Swiggy's founder and CEO Sriharsha Majety.
What began as an experiment less than two years ago, is now a huge business driver for Swiggy and could surpass its core food delivery business in the future.
Swiggy's Instamart, its express grocery delivery service, which launched in August 2020, now has over 2 million transacting users and clocks 1 million orders a week. With Instamart's GMV (gross merchandise value) poised to hit the $1 Billion mark in the next 3 quarters, Swiggy has decided to go full throttle, committing $700 million to this business.
The fresh ammunition for Instamart comes amid heightened competition in the quick commerce space in India, as more customers shop online for essentials. Instamart is vying with rivals such as Zomato-backed Grofers, Dunzo, Zepto, Flipkart, Amazon, Tata-owned BigBasket, and Reliance-owned JioMart to deliver in 15-30 minutes.
In an interview with Moneycontrol, Swiggy founder and CEO Sriharsha Majety spoke about why he's betting big on Instamart, if the intense competition will lead to a shakeout, Swiggy's IPO plans, and its bias to build rather than buy. He also spoke about what the platform is doing to address the concerns of delivery partners.
What made you decide to double down on Instamart now? This also comes at a time when there is a lot of competition in the space.
The growth had taken us by surprise. Our retention is really looking incredibly good. And the frequencies that we are seeing for consumers who spend time every passing month, have changed our assumptions about how large the market can be. And that fundamentally means a high degree of clarity that this category is going to be very huge. And given the early lead, that we have a significant market leadership now we are just formally doubling down saying, let's go and do justice to the category.
Last time we spoke, I think you said Instamart accounts for 25% of your business volumes. So do you see that going up even more? Do you see that perhaps exceeding food delivery and by when?
So I think we talked about non-food, not Instamart, per se. Our hope is that that number keeps going higher and higher. Of course, food is going to grow. But the pace at which some of the new initiatives are growing or can grow will mean that we should be looking at this number inching up higher and higher.
Do you see this exceeding food delivery going forward?
The commitment assumes that this could even be larger than food delivery. But again, the two are two different businesses, both are growing.
By when do you expect this breakout to happen?
There are no such timelines. Food delivery also has a $3 billion GMV(gross merchandise value) run rate. So it's not going to slow down anytime soon. I'm unable to offer a timeline. It's a competition between the two but it has a fair chance of being larger.
Apart from the $1 billion GMV for Instamart, you've also said $3 billion GMV for food delivery. So take us through the growth that you've seen in the food delivery business. Has it come back in full force with offices opening up?
Starting from April, May, June with the second lockdown, we saw consumers take to food delivery in a much stronger way than we ever saw in the past. And that momentum has continued even into the next quarter. With more consumers coming back to the big cities as offices open, that is going to have a meaningful impact on our lunch orders and ordering frequencies in general. But other interesting mentions would be if you look at the average spending from transacting users that has increased by more than 50% since pre-COVID. We are talking about monthly spends not per order spend. There is some softening in the order values, food only for entertainment is not happening. There is food for entertainment as well as food for convenience.
Talking about the $700 million investment, where exactly will it be utilized?
The $700 million investment is a medium-term commitment. This is for the category development that we will do over the next two, three years. The key investments are going to be in driving awareness, distribution, there's a lot of technology investments that need to be made continuously to make operations more efficient.
When I say distribution, it is the geographies, we're now in 18 cities, we will expand some more, and test the market and then explore further expansion. And in terms of the stores, the network has more than 150 now. And we will add close to another 100 in the next three months. By January almost all of the orders are expected to get delivered in under 15 minutes. The model doesn't work by setting up even larger stores. But it works by setting up more stores. Not only are you getting closer to the customer, but it also has a bearing on the delivery costs that we incur because our partners have to travel shorter distances.
Unlike food delivery, instant grocery delivery was considered more of a convenience play. There wasn't much talk of discounting. But now with so many companies coming up into this domain and with so much capital how do see the space transforming?
This is an out-and-out convenience category. Groceries are also an all-pervasive category, so just putting regular daily consumption items on discount means that you can just get volumes but not all of it is going to stick. So I think it is different from food delivery in that fashion. There is no way that you can make the model work by pricing like a value brand while you're in convenience.
There's also been this whole debate on whether people really need atta, dal, and chawal(wheat, lentils,rice) in 10 minutes?
Even at Swiggy, we are exploring two different grocery plays. So between Instamart and Supr Daily, we actually don't think that 15-minute delivery is the answer for all groceries. As you mentioned, if you're only ordering atta, daal, and rice typically that's a part of a planned purchase. The odds are, that's not the need that you come to superfast delivery offerings for. Of course, if you suddenly need something is when you start coming to the platform. And that behavior happens even at offline retail, where there are a lot of top-ups that do happen on impulse needs and distress needs. And that's going to be a huge part of our purchase.
So it's not monthly stock up, but we will be having some relevant selection in these categories, and they will also be consumed. So even as we are seeing it, it's not the largest category at all for us, which is why I think the inventory itself is quite different from, let's say, a conventional grocery store. Like we might have the largest ice cream selection in all of online commerce.
I think grocery is one category where there will be five types of customers. And they will have five types of needs.
