20VC The Most Revealing Breakdown of Unit Economics for Quick Commerce; AOVs, Retention, Delivery Costs and more, Why The Business Model is Different for Emerging Markets & Will This Be a Market of Consolidation or Many Players

In this episode of "20VC: The Memo," host Harry Stebbings explores the quick commerce (q-commerce) landscape in emerging markets, contrasting it with Western models. Founders from Zepto (India), Airlift (Pakistan), and Joker (Latin America) share insights on their unique challenges and advantages, such as lower labor costs, higher average order values (AOVs), and the importance of fresh produce in driving customer retention and margins. They discuss the impact of infrastructure issues, the necessity for local sourcing, and the strategic use of delivery fees post-customer acquisition. The panel also touches on the potential of advertising revenue as a significant business lever, with emerging markets offering a new advertising outlet for major CPG brands. The conversation reveals the nuanced and dynamic nature of q-commerce in emerging markets, where operational excellence is key to success and profitability is achievable through various paths.

• Harry Stebbings introduces the monthly show "20 VC: The Memo" focusing on quick commerce in emerging markets.
• Discussion includes how business models in emerging markets compare to western countries, especially in light of recent layoffs in global players.
• Founders from Zepto (India), Airlift (Pakistan), and Joker (Latin America) discuss their business models, revealing key metrics like AOVs, CACs, and margins.
• The panel explores the advantages and challenges of quick commerce specific to emerging markets.

"Today we're going to do an examination of the world of quick commerce in emerging markets." Harry Stebbings highlights the focus of the episode on quick commerce in emerging markets.

The quote establishes the central theme of the episode and the intent to explore the nuances of quick commerce in these markets compared to established ones.

• Usman of Airlift discusses the straightforward path to free cash flow in emerging markets due to low minimum wage costs and strong AOVs from a diverse assortment.
• Ralph and Adit highlight the benefits of population density in India, leading to high order volumes per day and low operating costs.
• Adit also notes the ingrained habit of frequent grocery shopping in India, which enhances frequency of usage for quick commerce platforms.
• Ralph points out the low penetration of supermarkets in Latin America, positioning quick commerce as a comprehensive shopping solution.

"The reason we're so excited about emerging markets in particular is because the path to free cash flow is actually extremely straightforward." Usman explains the financial advantage of operating in emerging markets.

The quote emphasizes the economic benefits and efficiency of quick commerce in emerging markets, which contribute to a faster route to profitability.

• Adit discusses infrastructure issues, such as poor road conditions and weather-related disruptions, as a significant operational challenge in emerging markets.
• He also mentions the complexity of managing fresh categories due to lack of standardization in procurement from local farmers.
• Ralph adds that customer expectations for a comprehensive assortment are high, while existing distribution and supply chain infrastructure is not as efficient or flexible as needed.

"Roads are just not as smooth as you want them to be... Routes are not as well planned. When it rains, things flood for quite some time." Adit describes the infrastructural challenges that impact quick commerce operations.

This quote highlights the logistical hurdles that quick commerce companies face in emerging markets, which can affect delivery times and customer satisfaction.## Quick Commerce in Emerging Markets

• Emerging markets require companies to be both consumer-facing and supply chain-oriented.
• Pure marketplace models face challenges without their own logistics and procurement systems.
• Building a comprehensive supply chain in emerging markets creates a high barrier to entry for competitors.
• Local procurement is essential for efficiency and sustainability.
• The combination of micro hubs and larger distribution centers optimizes procurement and supply chains.

"In emerging markets, you have to be, to a very big degree, a supply chain and procurement company."

This quote emphasizes the necessity for quick commerce companies in emerging markets to invest heavily in their own supply chain and procurement processes, rather than just focusing on the consumer-facing aspects.

• Local products and brands are increasingly in demand for sustainability and efficiency.
• Shortened procurement processes from local sourcing lead to higher product margins.
• Local procurement allows tapping into a significant product margin pool, with up to 50% in some regions.

