Can Q-commerce ever make profits?

With a total addressable market value of $45 billion, quick commerce players are fighting tooth and nail to be the first to get to your doorstep. The competition in the q-commerce space is growing monumentally. As per industry experts, q-commerce is expected to grow at a rate of 20x by 2030 and it will soon overtake other major markets, including China.

The 10-minute delivery has become the holy grail for grocery delivery companies in the last few years. It is on the cusp of becoming the next major segment as players realise the mammoth potential it has. According to a report in 2022 by Redseer, a consultancy firm, India’s quick commerce market is prepared to grow 10-15x by 2025. From $300 million at present, it is expected to reach a market size of close to $5.5 billion.

However, the pertinent question remains whether q-commerce companies will ever make profits?

What can drown the business?

As per a report by McKinsey in 2022, most leading q-commerce players have a negative EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), while offline grocers have a positive EBITDA of 5 to 8%. High cash burns associated with last-mile delivery have posed as a key challenge in profitability for online grocery players.

Logistical issues like setting up and expansion of dark stores (mini warehouses), intense competition, and regulatory hurdles are some other challenges the companies are facing. Additionally, the cost of hub-operations is so high that they need at least 800 orders daily for margins.

Anand Ramanathan, partner & consumer industry leader -- consulting, Deloitte India, points out standalone q-commerce companies may not be able to survive long-term. “It will always be challenging to get unit level economics to work because firstly the ticket size is not going to justify the involvement a company needs from a logistic, delivery, and dark stores standpoint,” he says.

While consumers have made it a habit to order from their couch, they are also reluctant to pay delivery charges for a small basket size. They would rather call their local kirana store and have their order delivered for free, even if it takes slightly more time. Many Q-commerce companies end up incentivising larger basket sizes by offering further discounts, and while that could create consumer habits and lead to long-term profits, it hurts the economics in the short to medium term.

Zomato, in its latest financial results report, announced its platform business, meaning food delivery excluding quick commerce, had achieved breakeven. Losses for other companies are piling on. Zepto posted just Rs 142 crore in revenue on a loss of ₹390 crore in FY22. Meanwhile, Dunzo posted ₹68 crore revenue on a loss of ₹464 crore in FY22.

How can companies stay afloat?

With time, it is possible that the q-commerce companies will not be able to keep up with last-mile deliveries and the initial promise of 10-minute deliveries will taper off and increase to 30 minutes per delivery. “There is some compromise here to make the economics a little more manageable,” says Ramanathan. He adds, however, that you cannot just be a q-commerce player and survive. “As a full-service provider who also has q-commerce as part of its portfolio, you can subsidise the q-commerce segment from the money you made from your main service.”

Q-commerce retailers need to encourage higher order sizes by offering free delivery, promotions, and a wider assortment of high-margin products. Enhanced checkout recommendations can also play a role in improving growth. Optimisation of dark store networks and implementation of smaller discounts, enabling retailers to streamline operations will lead to cost reduction and higher margins of profitability.

Ramanathan also suggests using AI (artificial intelligence) and data science more efficiently to predict consumer needs and bring in insights, which could promote the longevity of q-commerce companies.

“The major costs of quick commerce include technology and operational costs (45-50%), personnel costs (25-30%), property and facility costs (5-10%), promotional costs (5-10%),” says Deloitte’s report ‘Future of Retail’.

The report also found out that q-commerce has already captured 13% market share of online groceries and 46% of consumers prefer online shopping for groceries through q-commerce channels.

One thing is certain – q-commerce is here to stay. It is largely expected that like every new supply chain solution eventually finds a way to fit into the overall value chain, Q-commerce will find its lucrative kingdom.