it's creating a perception in the market that these players are inconsistent. That macro perception gets played out which needs to be reversed. This is exactly the same thing that happened with food delivery.

However, what's positive is that when we actually do launch in micro markets and start acquiring customers quickly, we're not compared in terms of marginal utility to these folks.

We're consistent. Our average delivery time is 8.47 minutes. We have high quality fruit and vegetables. We've got predictable serviceability. If we live in an area, we will always live in an area; we don't sort of switch off, switch on.

Are you in talks for a successive follow-up round?
There's a tremendous amount of invested interest, even if some of it is unsolicited, to be very honest with you. We are a capital-intensive business. So hopefully, in a short period of time, we'll be back, having the same conversation.

Do you plan to expand internationally?

Right now, India is such a massive market. Quick-commerce groceries are at least three to four times bigger than food delivery. The same people that are using Zomato and Swiggy are also using Zepto. But what we are seeing is that these people use the apps (Zomato and Swiggy) three times a month on average. On Zepto, they use the platform three times a week with even better AOVs (average order value) and margin structures.

What is Zepto's AOV? What are the margins you are working on?

The only reason why we don't give out AOVs or margins right now is that it's an output metric that these guys can benchmark on.

But grocery, fundamentally, has a much better AOV structure than food delivery, maybe 20% higher. For us, the best thing about this model is that you've got economies of scale. And so, we've scaled pretty quickly and we're seeing that our margin structures are improving. With better scales, margins will improve further.

What we understand is that, on an industry level, margins on FMCG products is 8-10%. Also, the AOV ranges between Rs 200 and 400. Can you comment on that?

I can tell you, for sure, that's not at least what we are operating at. We're operating at a significantly higher chunk.

That's like general trade numbers. If you look at scale retailers -- Bigbasket, DMart, More Retail or Spencer's (it is much larger). With low amounts of scale, 7-10% is what a local kirana store operates at, no back-end supply chain, and procuring from wholesalers. In reality, FMCG is close to double of that. And then, you've got fruit and vegetables, which is a high-margin category, if you are able to manage the waste.

In terms of the AOV structure, it’s roughly in the range of food deliveries -- just a bit on the higher side.

Have you started charging customers for deliveries?

Yeah, we have. As micro markets mature and get to a certain saturation level where they're hitting capacity, we start implementing delivery fees and we're seeing very minimal drop-offs. In Mumbai, the delivery fee is already live and we are slowly putting that through to other mature micro markets.

What's your take on the often-asked question of who needs groceries in 10 minutes?
For any interesting innovation, the history is that there are always similar questions being asked. Why do we need ride-sharing, with rickshaws and cabs everywhere? Why do we need food delivery when we can just pick up and call the restaurant? That question doesn't weigh on my mind anymore.

The current assumption is that 10-minute delivery is the product, the market. The question becomes how many people will pay for a 10-minute delivery. This is a sort of product we're offering or how big is the standard delivery market.

The market that we have is a massive top-up and replenishment use case in the grocery industry. This is a high frequency -- two to three times a week purchase -- that accounts for over 60% of the average Indian’s wallet share, especially in urban India, where it's growing even faster. For us, 10- minute delivery is a means to an end.

It's very easy to have high level, loaded 280-character conversations on Twitter. But the reality of the situation is that if you look at the numbers here, this is a deep, deep product market fit. We are in a position where our month-on-month retention is 65%-plus, which is almost double of what food delivery operates. Our Net Promoter Score is stable at 88 points, which is higher than any consumer transaction platform in India.

Are your customers willing to pay a delivery fee for every order?

There's a misconception about how many people would pay extra for a 10- minute delivery. The counterintuitive reality is that the faster you are doing deliveries, the cheaper it gets to fulfil them. You get a higher amount of rides per rider, per hour, per day. My riders can comfortably do two to three times more deliveries than say Zomato or Swiggy riders, because they are doing it in such a short distance. Your last-mile costs will be way down because you're delivering faster.

The Rs 15-20 that we charge is not just the delivery fee. It's every receivable that we have  -- surge fee, packing fee, etc., all-inclusive. That's all we need, compared to almost double for food delivery to be sustainable in the long term. People don't even really need to pay extra to do that. If I was delivering in 45 minutes, I would have asked you to pay more.

The market is getting pretty aggressive, where poaching delivery riders has become the new norm. Is this going to live for long?

Dunzo, in Bengaluru, is paying delivery riders between Rs 80,000 and Rs 1 lakh a month (Moneycontrol couldn't independently verify this claim). This is like how much you might pay a junior engineer. So crazy, crazy, crazy numbers in Bengaluru right now. If you look at our EPH (earning per hour), it is structurally lower than most of these guys. At the end of the day, the bottom line is execution. The reason why we were able to get the backing from such large and well-respected investors is mainly because we are executing.

We can have high-level conversations about life, liberty and the pursuit of happiness and our launching 10 dark stores every day, which is like all nonsense. The reality is that we're executing really well on the ground. Out of the three four guys (competitors), I think one guy is executing pretty well, that's what we're focused on, everybody else is just noise.

Our philosophy is that probably two to three years from now, most of these guys will be dead. There would probably be one competitor that we have to go head to head with. That's how the market will consolidate. So it's a very short-term problem and investors know that.

Some reports said that this round could have led the company to unicorn status. Was it this round? Is it an upcoming round?

A billion-dollar company doesn't mean much anymore, for better or worse. But very frankly, there is a tremendous amount of interest. We are taking our time. It's a matter of whom we're excited by and when is the right time for us to digest this capital.

A month and a half from now, the company wants to be at a much larger scale. We will be 3x the number of dark stores in the next 30-40 days.

Priyanka Sahay
first published: Dec 21, 2021 02:55 pm
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