"We are always choosing and trying to find ways of like local procurement, trying to reduce the dependency on global brands."

This quote highlights the strategic move towards local sourcing to meet customer demand for local products, reduce reliance on global brands, and improve profit margins.

• Fresh-focused categories like fruits and vegetables drive retention, frequency, and margins.
• Direct sourcing of fresh produce can yield buy-sell margins of 40-50%.
• Efficient sourcing and quality control are critical for reducing wastage and increasing margins.
• High inventory turnover rates contribute to procurement efficiency.

"We're in a position where we've got buy sell margins in fresh fruits and vegetables at scale when you source directly."

This quote illustrates how focusing on fresh produce and direct sourcing can significantly improve profit margins due to high buy-sell margins.

• Picking costs are a crucial factor in the quick commerce business model.
• Reducing picking costs involves automation and increasing efficiency.
• Achieving scale in neighborhoods can lead to more efficient delivery and picking operations.
• Order stacking and warehouse automation are potential methods to improve efficiency.

"Our picking cost averages in between, like two to 3% of revenue."

This quote provides a benchmark for picking costs as a percentage of revenue and suggests that there is potential to reduce these costs through various operational improvements.

• Delivery fees can impact customer retention after a certain number of orders.
• Implementing delivery fees after the fifth order does not significantly affect customer retention.
• High retention rates are observed after the third order, trending towards almost certain retention after the eleventh order.

"We haven't seen much drop-off in terms of user retention rates post implementing delivery fees post the user's fifth order."

This quote discusses the impact of implementing delivery fees on customer retention and indicates that, when timed appropriately, delivery fees do not necessarily lead to a drop-off in user retention rates.## Customer Base and Delivery Fees

• Mature customers across the country are currently paying fees for their orders.
• Delivery fees have doubled in the past two months and are expected to grow as the customer base expands.
• The goal is for 60-70% of the overall customer base to be paying fees, with the early sub-five-order category representing 20-30%.
• Over time, the trend is to have 90-95% of customers paying fees after their fifth order.
• Despite increased delivery fees, there hasn't been a significant drop-off in buyer activity.
• A slight decrease in order frequency is observed, but it does not significantly impact Gross Merchandise Value (GMV) due to an increase in average order value (AOV).
• A higher AOV compensates for the lower frequency, resulting in stable GMV.
• Faster delivery leads to cheaper last-mile costs due to more orders per hour per rider, reducing the per-delivery cost.
• The platform has a lower last-mile cost than other hyper-local commerce in India for mature markets.
• The end-state delivery fee is expected to be lower than that of food delivery platforms while still being free cash flow positive.

"All mature customers across the country currently have a fee attached to their orders, right."

This quote indicates that all established customers are being charged delivery fees, which is a part of the company's current business model.

"Month on month, we're still seeing delivery fees constantly being added. In fact, our fee construct doubled the past two months consistently."

The company's delivery fee structure is increasing, having doubled in the previous two months, reflecting growth in this revenue stream.

"So that's essentially the very high level strategy is post maturity users get hooked up to the fifth order and after that, as you should have incrementally increased delivery fees, we really haven't seen drop offs as much, at least on the buyer side."

The strategy is to increase delivery fees incrementally after customers reach maturity, which is defined as past the fifth order. This increase has not led to a significant drop in customer retention.

• There is a focus on operating efficiency and the cost side of the business, alongside the importance of average order value (AOV).
• AOV is a critical driver for the P&L, with the platform's AOV being higher than competitors in the market.
• The higher AOV is attributed to an assortment advantage and an efficient distribution center network.
• AOV has been increasing over time, significantly impacting profitability and unit economics.
• The goal is to encourage customers to build larger baskets, which improves profitability more than delivery fees.
• The platform is experimenting with charging delivery fees for small orders to incentivize larger basket sizes.
• Improving assortment quality and availability is a strategy to drive AOV and customer lifetime value.
• The platform's vertically integrated model aims to serve all income levels, not just the middle or upper class.

