User retention is flat post 40 minutes, 95% of Indian grocery basket can be covered in 10 minutes: Zepto founder and CEO Aadit Palicha 

Kaivalya Vohra and Aadit Palicha.

Earlier this week, Zepto, a nine-month-old grocery startup founded by two 19-year-old Stanford dropouts—Aadit Palicha and Kaivalya Vohra—raised $200 million at a valuation of $900 million in a sign the quick commerce battle is on.

Zepto competes with the likes of Swiggy, Dunzo, BigBasket, Amazon, Flipkart and Blinkit in the quick commerce space, a term used for deliveries in 15-30 minutes. Its strong operating and execution chops soon saw investor interest and steep valuations amid the funding boom in Indian startups.

But can Zepto continue to operate in an increasingly competitive environment where it has to face off with well-funded rivals? Can the 10-minute delivery model sustain the long run?

In an interview with Moneycontrol following the fundraise, Palicha spoke about Zepto’s runway, burn rate and how this space is evolving.

We’ve got most of the cash in the bank. And most of the cash we have from our Series C round, and on top of that, we’ve got $200 million in the bank. So we are really in a position where we know we have well over two years, which is obviously why we need to be able to continue growing pretty aggressively and expand.

For companies at our revenue scale, at that stage, historically, companies have burned $30-40 million or more, we are at a significantly lower level than that. About 20 percent of our burn is actual operating costs and discounts. Most of that is actually covered by the gross profit. And the actual burn most of it is currently IPL (Indian Premier League) spends. We’ve got capex and corporate costs, obviously, like salaries, etc., which will go down as we scale up on a broader basis. And capex and IPL are sort of one-time expenses. So most of it is just one-time expansion oriented.

Many have raised doubts over the sustainability of the 10-minutes model, saying that it will eventually trend towards 90 minutes to an hour with a higher number of stock keeping units (SKUs).

The current reality is that the faster you’re delivering, the cheaper it gets. And you can do significantly more deliveries per item per hour in the same distance travelled if you’re delivering in short distances versus 6-7 km.

For us, the faster we deliver, the cheaper it gets. Fortunately or unfortunately, most people don’t grasp it quite well. But that’s why most people aren’t able to sort of create the ideas that actually end up working out well. Our one cost is also the last-mile cost between micro markets, which is much lower than any other country.

Largely, it’s operationally difficult to do. But if you do it well, it is significantly cheaper, if you don’t do it well, it will still be cheaper, but you might screw up on the customer experience. We’re always going to be working very hard to deliver as fast as possible because the faster we deliver, the cheaper it gets.

It’s very easy to hide behind statements like customers wouldn’t mind waiting 10-60 minutes. The reality is that according to the data, the retention is flat post 40 minutes. Ninety-five percent of the average Indian grocery basket is within 1,800 SKUs.

Even if I get you 10,000 SKUs, you will not buy some fancy bottle just because it’s in our 10,000 products. If I give you 200 different types of chips, you will buy Lay’s. There are just these key SKUs that make up most sales. We went from 1,000 to 3,000, SKUs incrementally. We’re not super-excited about that. Generally speaking, we think that we can get a majority of sales with the right assortment, or the right SKU, and at the same time have a good experience.

On a day-to-day basis, I would say hundreds of customers have ordered. And the key is, we know why customers are using the platform. It is obviously about speed, but it’s also about freshness, reliability and for multiple other reasons. And assortment is something that people are just not as easy about, because you get the SKUs, which means to deliver better service but it doesn’t mean the customers are going to come to your platform, and we’re seeing that. Tons of people are jumping into this space. Either it’s a huge opportunity they’re afraid of missing out on or taking a huge pile away from them. We’re in a position where we just make the chore of getting groceries so much easier, and fresher and more reliable.

Your competitors are well funded. What impact is this likely to have on growth, will consolidation happen at a slower pace?

The market over here will evolve in a pretty interesting way with strategic players in place. I don’t think there’s a meaningful difference but it may lead to slower consolidation in the industry. And definitely, over time, that’ll have to happen like in any other industry. 

It’s something we see in other mature startup ecosystems like in Silicon Valley or in China, with large strategic investors making investments and leading rounds in other companies. The difference, though, is that most of the time those companies end up being highly profitable and use the free cash flow for equity upside. But who knows, India could be a different market and I’m eager to see how it plays out.

In about eight to nine months, we have opened hundreds of delivery centres across the country. So that’s been pretty exciting. Today, we’re launching a new one every morning. And each facility can do 2,000-plus orders a day, while some of our competitors cannot, and it’s not a criticism, they operate at different capacities and that’s their prerogative, they’re trying to implement the model differently.

We don’t go very inwardly focused, we don’t look to see if someone is aggressively expanding, we think we just could expand sustainably, we don’t have to worry about the market catches. That’s something that we’re trying very hard to avoid, where we don’t get swayed by the ups and downs of what’s going on externally. And you just want to move forward sustainably. So we’re going to continue to sustainably expand across the country at this capital raise. Frankly, the valuation is higher than most of our competitors, despite being much younger. Because investors are confident that the execution style that we’ve adopted is the right execution style for a market like this, which is more sustainable.

Having stronger validation, good economics, having new customer experience front and centre of what we do, and just being very driven about every decision we make, whether it’s delivering in 10 minutes, whether it’s delivering 2,000 or 5,000 SKUs, and whether it’s launching in a new city or focusing on profitability. I think that’s the thought process. And I’m sure even other competitors would catch up. We are on a significant scale. We surpassed over a million orders a week a while ago. But we know where to scale, that might surprise most of us. We don’t like parading it because we don’t want to ring any alarm bells.

The more immature side of me might have been disappointed. But the reality is that when we’re actually evaluating this, most companies are not able to fundraise in an environment but we have good options. So we said, wow that’s really sort of a testament to how well this company is doing. Because you know, pretty much everyone that we know is screwed in the tech industry, but we have those options.  And we said if we’re going to be in this rocky market situation for the time being, we want to work with investors who really add value in the long run and are willing to sort of markers in the long term as well.

So some investors might have given us a 10-15 percent higher valuation, but in the long run might not be as supportive as YC (Y Combinator). And I think that directly will add much more value to shareholders in the long term than 12 percent higher valuation today. So that’s the reason why we chose what we chose.