What impact will the heightened competition in the quick commerce segment have on unit economics? Will it be an era of deep discounts followed by the inevitable shakeout, what we saw five years ago with Peppertap and Local Baniya? Or do you think the market has changed this time?
I think that on a category level the customer experience opens a new operating model. So there will be investments but, and I am speaking for myself, the spends are not into discounts. Because I don't know if that is where the category will find its sweet spot. It's very easy to just get a lot of growth by giving value in groceries. It's not like giving a small deal on a pizza. Once you go into daily necessities and go deep discounting, it's easy to get tricked into growth that may not stay. So I know we're treading carefully and treating the category with the respect it deserves because it is different from other categories.
So there may be some intensity, I think we're seeing more competitive intensity and delivery fee pricing. It's not a place where items are getting deep discounted. And I don't think the model can work at all.
What is the average ticket size?
There's a user training curve. New users start with pretty small purchases, start getting comfortable with the platform. As I said, the atta also makes its way into a cart, the third time you order or the fourth time you order.
The other concern analysts have cited when it comes to groceries is that it has a negative contribution margin when compared to food delivery?
When we started in August (2020) we said to ourselves that first we need to get to some proof point that will give us comfort in the contribution margin and we got them in March. Right now, if we had the same number of stores and allowed for the demand to come, then contribution margin numbers would be very different but we are adding a new store a day given the demand growing. So we are in the middle of that. Contribution margins we were able to prove to ourselves internally in one or two locations that we chose. So I think we feel good about the path here.
The restaurants' gross margins are, of course, 60 to 65%. Whereas here, the gross margins aren't as high. But for online delivery, there are multiple line items. You can help with advertising there is a delivery fee. So the business model is different.
How much more can you push the pedal when it comes to timelines for delivery?
Some customers already get single-digit minute delivery. All of that is organically happening. Technically if you have a million dark stores you can deliver in 5 minutes to everyone. So it's really a question of the size of demand in the market. Of course, there is a delight around speedy deliveries and we think there is room to offer it. But we are not at all waking up and saying single digit is the mission. Our fleet size now is 250,000.
You are also reportedly raising a new $700 million round at a $10 billion valuation. Will that be the last round before an IPO? When can we expect you to hit the public market since that's the flavor of the season so to speak?
So I obviously can't comment on any speculation around the fundraise. Given the success we've been having with Instamart and overall diversity, there is a lot of interest. But there's nothing I can comment on that right now.
On the subject of the IPO, I think every passing month, brings new information to go forth and improves our own understanding of the market. And our own readiness with the investment calendar for this. So keep watching this space closely.
Your strategy of building vs buying is quite different from what Zomato is doing. They want to focus on their core food-related businesses and do other things via investment. What is your own philosophy here?
We do have a builder bias. Instamart launched in August 2020. But we've been experimenting with it in small parts since December 2019. And even if you wanted at that time to make an investment or to do an acquisition, there was nobody. So I think when you are going to be the first to enter or try creating a category, you don't always have the luxury of choosing between buying and building. But there will be categories that we're excited by today where great companies are building for the future. So that will be a balance for us.
You will see us do a balanced strategy of acquisition plus investment. But I think we do have a builders bias. But if we feel it's always come down to a dispassionate decision. If there are great teams building things that we don't think we easily be able to build, we'd love to partner with companies. But it is strategic and linked to the company's core mission. We won't be doing any financial investments.
As much as many on-demand platforms claim that there's no pressure on delivery partners to deliver in a hurry, social media is filled with posts contradicting it. A lot of times the delivery partners call customers in advance. They say they are running a few minutes late and request the customer to mark the delivery as a 10-minute delivery so that he could earn that extra incentive. How do you plan to address some of these concerns?
I can only speak for ourselves because we didn't start by saying 10-minute delivery is the model. But like I said, we're organically moving faster and faster, our journey has been different. And as we have maintained, the delivery partners on Swiggy do not know that this needs to be delivered in this timeframe, we will show ranges on our app and not just an absolute number. And the second thing is they are not penalized for this. So we have no reports of such circumstances.
No penalizing, but are there incentives to deliver faster?
I don't think so. But there are incentives around ratings and customer experience, etc. But just on-time delivery, there aren't any.
There's also been this constant friction this year between employees and platforms, not just with Swiggy but we saw this with Zomato, Urban Company. What is the larger solution here? The government is talking about bringing gig workers, under the new labor law. So how are you preparing for changes on the policy front, when it comes to gig workers?
We are in constant dialogue with the policymakers and presenting our point of view. At scale, this is still year three or four of the gig economy. We're pretty mindful of our responsibility, we believe in the earnings, as we mentioned, are now at an all-time high, meaningfully higher than last year. But it's not just the earnings, our responsibility extends beyond earnings and improving their overall conditions on the job, can we make it easier? What are the things that we can do? That's a work in progress. So that's what we can do within our control.
And in terms of policymakers, I think our teams continuously are in dialogue, and we're sharing their point of view. And I think the key point is that this is three, four years old. So I think there is a lot of iteration that will continue to happen. So long as we take responsibility, and are continuing to figure out the win-win here we will make progress.
There is also buzz around Swiggy piloting social commerce with Swiggy Bazaar?
Too early to say that, right now very very focussed on the market that we began with and there's just so much to do. Maybe we do some pilots at some points.