Quick commerce: Sustainable or 'quick' enough to fade away?

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The post Covid-19 customer has evolved. She is increasingly choosing multichannel for her buying experience, and quick commerce has emerged as one of the major ecommerce models. This new buzzword denotes the race to please customers with ultra-fast delivery i.e. within 10 to 15 minutes. Despite the steep cash burns to fulfil orders, companies are gung-ho about the trend as it is catching up fast amongst consumers in key metro cities.

According to a Redseer report, quick commerce is slated to touch $5 billion by 2025, recording 10 to 15 times growth in the next five years from an estimated $0.3 billion in CY2021. Currently, quick commerce has a small 4-5 percent share of the pie of the ecommerce market.

However, in this new age of instant gratification, the question arises; are customers actually looking for 15-minute deliveries?  Are they ready to pay a premium for quick deliveries? More importantly, will this ‘quick commerce’ be sustainable over the long haul, or will it be ‘quick’ enough to fade away?

The pressure of faster turnaround times (TAT) and high operations cost

The quick commerce trend has primarily accelerated due to its sheer speed, the convenience of ordering, and the rapid delivery. However, the pressure of faster turnaround times (TAT) coupled with low margins and higher delivery costs leads to excessive cash burn for companies, making quick commerce a risky model.

So, the question is: In a diverse market like India, do customers really want a supersonic delivery with a limited product assortment or will customers prefer and appreciate longer delivery times—say, within an hour—with a better product assortment and sharper pricing?

The pertinent point for new-age players to ponder upon is that it is not just about racing against time to deliver; the real win is delivering the right product mix. Giving customers On-Time In Full (OTIF) along with a smooth refund process, and having the right and unlimited product assortment will be critical for an enhanced customer experience.

A part of this industry works with gig workers. In this rat race of delivering within 10 minutes, the working conditions, health and safety of the riders and delivery partners remain majorly compromised.

Also Read: On the trail of how 10-minute delivery works—and doesn't

Data and technology cannot be the answer to everything, especially in India

Currently, the Indian market is disrupted by data-driven technologies that are channelised through new-age ecommerce platforms. But retail is a business about buying and selling products, and in India’s dynamic market, it is all about the right pricing. Most new-age platforms also don’t have the proficiency and knowledge of the right assortment of products. In our complex demography, having a deep understanding of customers’ buying preferences takes a lot of effort that cannot be solely leveraged with technology.

For example, there are probably over 5,000 varieties of rice being consumed across different parts of our country. Which variety should be offered in what part of the country requires specialised expertise, which many new-age companies don't have. To get a leverage over this product assortment expertise already present in offline retail, quick commerce companies are currently throwing their funding might to hire specialists and talent from physical retail with 50-60 percent salary hikes. But this is not sustainable beyond a point, and some sanity and course correction is expected. Only those companies that are focused on curating a profitable and sustainable business model will survive because, ultimately, positive cash flow is what matters for a sustainable business.

The biggest casualty of quick commerce will be small and local businesses. A lot of small stores and kiranas have adapted to the new digital world and omnichannel, especially post the pandemic. However, they do not have the wherewithal of huge capital in hand like quick commerce players to sustain losses for years. Quick commerce will eventually wipe out the small shops and businesses from urban neighbourhoods, leaving them to a similar fate of physical mobile stores in urban markets.

Consolidation in retail is imminent

The competitive battleground of quick commerce requires deep pockets, and companies capable of running on negative EBITDA for years can stay afloat. In today’s scenario, it seems, the higher the losses, the better valuation one gets.

In well-established FMCG companies, there is sanity in pricing; there is a floor on pricing, and it cannot be reduced below a certain threshold. But in commodities, there are no such restrictions and many new-age players are just driving top lines, selling way below buying cost and operating at 1-2 percent gross margins. With the kind of cost structures involved, there is no line of sight for profitability for them.

A lot of startups and unicorns got listed with crazy valuations both in India and globally in the last couple of years. However, in the recent corrections on the NASDAQ, many of those companies have seen serious corrections in their stock prices, and corrections in valuation by 60 - 70 percent. The same is eventually going to happen in India. Ultimately, the private equity firms funding these new-age startups will start asking tough questions. The funding for many big players is already drying up and they are opting to raise debt versus vs equity funding. We have seen several unicorns which had enormous funding and started with a bang, but now are seeing the funding taps drying up, and many startups have folded.

While we are seeing a lot of euphoria and hype being created by quick commerce and the new-age start-ups in the Indian market, there is no doubt that there will be a shakeout, and consolidation that will eventually happen. It is a matter of time before the bubble bursts and some sanity prevails.

Only serious players who are focused on building a profitable model with customer-centricity and have their P&L sorted, will eventually sustain and will be the winners in the long run. Therefore, it is important for these players to go back to the basics of a fundamentally sound business i.e., attractive margins, attractive profitability, and great customer satisfaction. The question that needs to be asked to the new-age players is what kind of long-term moats have they built. Most of these new-age retail players lack a competitive moat—currently, who is burning more cash is the new trend. For a profitable and sustainable business model, the kind of moat these companies build will be crucial for their success in the longer run.

The writer MD and CEO, METRO Cash & Carry India and Chairperson FICCI Retail & Internal Trade Committee.

The thoughts and opinions shared here are of the author.