Disclosure: Contrary was an early investor in Zepto through one or more affiliates. Materials included in this report include a mix of private conversations and public sources and do not constitute investment advice.

The Indian economy, which is among the largest and fastest growing on earth, is expected to grow 6.4% in 2023. For comparison, this was three times as fast as the US, which grew 2.4% in Q2 2023. India’s economic growth is likely to bring many Indians to online commerce for the first time in the coming decade. Hundreds of millions of Indians are expected to enter the ecommerce market by 2027, which is growing rapidly at a rate of between 25-30%.

Within this, Indian grocery delivery is growing even faster than ecommerce more broadly. Valued at $2.9 billion in 2020, it grew to $4.8 billion by 2022, driven by Indian economic growth and growing internet penetration. Quick commerce is a subcategory within grocery delivery where the delivery takes place within an hour or less of a customer’s order. This is a rapidly growing market category, both globally and in India alone, where the quick commerce sector is projected to grow from $300 million in 2021 to $5 billion by 2025. Others even estimate that the market could reach $6 or $7 billion as early as 2024.

Zepto is a grocery and consumer product rapid delivery company founded on the idea that faster delivery speeds could lead to better (instead of worse) unit economics. In other markets globally, rapid delivery from dark stores (also known as “quick commerce” or “q-commerce”) has been associated with high valuations and high burn rates. GoPuff in the US, Rappi in LatAm, Gorillas in Europe, Getir in the Middle East, and Airlift in Pakistan (which shut down) were all at some point valued at more than $5 billion, but have struggled to become profitable in the long run.

Zepto’s bet is that if it can deliver groceries faster than competitors using well-designed technology, hyper-local infrastructure, and a rigorous operating cadence, it could serve more customers per unit of labor time, saving costs while generating a superior user experience. Although early in its lifecycle, the company has already seen significant traction. Zepto started out delivering grocery items but has since expanded to deliver common household goods and more. In late 2022, the company mentioned that it will soon begin exploring categories including pharmacy, fashion accessories, cafe, electronics, and personal care.

Aadit Palicha and Kaivalya Vohra founded Zepto in 2021. They were childhood friends who grew up together in India. While they were both admitted to Stanford University and initially planned to enroll there in 2020, Palicha and Vohra ended up raising money from Contrary to skip college and pursue building a company.

The pair were not new to starting companies, having launched a ride-hailing app for school kids called GoPool when Palicha was only 17. In deciding on their next step, Vohra and Palicha agreed that India was well-positioned for growth as a tech ecosystem, and didn’t want to miss their window of opportunity by attending college. Having remained in India, the two grew frustrated with the grocery delivery options during the pandemic and eventually started a grocery delivery service called KiranaKart in September 2020.

The idea behind KiranaKart was to bring kiranas — local mom-and-pop vendors selling produce — online with simple inventory management that would feed into a delivery network. Vohra and Palicha started by doing deliveries themselves, going from kirana stores to customer doorsteps. While running these experiments, the two began to worry that scaling such a model would be a serious challenge and might not ever lead to profitable margins, even at scale.

Source: Business Today

After receiving additional funding from Y Combinator and others, Palicha and Vohra started to notice a trend in their customer retention rates. On average, KiranaKart was able to deliver groceries within 45-60 minutes. However, in some instances, it was able to deliver groceries in 10-15 minutes due to proximity. Palicha and Vohra realized that the engagement and retention metrics of individuals that were able to get their groceries in the 10-15 minute time frame were significantly higher than for customers with longer wait times. In 2021, Vohra noted the effect this had on their business:

The two founders, therefore, decided to stop working with kiranas, verticalize the entire operation to enable scalable rapid delivery, and re-launch as Zepto in April 2021. The company has since raised $360 million and established a network of more than 200 micro-distribution centers across 10 cities in India with tens of thousands of delivery drivers at work.

Zepto’s product can be broken down into two interdependent elements: the customer experience via the app, and the “dark stores” which manage inventory and compile orders for drivers. While the app is essential for a good user experience, the dark stores and their underlying infrastructure are the backbone of the business model, which allows for fast and relatively inexpensive delivery.

Zepto App

Source: Google Play

The Zepto app now offers customers more than 5K products across food, drinks, household necessities, and personal hygiene. After downloading the app, customers can filter through the various goods to quickly find their desired items, similar to other ecommerce services. After confirming their purchase, the customer can track delivery status all the way to their doorstep.

The app’s homepage is populated with discounts and deals, demonstrating the company’s focus on convenience and the cost-conscious consumer. A delivery fee of around $0.50 is charged for smaller orders, but such fees are waived for any order over ₹149 ($1.81 as of August 2021). Zepto serves customers from 6:00 AM - 2:00 AM daily.

The average distance of a Zepto delivery is around 1.8 kilometers which enables the company to deliver its items in a median time of 8 minutes and 47 seconds.

