How dark stores are powering growth of quick commerce players

Raghu Rai, who is in his early 30s, loves his job. The delivery executive has graduated to a scooter from a bicycle within two months of joining Zepto, a quick commerce start-up. “It’s a satisfying job where I get to meet different kinds of people. It’s thrilling, too, as I race against time to deliver groceries,” says Rai. Then there is Guddu Kumar, 24, a Swiggy Instamart delivery person who moonlights at Zepto. His day starts at 7 am when he dons the orange Instamart jersey and cycles through Byculla, Mahalaxmi, Lower Parel and Prabhadevi areas of Mumbai, delivering groceries. Come afternoon and Kumar undergoes a sartorial change—slipping into Zepto’s purple T-shirt. “Both jobs require me to work about seven hours and that seems doable since both have a solid tech infrastructure. But what stands out is that neither company penalises me over a delay in any order,” he says, smiling.

Rai and Kumar are obviously happy with work and life, but are customers happy with their employers—quick commerce players that promise to deliver anything from fresh strawberries to washing powder at their doorstep in a matter of minutes? To find out, Business Today placed three identical orders of potato chips and fresh strawberries on Instamart, Zepto and Blinkit. All three players have their warehouses, known rather spine-tinglingly as ‘dark stores’, within 1.5 km from the BT office in Mumbai’s Lower Parel.

The first to deliver was Zepto, in a smart 6.35 minutes. It was also the cheapest at Rs 150, as Zepto doesn’t charge for delivery. The next to arrive was Blinkit, which delivered our order in about 10 minutes with zero delivery charges as the order value was above Rs 149. Else, it would have charged a delivery fee of about Rs 20. The final delivery came from Instamart, in 14 minutes; plus, there was also a fast delivery fee of about Rs 35.

Still, the timelines are impressive. How is it possible to deliver so quickly? The secret sauce is a network of dark stores across cities where these companies offer their services. A dark store is essentially a retail facility resembling a mini-warehouse that houses goods to fulfil online orders. The difference: it is not open to the public. In fact, it is usually out of bounds even for most employees, except those who actually work there.

For instance, Zepto, which has 200-250 dark stores in Mumbai, Delhi-NCR, Bengaluru, Hyderabad, Pune, and Chennai, doesn’t allow delivery personnel to even peep into these mysterious structures. “We don’t want our competition to know what is happening inside our dark store,” says Aadit Palicha, Co-founder & CEO of Zepto. “We have optimised to a point that within 76 seconds of an order being placed, the order is packed and made ready for pickup. So, the tech we use is a trade secret, and we wouldn’t want anybody to get wind of it. The SOP is to not let anybody in. There are tighter aisles, and SKUs of frequently ordered products are accessible.”

Dark Deliveries

Dark stores are typically 2,500-3,000 sq. ft in size, and are carved out of shuttered buildings or gone-out-of-business stores, and allow the companies not only to save costs, but also reach deep corners of cities and even semi-urban areas.

Due to their nature, it’s difficult to spot a dark store—it is not likely to keep its front doors open for you to watch or waltz into. The only way to figure out that there’s a dark store in a locality is by spotting delivery people waiting around to pick up orders. For instance, we figured out where Zepto’s dark store was in Mumbai’s Lower Parel by spotting delivery staff milling around a location in their purple T-shirts and helmets. Similarly, you’ll spot the orange jerseys of Swiggy’s Instamart and the yellow jerseys of Zomato’s Blinkit.

How does a dark store function? After keenly observing the Zepto dark store and speaking with several industry insiders, we zeroed in on the following modus operandi: When a user places an order on Zepto, the system at the store showcases the list of items on a screen, and within two minutes a store staff packs it in a paper bag and places it in a pigeonhole, located near the entrance of the store. Meanwhile, a delivery partner who is closest to the store (or within less than a 1-km radius) gets a notification asking her/him to accept the delivery.

Upon accepting it, the delivery partner reaches the store in the next couple of minutes and gets a prompt about the rack number of the pigeonhole. She then scans the barcode of the rack, opens the paper bag to confirm the items, and then sets off for her destination. With the clock ticking, the delivery partner has about 8-10 minutes to make the delivery. The workflow at the two other companies is largely similar. Quite obviously, the most essential ingredient in this flow is speed.

The bright side

Speed, rather unparalleled acceleration in orders, is what the online grocery delivery business in India saw during the lockdowns induced by the Covid-19 pandemic. According to data analytics website Statista, the Indian online grocery market nearly tripled in size from Rs 15,000 crore in 2020 to around Rs 40,000 crore in 2022. Angshuman Bhattacharya, Partner for Strategy & Transactions at EY Parthenon, expects that number to skyrocket to Rs 2.1 lakh crore by 2027. It is, therefore, hardly a surprise to see so many companies interested in this business.

