India’s Urban Retailers Face A New Challenge — The Quick Commerce Juggernaut

A recent visit to D-Mart and Reliance’s Metro established the fact that the once busy cash counters are idle and long queues are missing. So is the footfall. This is very stark in the highly dense Mumbai suburb district.  

Quick commerce is doing to modern retail what modern retail did to general trade. The rising adaptability of quick commerce has led to rising inventory levels at the kiranas and the modern retail stores in cities.

Urban cities are rapidly witnessing rapid distribution channel shifts in favour of online, led by quick commerce. Many FMCG companies have been caught napping. The apparent shift has not been entirely factored into their product SKUs and pricing formats, as a result the agility is missing.

The new form of online ordering is expected to contribute to a fourth to a third of the ecommerce revenues of large FMCG companies. While some of the companies are warming up to the latest distribution channel with a playbook which includes smaller SKUs and search-based marketing, they are still cautious given the kind of backlash they had seen from general trade, when online trades picked up.

Quick commerce, which began with grocery commerce, has moved on to high value ticket items like gold and mobiles, thereby disrupting jewellers and electronic retailers. They now have a healthy margin as end customer discounting is limited compared to food delivery margins and hence, quick businesses are valued higher than food delivery business.

What is making margins for quick commerce more profitable is the higher asset turnover ratio. In addition, the ease of ordering at convenience has ensured that general trade is hit badly with stock inventory.

The rapid adoption in quick commerce in 68-70 cities is weighing on the urban general trade channels and distributor returns. Marico Ltd., in its second quarter commentary, stated that it had to corrected distributor inventory and the Parachute hair oil maker is not alone.

Retailer DMart, which released its second quarter update, also saw a slow growth in revenues despite a 12% store growth. It is also seeing volumes moving to DMart Ready—its online format which is growing at a faster rate than standalone retail stores.

DMart derives a substantial portion of its revenue from the top eight cities, which coincides with higher penetration in these cities by quick commerce players like a Zomato’s Blinkit and Swiggy’s Instamart. The rapid scale up of quick commerce players in these cities has taken retailers and FMCG companies by surprise.

Zomato Ltd. wants to increase its dark store presence four times to 2,000 in next two years, while Swiggy is looking to raise its dark stores to over 1,000, with Rs 1,000 crore from its IPO proceeds earmarked for this investment. Swiggy has upsized its fund raise to now raise up to Rs 5,000 crore, which could also mean it will pump in more money for quick commerce than what was earlier envisaged.

The biggest challenge many retailers are facing is the migration of the affluent convenience seeker, who are willing to order online instead of walking into the kirana or hypermarket.

Quick commerce is set to expand from the current 70-odd towns to 700 towns where food delivery is currently serviced. As convenience shopping takes form and shapes the margins for traditional brick and mortar stores and hypermarket is looking bleak.

So far distributors and retailers, that is, general trade, which formed the backbone for FMCG companies enjoyed significant margins. But going forward they may have to compromise on margins to ensure that they stay relevant.

Quick commerce platforms are increasingly setting up dark stores to service customers. The economics for dark stores at a point in time will become unprofitable as real estate rental in big towns start eating into profitability. The only choice left would be to integrate quick commerce delivery frontend with the kirana stores and hypermarkets and fallback on backend. A win-win for the quick commerce and retailers.

But that would mean sharing of the margins.