India has the third largest startup ecosystem in the world, and it is constantly expanding with each passing quarter, giving birth to new startups and aspiring unicorns. Yet, despite this surge of promise, a significant portion of these unicorn or soon-to-be unicorn startups are minting losses, despite raising billions in investments from the biggest tech giants. One such emblematic case is Dunzo, a quick commerce startup founded in July 2014 in India.
Surprisingly, Dunzo isn’t just grappling with financial losses but also struggling to keep its very operations afloat. These formidable challenges include massive layoffs, delayed salaries, non-payment disputes with Facebook, and the closure of some of its dark stores.
Dunzo’s ongoing struggles have left many perplexed, especially considering its impressive valuation of $757 million and the backing of esteemed companies like Reliance Retail, Google, Blacksoil India, and Blume Ventures.
This leads to a few thought-provoking questions: Why do Dunzo and some other startups in India, despite securing significant investments from top-tier investors, continue to face challenges in running their businesses seamlessly? And Is the quick commerce model not as viable as it seemed in this thriving Indian startup ecosystem?
Before we dig deep into the answers to these questions, let’s take a look at Dunzo’s recent troubles, which seem to be formidable obstacles with no immediate resolution in sight.
Dunzo’s Unending Troubles 2022-2023
Despite securing late-stage funding from Reliance Retail and Google, who had previously invested millions in the company, Dunzo encountered a series of troubles in 2022.
In January 2022, Dunzo successfully raised $240 million in a new funding Series F round led by Reliance Retail Ventures Limited. Reliance Retail invested a substantial $200 million, acquiring a 25.8% stake in the Bengaluru-based firm on a fully diluted basis. This significant investment led to Dunzo’s valuation surging to $775 million from its previous valuation of $300 million in March 2021.
However, despite the impressive funding, Dunzo faced financial losses as per the FY22 results. The quick commerce firm reported a 2X surge in its losses, reaching Rs 464 crore, while the revenue from operations also grew over 2X, reaching Rs 54.3 crore during the 12 months ended March 31, 2022.
By June 2022, Dunzo encountered an EBITDA loss of over Rs 176 crore, highlighting the financial pressures faced by the hyperlocal quick delivery startup. The company’s core business, Dunzo Daily, also faced considerable financial strain, losing Rs 230 on each order delivered during the first half of 2022 (H1 2022). These financial challenges posed significant hurdles for the company.
In November 2022, news surfaced that Dunzo was in the process of shutting down 25-30% of its dark stores in Delhi-NCR and other regions, as reported by Entrackr. This restructuring effort impacted both permanent employees and contractual staff, signifying a difficult phase for the company. However, the company’s spokesperson said that they closed only a few stores in low-demand areas to improve efficiency and reduce costs.
Overall, 2022 was a year of highs and lows for Dunzo, marked by significant funding and revenue growth but accompanied by mounting losses and strategic adjustments.
Unfortunately, the struggles for Dunzo continued into 2023.
In April 2023, Dunzo reportedly laid off 30% of its workforce, impacting nearly 300 employees. The reason cited was the need to cut costs amid the challenges posed by the ‘funding winter,’ which had been affecting other late-stage startups as well. Despite raising an impressive $75 million through convertible notes, Dunzo still found itself grappling with financial difficulties. The struggle to achieve financial stability persisted, leading to tough decisions like layoffs.
In July 2023, the situation worsened as Dunzo encountered difficulties with employee salaries. For certain employees in manager-level positions and above, the company decided to postpone 50% of their salary.
Additionally, the payment of salaries for the months of June and July was delayed, leading to concerns among the workforce. Earlier, Dunzo had already capped the June salary payment at Rs 75,000 and assured employees that the outstanding amounts would be paid on July 20.
In an internal communication, Dunzo informed its team members that the pending salaries for June and July would now be paid on September 4th, 2023, along with the August salary.
However, the situation remained uncertain, leaving employees concerned about their financial well-being.
To compound matters, Dunzo faced legal troubles from Facebook India Online Services Private Limited (“FBI”) and Nilenso, a software consultancy firm based in Bengaluru. On July 20, 2023, Moneycontrol reported that the legal notice was regarding non-payment of dues. According to sources, Dunzo had made partial payments to Facebook but still owed approximately Rs 1.5 crore to the social media giant for availing their advertising services.
Adding to the complexities, Google, Dunzo’s second-largest backer, also issued a legal notice to Dunzo, demanding the settlement of unpaid dues.
These legal developments added to Dunzo’s financial woes and showcased the seriousness of the challenges the company was facing.
Quick Commerce Market in India
The challenges faced by Dunzo and some other startups, such as Blinkit and Zepto, in the quick commerce space, raise thought-provoking questions about the viability of the quick commerce model in the Indian startup ecosystem. While the quick commerce model appeared promising initially, it has encountered hurdles that have led to financial struggles and operational difficulties for most companies.
Before exploring the challenges of running a quick delivery startup in India, let’s ask ourselves, “Can we live without quick delivery services?” The answer is affirmative – Yes, we can easily manage without them. “Do we genuinely need 10-min delivery of groceries, food, and other products (except medicines)?“. No, we do not. Such ultra-fast delivery is not a necessity.
These answers prompt us to contemplate the underlying reasons behind the existence of quick-delivery startups and their role in solving real-world problems. It also leads us to question the viability of providing such rapid delivery for a wide range of products while maintaining a sustainable business model.
The quick commerce model, which focuses on hyperlocal and on-demand delivery of goods and services, can indeed be a good business model in certain contexts. It offers convenience and speed to consumers, which are highly valued in today’s fast-paced world. However, like any business model, some challenges and considerations may make it less suitable or difficult to sustain in certain situations. The two critical factors that impact the cost structure and profitability of quick commerce startups are warehousing and manpower.
Quick commerce businesses face the challenge of maintaining strategically located warehouses or dark stores to store inventory and ensure swift deliveries. The expenses associated with setting up and operating these storage facilities, as well as managing inventory, can be pretty substantial. In addition, quick delivery companies heavily rely on delivery personnel to promptly fulfil orders, demanding a significant workforce or manpower.
However, despite these efforts to provide fast and convenient services, the average customer is generally unwilling to pay extra (premium) for faster delivery on online purchases. Instead, they prefer to shop at physical stores. As a result, quick commerce businesses often struggle with narrow profit margins compared to conventional online grocery and food delivery services.
As markets gradually reopen after the Covid-19 pandemic and people return to physical retail stores, the demand for ultra-fast deliveries within 20 minutes or less is challenging due to a slowdown in demand. The shift in consumer behaviour, with more individuals opting to shop in person, has impacted the demand for immediate delivery services provided by quick commerce startups.
The quick commerce sector in India is currently valued at $700 million. However, it is expected to witness remarkable growth in the coming years, despite the challenges faced by quick commerce startups in the country. Projections suggest that it will expand by 8 times, reaching an impressive value of $5.5 billion by the year 2025.
As the Indian startup ecosystem continues to evolve, will quick commerce startups find innovative solutions to balance rapid delivery demands with sustainable business models?
