Toys, gifts, printouts, passport photos: What Swiggy Instamart will look at delivering in the future

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Launched in the middle of the pandemic in August 2020, Swiggy Instamart, the food delivery app’s grocery platform, has completed two years. A lot has happened during this time, with the promise of 10-minute deliveries attracting billions of dollars in venture funding across the world. But with the dust settling on a period of excess in the tech start-up ecosystem, the definition of 'quick' in quick commerce has changed, with delivery times getting longer across metros. Instamart was one of the players that didn't jump on to the 10-minute bandwagon.

Swiggy Stores, the company's first iteration of grocery delivery, was junked after the marketplace model of delivering groceries encountered operational challenges. The next step was to experiment with the dark store model. These stores typically resemble conventional supermarkets, except that they are open to online orders only. They cater to customers within 3-4 kilometres in urban areas as delivery executives ride to and fro, fulfilling quick needs like groceries, packaged snacks, beverages and more. Eventually, all quick commerce companies have adopted this so-called dark store model.

In the past 24 months, Instamart has expanded to 25 cities and catered to nine million users. Moneycontrol sat down with Karthik Gurumurthy, senior vice president at Swiggy, to talk about the road ahead and the trends in the sector. Edited excerpts:

What kind of order volumes are you doing right now?

I can’t share order numbers, but we are the largest player in the space. The penetration of Instamart compared to the food delivery business has roughly grown 2.5X when compared to December last year. Within each city, we classify some areas as core zones where the average delivery time is about 20 minutes today. Our coverage in the big cities is fantastic as we deliver in 98-99 percent of the areas. In some of the larger cities, we have relaxed our service level agreements (SLAs) a bit so that we can reach out to more users.

Swiggy had outlined plans to invest $700 million in Instamart. How much of that has already been deployed?

The entire investment is meant to happen over a period of time to make this category extremely large. We have been the creators of this category and are fairly in line with the investment plan for this year. A lot of the investments go into experimenting with newer models and sub-categories. The investment goes into setting up the delivery infrastructure, working with more and more sellers to get closer to the consumers.

Different numbers are going around about what needs to be the size of the order basket in quick commerce for it to be a sustainable business. What is your take?

The average order value (AOV) has to be more than Rs 400 for the business to be anywhere close to sustainability. This would mean that the order consists of six to seven items. I think that’s the eventual number all of us are chasing. The AOV gets impacted a lot by the pricing philosophy. If you see our overall trajectory for the last two years, we have actually never done anything to show the absolute number of orders, which is purely a vanity metric beyond a point.

Right from the beginning, we have been very clear about the minimum order values with which we need to operate and have never gone below Rs 149. In fact, in November and December last year when there was so much competition, we took a stance that customers can subscribe to Swiggy One and get a minimum order value of Rs 99 or else they need to pay the delivery fee. And I see a lot of them still paying the delivery fee. They are ready to pay for the convenience, and that is the way we wanted to build the business.

Another contested figure is the number of orders per day for a dark store so that it is sustainable. What’s your number – 500, 1,000 or something else?

The number of orders is a vanity metric. Logically speaking, a store has to do Rs 4 lakh-5 lakh of turnover per day for it to make any sense. And that is the way to approach the business.

If you do a back-of-the-envelope calculation, most of the stores would cost around Rs 1.5-2 lakh as monthly rental and if you have to keep your rental cost down at around 1 percent. In modern trade, rentals are around 5 percent, but here you also have a component called delivery cost.

It seems expansion plans for more dark stores and newer cities in the quick commerce space have taken a hit recently. What are your plans for the next 6-12 months?

The marginal utility of opening a new store diminishes over time. Once you are within 3-4 kilometres of a consumer, there is no point in opening more stores in the area. I think everyone feels that they have reached that level of density in their core areas. As a result, they are not expanding much.

We are present in 25 cities where there is a large opportunity to serve consumers. You also have to consider the economics because the supply chain is a bit more complicated in India as you go to smaller and smaller cities. The cost of servicing those cities, the fill rates of the different vendors, etc become a bit more challenging. I think we are very comfortable with the number of cities we are present in today.