Dark Stores

Source: Zepto

Dark stores are approximately 2.5K-3K square foot micro-warehouses tightly packed with goods. Instead of consumers visiting the store themselves, the site is full of employees quickly packing goods for drivers to pick up for delivery. This model allows Zepto workers to assemble orders quickly and avoids the unnecessary costs associated with an outward-facing retail presence. As of April 2023, the cost to run dark stores was less than 10% of company revenue and the average dark store could ship 2.5K orders per day.

Because less space is needed to stand up a dark store than normal storefronts, Zepto can create a wider network of stores across a city allowing for short delivery times. As of June 2023, the company was operating in the Indian cities of Mumbai, Pune, Delhi, Noida, Gurugram, Ghaziabad, Kolkata, Hyderabad, Chennai & Bengaluru. Of the 10 most populated cities in the country, Zepto operates in six, and will most likely look to expand into other high-population cities like Hyderabad, Ahmedabad, Surat, and Jaipur.

Zepto had built over 200 dark stores by May 2023 and claimed that many of them had become fully profitable. Because consumer preferences change from location to location, each dark store is filled with items specifically catered to the customers it serves. Since each dark store serves a relatively small area, drivers never finish the day far from home, allowing Zepto to avoid overpayment.

While finding enough drivers to make delivery times possible is important, dark stores were the most important factor in Zepto’s early traction. According to Palicha, innovations like in-house software mapping ideal paths inside dark stores and other efficiency measures have been important in maintaining quick delivery times:

Source: TechCrunch

Customer

Zepto markets to busy people living in densely populated areas in India where quick delivery is possible. Its customer base is broad and encompasses a wide range of customers from working parents to young college students. Customers falling between 25-35 in age were the most active users as of July 2022, followed by customers in the 18-25 age group. People in these demographics tend to be single or DINK (dual income, no kids) households, though some may have children. Such people typically care most about price and convenience, which is why Zepto goes out of its way to offer promotions and discounts on the app. Its customers’ traits have led Zepto to focus on an app that is easy to use for all demographics, consistent delivery times, and competitive pricing.

Market Size

The global online grocery delivery services market is projected to grow by $800 billion from 2020 to 2025, representing a greater than 25% CAGR. In India alone, the quick commerce sector is estimated to grow from $300 million in 2021 to $5 billion by 2025. Others even estimate that the market could reach $6 or $7 billion as early as 2024. The APAC region is expected to contribute to 55% of the market growth over this time period. Zepto specifically says that it views the Indian grocery market as a $600 billion opportunity. While some believe that the online grocery market experienced unsustainable growth during the COVID-19 pandemic which will soon cool off, others believe that global quarantines acted as a catalyst for a market that is poised for further growth.

Source: Business Today

Across India, there were ~20 million households addressable by the quick commerce industry as of October 2021. Indian consumers have rapidly embraced the concept of quick delivery compared to other regions. The percentage of grocery delivery in India attributed to quick delivery was nearly 2x that of China and more than 4x that of Europe in May 2022. One concern about India that analysts have surfaced is that the average order size is only $6, which is half of the global average. However, the company has stated that it is seeing increases in basket size due to greater usage of expanded SKU options.

Source: TechCrunch

Blinkit

One of Zepto’s biggest competitors is Blinkit, originally founded in 2013 under the name “Grofers.” Based in India, Blinkit’s goal was to deliver groceries quickly. It has successfully expanded to 30 Indian cities and has been able to execute deliveries in under 10 minutes. As of August 2023, the company delivers a plethora of products including groceries, household essentials, and personal hygiene — amongst others. Blinkit has raised over $500 million in the private markets from notable investors like Sequoia Capital, SoftBank, and Tiger Global, while also taking on various rounds of debt. Blinkit was acquired by Indian restaurant delivery company Zomato in June 2022 for $568 million.

Blinkit employs a similar business model to Zepto, aggregating goods to central locations where orders can be assembled and dispatched. Previously, Blinkit simply partnered with local stores to process orders before drivers arrive to deliver them, but this has led to many inconsistencies across the customer experience. The company has since begun launching its own dark stores across India. Blinkit sells over 7K products, including those sold by Zepto as well as mobiles and accessories, electronics (including Apple products), and others. The company even offers private-label goods. The company’s delivery fees vary by location.

Dunzo

Dunzo is another delivery company in India. The company was founded in 2014 as a hyper-local logistics company that helped people with their chores like laundry, groceries, and package pick-up/delivery. Today, Dunzo offers services including 19-minute grocery and household essential delivery, medicine delivery, package logistics, and restaurant food delivery, among others. Dunzo was valued at $775 million in January 2022. The company later raised an additional $75 million in convertible notes from Google and the Indian firm Reliance Industries, bringing total funding to $457.6 million.