“Dark stores are critical to the development of hyperlocal infrastructure being fielded by e-commerce, D2C and quick commerce companies,” says Bhattacharya. “India, amongst other markets, is seeing rapid growth in quick commerce and foodtech, which has made the dark stores a critical micro hub of delivery.” Adds a spokesperson of Blinkit: “The quick commerce business is dependent on various factors such as the availability of products from the brand, seller ability, and supply chain capacity. Dark stores play an important role in this equation.”

Running a dark store, according to Palicha, is not very expensive: “It’s about 5-8 per cent of the revenue... it just has costs like rent, electricity, and employee expenses. So it’s definitely not more than 10 per cent.” Palicha also says dark stores are strategically placed after having studied a locality. “A Gujarati-dominated area would have more Gujarati groceries as SKUs. Apart from this, factors like population density and demography also come in. When we open a new dark store, we see the range of customers it will be able to reach, the average expenditure of delivery, and how is the accessibility offline.” For Zepto, atta, dal, rice, and packaged foods are the most profitable. At the same time, the company is also expanding into electronics, make-up and skincare products.

“Today we have an assortment of thousands of SKUs spanning 80-90 categories,” says a Swiggy Instamart spokesperson. “We have kept a close watch on what consumers want and have always been the pioneers while experimenting with new categories, such as gourmet and international assortment, and certified organic vegetables.”

A challenging industry

Delivering groceries in less than 10 minutes is not an easy process. “Hyperlocal delivery costs are high, and driving the right density of operations to break even on costs is critical. Also, customer acquisition costs are high, and maintaining repeat purchases is key to driving lifetime value,” says Bhattacharya of EY.

These challenges came home to roost for many players who rushed into the quick commerce space when Covid-19 was in play. The lifting of lockdowns saw a decline in demand, rationalisation of promised delivery timeframes, and even layoffs. Some players like Amazon Fresh and Google-backed Dunzo (where Reliance Retail holds 25 per cent stake) scaled back their operations in the ‘10-minute delivery’ space while others like Swiggy’s Instamart and bbnow by Tata-owned bigbasket revised their delivery timelines. Swiggy is believed to have laid off 380 employees. Blinkit (formerly Grofers)—which was sold to Zomato in 2022 for Rs 4,447 crore—is also believed to have laid off around 120 people. As for Dunzo, it is believed to have laid off about 3 per cent of its workforce in January 2022 and pivoted to 60-minute deliveries in mid-2022. However, Zepto, one of the youngest players, managed to survive without any job cuts.

Founded as KiranaKart in 2020 by 19-year-olds Palicha and Kavilya Vohra, Zepto is now a soonicorn with a valuation of $900 million, according to the company. It last raised funds in May 2022—a Series D round for $200 million led by Y Combinator’s Continuity fund. In fact, all prominent players (or their parent firms) in the quick grocery delivery space have solid financial backing. Swiggy, valued at $10.7 billion, owns Instamart, and is backed by Prosus Ventures. Its list of investors includes Baron Capital Group, Sumeru Venture, IIFL AMC Late Stake Tech Fund, Kotak, Axis Growth, Sixteenth Street Capital, Smile Group and Qatar Investment Authority, among others.

Meanwhile, Blinkit’s parent Zomato is banking on the quick delivery subsidiary to take it to profitability and rescue it from the stock markets, where it has seen stormy times since it listed in July 2021. “A vertical that can take Zomato on the path to profitability is its recent acquisition, Blinkit, apart from Hyperpure,” says Karan Taurani, Senior Vice President of Elara Capital. Hyperpure is also a grocery delivery service, but it is restricted to the B2B space. Tata-owned bigbasket, which runs bbnow, also has the financial heft and network of the salt-to-software conglomerate, the Tata group, to fall back on. bigbasket is believed to have nearly 200 dark stores.

With the opportunity so large, quick commerce players are moving quickly to gain heft. “We believe we have only scratched the surface in quick commerce grocery,” says Swiggy’s spokesperson. “As category creators, we will continue to invest in growing the category with a focus on offering convenience and other key things like selection, availability, and reliable and fast deliveries which consumers look for.”

Blinkit is working on increasing its reach with more and more dark stores, while at the same time also attempting to provide faster delivery at a lower cost. Says a company spokesperson: “We will continue adding categories and geographies that will make sense to our business while working on the P&L simultaneously to ensure healthy unit economics.”

Zepto has big plans, too. “We plan to multiply dark stores. If we stop opening new dark stores, we would be profitable in 2024, but we will not stop. We plan to open more stores and expand our delivery network. So, profitability is still afar. The utlimate goal is to be a publicly listed company, so we would be working towards that,” says Palicha.

With so much action, Bhattacharya expects consolidation to swing in at some point. “Consolidation is very likely as the growth phase involves cash burn and some players may find it difficult to sustain,” he says. “However, the segment is likely to witness increasing momentum as consumers get hooked on quick commerce. The definition of quick commerce may get relaxed to hours rather than minutes, providing some buoyancy to profitability.”

Whichever way the pendulum swings, one thing is clear: with quick commerce scaling up like never before, the network of dark stores in India is only likely to get bigger.

@r_dhanrajani