"Average order value is an incredibly high impact driver of the P&L, like in the month of January."

AOV is emphasized as a major factor influencing the profitability and financial health of the company.

"The aov for qcommerce, right, for delivery hero and some of these other players is actually around $6. The average for India is about $5.70."

Comparative AOV figures are provided, highlighting the platform's higher AOV relative to its competitors and the market average.

"The average group aov is currently at around like $25, which is already representative of a bigger grocery basket, instead of just like a fill up basket."

The speaker mentions their platform's average AOV, which indicates customers are purchasing larger grocery baskets, contributing to higher profitability.

• There are two broad Q-commerce models: ultra-fast delivery with lower AOV and slightly slower delivery with higher AOV.
• Ultra-fast delivery models require significant capital investment to achieve the necessary order density for profitability.
• The platform's model focuses on 30-minute delivery with a higher AOV, which is less capital intensive.
• Faster delivery rates result in better penetration of high-margin categories and lower logistics costs.
• The mature micro-market model can achieve low fully loaded cost structures, including last mile and packing costs.
• In high-density markets like India, a ten-minute delivery proposition is manageable with a broad SKU assortment.
• The faster delivery model leads to higher customer purchases of fresh products, which have higher margins.
• The model has led to some stores reaching cash flow positivity in a shorter timeframe than traditional e-commerce.
• AOV should not be considered in isolation, as it does not reflect other benefits like higher gross margin structures from faster delivery models.

"And we're on track to be in a position where we can continue growing and have about 60 70% of our overall customer base paying fees, with that remaining 20 30% being in that early sub five order category, and eventually that will trend to 90 95% over time."

The company is aiming for the majority of its customer base to pay delivery fees, with a smaller percentage in the early stages of ordering.

"So if you're paying a rider rs80 per hour and he's doing one delivery per hour, then your cost for every delivery is rs80."

The quote explains the cost calculation for delivery based on rider payment and the number of deliveries per hour.

"But if you're paying him rs80 per hour and he's doing two deliveries per hour, your cost for every delivery is rs40. If he's doing three deliveries per hour, your cost for every delivery is rs27."

This quote further elaborates on how increasing the number of deliveries per hour reduces the cost per delivery.

• The platform has launched its own advertising business, Joker media, leveraging high-frequency and retention rates.
• Joker media addresses the limited geo-targeting capabilities of other online advertising platforms in Latin America.
• There are also limitations in offline advertising in Latin America, such as restrictions on billboards and public transport advertising.
• The hyper-local model with detailed customer consumption data provides a foundation for targeted retail advertising.
• Joker media has already contributed significantly to global revenue shortly after launch and is expected to grow.
• The new advertising revenue stream is seen as an additional profit lever and differentiator.
• The advertising strategy does not conflict with the focus on fresh categories, which are procured locally with high margins.
• The advertising business complements the existing business model without creating conflicts with CPG sourcing strategies.

"We have now built our own advertising business."

This quote introduces the launch of the company's advertising business, which is expected to become a significant revenue stream.

"There are very, very limited advertising capabilities in Latin America."

The speaker highlights the gap in the market that their advertising business is aiming to fill, particularly in terms of geo-targeting and limitations of offline advertising.

"We launched our Joker media proposition only some few weeks ago and already in the first month it's almost contributing 5% of our global revenue."

The rapid success of the Joker media proposition is emphasized, showing its potential impact on the company's revenue.## Q-Commerce Platform Development

• Q-commerce platforms are being built with their own SKU sets.
• Direct contracts with producers and brands are established for better navigation of commercial relationships.

"No, we are building our own SKU set. We are entering into contracts with producers and brands directly, and hence we can always navigate in between the way, how we are basically dealing and having commercial relationships in place with each of those individual producers."

The quote explains the strategic approach of developing a q-commerce platform by creating unique SKU sets and forming direct relationships with producers and brands, allowing for better control and management of commercial interactions.