Products offered by Dunzo include food and grocery, medicine, pet supplies, produce and meats, health and wellness goods, gifts, and more. A combination of dark stores in some locations and local partnerships in others create the inventory system behind Dunzo’s deliveries. To save on costs, the company has been shutting down smaller dark stores and instead centralizing operations to fewer, larger dark stores in the most densely populated areas. A small delivery fee is added to every order and during peak times, a surge charge may be added. Dalvir Suri, co-founder of Dunzo, has mentioned that the company is not interested in 10-minute deliveries and instead is looking to provide a balance between convenience and other factors like affordability.

BigBasket

Founded in 2011, BigBasket is one of India’s largest online grocery delivery stores. As of August 2023, its latest round was a $200 million funding round led by Tata Digital which valued the company at $3.2 billion and brought its total funding to $1.5 billion. BigBasket has a large reach, having expanded to “450 Indian towns” by March 2023.

For BigBasket, deliveries happen not in minutes like with Zepto, but in days. The company has stated that its goal is to complete 80-100% of orders within the same day. From 2018 to 2023 BigBasket sustained a 50% CAGR and hopes to be EBITDA positive by the end of 2025.

Customers of BigBasket are much more interested in variety than they are in short delivery times. BigBasket offers over 20K products across 25 cities, but even express deliveries can only be completed in 90 minutes. The company would rather have its customers select a time slot for their order to be delivered a day in advance. Delivery fees are charged on orders under about $12 (₹1k) demonstrating that BigBasket customers are submitting larger orders with less emphasis on speed of delivery.

Zepto makes the majority of its revenue by adding small margins to the products customers buy. In 2021, the company started charging small delivery fees of less than $0.25 in its more mature micro-markets, and according to Palicha, these fees will expand to other markets. Palicha also noted that as delivery times decrease, the company expects to become more profitable:

Early in 2023, Palicha said that if the company stopped opening new dark stores then it would be profitable sometime in 2024. However, the company’s priority in 2023 remains growth. That said, Zepto has also focused on decreasing burn by increasing scale and better utilizing its supply chain. For example, with more dark stores, Zepto receives better terms from its suppliers. Such measures enabled the company to cut burn per order by 5x quarter over quarter in May 2022.

It is also important to note that Zepto has begun making its own product line of commonly ordered household goods, which can be seen on its app. Like grocery stores, these products have much higher margins than products from third parties. Additionally, brand advertisements can be seen across the app which most likely creates ad revenue for Zepto.

In November of 2021, Zepto was growing at 200% month-over-month with buyer retention near 80% and 40 dark stores online. The company was gaining 100K customers every single week in December 2021, 60% of which were women. Less than a year later, in May 2022, Zepto’s annual revenue was estimated to be between $200 million and $400 million, growing at 50% month-over-month. During that time period, Palicha told reporters that the company was offering services in 11 cities and planned to use additional funding to reach up to 24 new cities by the end of the following quarter.

Later in 2022, Zepto told Forbes that it was processing hundreds of thousands of orders every day. Over the next 12 months, Zepto would 4x its business. Palicha stated that the company’s goal is to reach $1 billion in annualized sales sometime in 2023 and surpass billions in revenue in the following years.

Zepto raised a $100 million Series C led by Y Combinator in December 2021, with a post-money valuation of $570 million, the third round of funding it raised that year. Just five months later, in May 2022, the company went on to raise a $200 million Series D once again led by Y Combinator. This time, Zepto received a post-money valuation of $900 million, increasing the company’s value by 57% in just five months. Other notable investors behind Zepto include Contrary, Kaiser Permanente, Glade Brook, Nexus Venture Partners, Global Founders Capital, and Lachy Groom. Palicha said in April 2023 that the ultimate goal for Zepto is to become a publicly traded company within as soon as two years.

Domestic Growth

With every announcement of fundraising tied to Zepto, there has been a statement outlining the company’s plans to use the capital to expand operations, open additional dark stores, and reach more customers. It is much cheaper to acquire customers in cities without competitors. Thus, Zepto is pushing to serve as many areas as possible. The more dark stores Zepto can open, the larger its margins grow due to better terms with suppliers and opportunities for cost spreading. More dark stores means more employees which can be strenuous for some companies but not so much in India as the country is projected to have an employee surplus of 245 million by 2030.

Supply Chain Verticalization

In February 2023, Zepto announced Zepto Bloom, an app built to help farmers every step of the way from planting seeds to selling produce, refining supply, and improving yields. This “farmer’s app” and collection centers located in villages across India are intended to enable farmers to sell their produce directly without bidding for long-term credit agreements. The app is also intended to help farmers price their produce at market standard rates while also receiving agronomic support to ensure harvests remain plentiful.