Sriharsha Majety (Swiggy CEO and co-founder) said last year in December that Instamart will hit a billion dollars in annualised gross merchandise value in three quarters. Where are you at present? 

We had set a target of hitting the billion dollar mark in three to four quarters and we are pretty much trending towards hitting that goal. The market size is huge and we believe it will be $7-8 billion in a period of two to three years. We want to take a lead as we have been the pioneers in the space.

How hard is it to play the long game when there are so many distractions like 10-minute delivery, printout service, etc?

We have to pick the strategic priorities very clearly and what we want to deliver to the customer. What is it that consumers want from us? Get a good understanding of it right from the beginning that eventually any category, item, or assortment, which we believe comes in the realm of convenience, will be needed urgently or I don't get it nearby.

Our focus has been always to play on all of these categories wherever consumers value convenience, much more and eventually are willing to pay for it. We've experimented with some categories like fresh paan, which we introduced last year. There are clear priorities which are actually set together for us when we say these are the spaces where we want to win. These are the use cases which we want to actually keep innovating. Try it out and if it succeeds, scale it up.

The second thing is to define the fundamentals. These are things which we will not do no matter how much pressure is there, just to show certain good numbers. We will not do that because we will have to actually build those things.

You recently added some private labels on Instamart. Are you planning to add more?

Consumers need variety in all areas. And we keep looking at a lot of data in our algorithms which tell us here are the whitespaces. Fundamentally, there are ways in which you could say either you work with some regional players or sometimes it could be to be private. And all of these are sometimes not just the assortment gap, sometimes it's the footprint gap, opening price point gap, just one feature which is actually not present in this particular product and consumers are looking for it.

As you grow bigger, are you getting better margins from FMCG companies? Is selling them ads also a part of the monetization plan?

We today work with FMCG companies to actually help them solve very specific use cases. We actually bring a lot of their products to life in a much better way. And we can actually do a lot of targeted promotion goals. As a result of this, some of the companies launch their campaigns with us. We are currently working with Coke on their campaign. We also have ad sales as a monetization strategy.

What opportunities do you see from ONDC? 

Overall, it is a great opportunity. Swiggy is of course approaching it with a larger philosophy and we will be a part of it. I can't comment on something very specific, but at least we need to replace the overall approaches because there are a lot of businesses and there are a lot of other opportunities as we hear.

Have the supply-side issues eased out? Some months back you had to suspend Genie services. 

Supply has been a bit of a challenge this year because if you even talk to FMCG companies they actually say that this year summer was very, very severe. A lot of high-street brands actually ran short of capacity. And followed by a set of festivals, which came together. A set of that came together as a result of which a lot of people moved towards their native towns and there was a shortage overall in the month of April and May. There's been a lot of relaxation because a lot of people have come back so the supply situation is far better than what it was then, of course now again comes the festive season so we are a little bit more prepared.

How are you preparing for the festive season?

We have planned it well ahead in terms of supply and there is also some product innovation. We are also working on how we get people not just on a daily basis, but actually work on different models so that we can actually have more security.

How are you preparing in terms of policies around gig workers, strikes and the regulatory landscape?

We have been very transparent with our workers in terms of payout structure and benefits we can actually get as a part of it. Even within Instamart, we have been very clear that from day one, there is absolutely no pressure, zero pressure on delivery time.

What’s the landscape around quick commerce in India? Has the euphoria come down?

Everyone's focusing a lot on efficiency. It is the larger focus now for every company. And I think those crazy burns and discounts have come down. It's not just in India, but across the world.

What other adjacencies do you see using the Instamart logistics and the infra that you have built? Like printouts or anything else?

There could be a lot of adjacent categories, for example, it could be general merchandise categories with toys, gifts, etc. That's a very logical use case. The discovery of D2C brands is another use case, which is why Swiggy Minis was set up. And apart from this, within services, there are opportunities. Printout is a brilliant idea. Passport size photo is another example.

Give us a sense of your path to profitability. 

There are really four levers to work in e-commerce overall. One is, of course, the average order value and the other avenues of monetization. Thirdly, how can you be very good in terms of the delivery cost, which will automatically come down by getting closer to the consumers. The fourth one is how well your selling partners actually manage pilferages and wastages.