• Advertising contributes to q-commerce revenue, with a goal to increase the percentage over time.
• Comparison with Delivery Hero's advertising revenue benchmark.
• Q-commerce platforms can achieve significant advertising revenue with the right market conditions and strategies.

"So we're seeing between 1.3% to 2% of revenue from the advertisements platform... We believe this can get to 45% and hopefully over time, up to 10%."

This quote indicates the current and potential future revenue from advertising on the q-commerce platform, suggesting growth expectations and benchmarks.

• Limitations on advertising in certain markets drive demand for online targeted advertising platforms.
• Large CPG brands in Latin America are concentrated and competitive, leading to increased advertising spending.
• Geographical reach and business size are essential for advertising relevance and revenue.

"The barrier, or the threshold of having something attractive in place is relatively low, because again, all other existing platforms are not sufficiently attractive for the big brands to spend on media."

The quote highlights the opportunity for q-commerce platforms in markets where current advertising options are limited or unattractive, allowing q-commerce platforms to capture a significant share of advertising spend from big brands.

• Emerging markets offer unique opportunities for CPG brand advertising.
• The proximity to the point of purchase enhances the value of advertising properties.
• Q-commerce platforms can offer targeted, personalized advertising with measurable ROI.
• Additional revenue streams include brand-funded discounts and off-invoice margins.

"For us, we've been in a position where when you include brand, it's not just monetization, by the way, that's significant."

This quote reflects the multifaceted approach to monetization in q-commerce, which includes not only direct ad revenue but also brand partnerships that contribute to overall financial performance.

• Quick delivery times enable the sale of smaller units and increase brand sales.
• Brands that were historically underrepresented in e-commerce platforms are now investing in q-commerce platforms like Zepto.

"Because we deliver in ten minutes, because we're incredibly fast. We're seeing brands that have historically been underrepresented... are now doubling down and tripling down on Zepto."

The quote emphasizes the competitive advantage of q-commerce platforms in offering rapid delivery, which attracts brands looking for immediate consumer reach and higher sales through smaller, more frequent purchases.

• The path to profitability in q-commerce is misunderstood.
• Q-commerce can be profitable without high order density or significant capital investment.

"Biggest misnomer is around challenging economics... there's a very kind of clear, fast and straightforward path to profitability that does not require immense levels of order density or a lot of capitalization."

This quote addresses the misconception about the economic challenges of q-commerce, explaining that there are clear and attainable paths to profitability in this sector.

• The q-commerce market will have multiple successful players, not just one or two.
• Operating excellence is the key determinant of success in this competitive market.

"There will be many players that win and some players that don't. Some players might fall in the bag of consolidation. Some people might just not make it."

The quote suggests that the q-commerce market is diverse and not necessarily prone to consolidation, with various players achieving success based on their operational capabilities.

• The term "quick commerce" is limiting; it's part of a broader e-commerce evolution.
• Q-commerce platforms offer fast delivery, personalization, vertical integration, attractive pricing, and sustainability.

"It's not only about Quickcommerce, it is ecommerce 3.0."

This quote proposes a rebranding of "quick commerce" to reflect its broader capabilities and innovations beyond just speed, encompassing a new generation of e-commerce with multiple advantages.

• It's crucial to differentiate your business model from perceptions based on other markets.
• Ensuring investors understand the complexities and unique aspects of your business can impact valuation and success.

"The most important thing I've learned it's very important to discern the business that you're building from what investors are also seeing in the west."

The quote emphasizes the importance of clear communication with investors about how a q-commerce business in an emerging market differs from similar businesses in the west, which can influence investor perceptions and funding.

• Emerging markets have inefficiencies in supply chain management.
• Direct procurement and vertical integration can lead to profitability and sustainability.

"Single biggest difference is the severe inefficiency in supply chain management that we see in emerging markets."

This quote identifies a critical difference in business mechanics between western and emerging markets, highlighting the opportunity for q-commerce platforms to address supply chain inefficiencies and achieve profitability.