According to Vinay Dhanani, Zepto’s President and former COO, over half of the company’s orders include fresh produce, so developing deep relationships with farmers is essential. While the company is still young, it is already procuring produce from thousands of farms across the country, creating many logistical hurdles. More tools for farmers as well as new tools for other verticals and product delivery to dark stores will lower the risk of low inventory and quality variance for Zepto.

Broadening Product Catalog

Zepto Cafe, a product line now featured on the Zepto app which resembles common cafe items, was launched in 2022 and has shown early signs of success according to the company. The new products essentially resemble those found in a 7-Eleven. According to Palicha, they carry a fairly high margin. Zepto purchases the ready-made products in bulk and does not do any cooking or preparations themselves as this would be contrary to its quick business model. After Zepto Cafe’s launch, Palicha actually felt it necessary to clarify that Zepto is not entering the food delivery business:

Source: Money Control

Zepto started out delivering grocery items but has since expanded to deliver common household goods and more. In late 2022, the company mentioned that it will soon begin exploring categories including pharmacy, fashion accessories, cafe, electronics, and personal care. Taking on giants like Amazon will not be easy, and new problems such as high return rates could force Zepto to make logistical updates, but the company believes its model will lend itself well to more than just groceries. In an interview with Contrary Research, Palicha said:

As this happens, there may be an opportunity to begin selling privately labeled goods under the Zepto brand. Just like Walmart’s Great Value brand, Zepto could offer goods at a lower price while also gaining more control over the supply chain.

Inability to reach profitability without fees

India is home to the world’s fastest-growing economy and may become the third-largest economy by 2027. One consequence of this is likely to be that more Indians can afford services like grocery delivery. However, many of Zepto’s customers have grown up in an extremely price-sensitive market, especially when it comes to food. These cultural habits will most likely not disappear quickly.

To attract consumers who are particularly price-sensitive, Zepto is consistently offering promotions to activate users and hopefully build enduring loyalty. Zepto has included a small delivery fee in some markets, which is not uncommon for a service of this kind. That being said, customers may choose to seek alternatives that do not charge any sort of fee, and price competition in this competitive market might exert downward pressure on margins. The question of how much profit margin Zepto can preserve after logistical and delivery costs will remain.

High-Risk Business Model

Zepto’s business model requires a tight timeline from harvest or production of goods to delivery of orders to customer doorsteps. There are many steps that must go right in order for a delivery to be completed in less than 10 minutes without any errors or unavailable items, all while allowing Zepto to make a small profit. For example, dark stores cannot be massive warehouses or else it would take too long to assemble orders, so supplies must be replenished consistently and any inability to do so would be disastrous. This also means that if any supplier relations are broken, there is little time to find alternatives. The model seems to be working well after a few years of improvements, but as the company scales it will open itself up to additional risks. The smaller the delivery window is, the less space there is for errors, and the delivery window cannot be much smaller than Zepto’s.

Beyond the current operations of Zepto's model, its important to acknowledge the obstacles that other companies in this category have faced globally. For example, Airlift, a similar quick delivery business operating in Pakistan, shut down operations, and both Getir and Gopuff have experienced significant layoffs. Each global market is unique, and Zepto appears to have found unique success by focusing on meticulous operating procedures, and geographic focus in the mostly densely populated areas in India. But the fundamental business model risks remain.

Regulatory Guidelines

As India’s economy is growing, so is the quality of life for citizens around the country. Many of the nation’s cities are built on old infrastructure, making their roads dangerous to navigate. As wealth increases, it is not unlikely that road quality and traffic regulations will also increase. This is positive for Zepto because the company’s drivers will be safer, but it also poses a threat to its delivery times. A driver only has around seven minutes to deliver any given order, meaning he or she must use their bike effectively to pass any traffic between the dark store and the customer. A driver for Zepto’s competitor Blinkit even said they fear for their life in certain moments.

Source: BBC

Automotive accidents kill 150K people per year in India and the addition of rushed delivery riders will not help this number go down. A Blinkit rider said they want the 10-minute delivery trend banned by regulation after seeing a fellow driver injured. Whether guidelines are instated and enforced remains to be seen, but either way, Zepto can still stay competitive by being faster and more reliable than its competitors.

Zepto is an Indian quick-commerce company offering its customers items across food, drinks, household necessities, and personal hygiene in under 10 minutes. Zepto uses a distributed dark store model to manage inventory and package orders in a matter of minutes before sending them on their way in the backpacks of riders. Founded at the inception of the COVID-19 pandemic, Zepto benefitted from quarantine mandates which made grocery shopping impractical for many. The company has continued to see traction since then. While Zepto continues to expand across current markets and into new cities, its competitors are attempting to do the same. By expanding the variety of goods offered through the app and managing additional parts of the supply chain, Zepto is positioning itself well to become a market leader. However, as a business based on expensive logistics, continuing to scale could include some of the growing pains that affect all businesses in this category.