Can quick commerce make money?

Can the quick commerce business really make money? We will explore this question under different conditions and evaluate them.

It's impossible to imagine a future 10 years from now where a customer comes up and says, 'Jeff I love Amazon; I just wish you'd deliver a little more slowly.'

- Jeff Bezos

None of us would say no to a 10-minute delivery. But does it make money? This question has been explored to the death by people much smarter than me. I was curious to know how would one make it work. In this post, we will cover the simple math behind making Q-Commerce work.

Meet the hero for our story, Bruno!

Bruno is a good boy who wants to start his own grocery business(1). With so many grocery stores around him, he needs to do something special to attract customers. He comes up with a cunning plan and promises all his customers that their delivery would be done in 15 minutes. Who says no to a 15 min delivery! I might as well throw out my fridge now.

Customers would be happy to get the delivery in 15 mins but can Bruno really make enough money off this business? His business plan is simple. He buys products for X, sells it for Y and if Y>X+management cost, he makes profit. Sounds easy right?

Now, selling grocery is not new. So he has a pretty good idea of the margins that he can get and cost he incurs in the traditional model. So, we can look at what is different in Bruno's model and see how it affects his profitability. The main difference between him and the store next door is going to be the management cost. Let's assume the rest are the same. The management costs include

How does the store cost vary?

Bruno realises that his store is not like any other store. Two main reasons.

  • He does not have customers walking into the store
  • He needs to be very close to his customers if he's going to keep his promise of 15 minutes.

With this in mind, Bruno can make a few changes

  • Remove all the flair and displays in his store and move it to a non-premium location. People will not see his fluffy tail anymore, but that's ok.
  • He doesn't need the huge walking space for his customers to trot around. His shelves can be cramped next to each other.
  • He needs to make sure his picking is done really fast when an order comes so his delivery guys waste little to no time. So all his stuff needs to be organized, labelled and arranged in a way they can be picked very easily.
  • He also needs to make sure he doesn't have 1000s of products in his store. He might as well focus on few 100 fast moving products.

His costs are

Rent - While he may choose a non-premium location, it still needs to be present in a densely populated area. And densely populated areas are typically expensive which might cancel out the not-so-flashy savings.

Inventory Holding Cost - Bruno has to buy his supplies and store them for a while. And that incurs cost. The smaller the number of products, the better he does. Smart boy that he is, he focuses on only storing few hundred fast moving, high margin products. So he does save some amount than a traditional store.

People - Bruno needs pickers and packers in his store who can do things at a blaze. He needs to pay them well so he gets folks who can work efficiently for multiple hours. This cost would be slightly higher than his competitors.

Let's look at delivery, shall we?

Now, Bruno has a great pack for delivery. They are the cutest and the fastest in the neighborhood. Just the ones he needs to do the fastest delivery.

But he needs to make sure he has enough pups available to deliver at any time so he can keep up the promise of 15 minutes. So no matter they have orders to deliver or not, Bruno has to pay them. So, he needs to make sure that every delivery pup delivers the maximum number of orders in a given day so his delivery cost per order is low.

Eg., for $15 hourly wage,

  • If a delivery pup delivers 1 order per hour, cost of delivery per order is $15.
  • If a delivery pup delivers 3 orders per hour, cost of delivery per order is $5.

With a 15 min delivery time, Bruno can expect 15 mins for delivery and 7-8 min to get back to store. So each delivery pup can deliver a maximum of 2.5 orders per hour.

Now, this is assuming that there are enough orders to go by. So when there are not enough orders, the number of deliveries go down and the cost of delivery goes up.

An important thing to note here is that Bruno can't have less pups in his pack. He knows that his customers expect an order to be delivered in 15 mins. So, he can't have a customer order waiting while all his pups are out delivering. So, he'll always have excess pups. This factor is called utilization. At any point in time, Bruno can't expect to have full utilization of his fleet.  

So, what should Bruno optimize at when it comes to delivery?

  • Increase utilization of his delivery fleet by increasing the order volume
  • Increase the efficiency of the delivery fleet so they can move faster
  • Increase the volume of goods they carry at a time so his profit margin increases.

Now that we have seen the entire lifecycle of Bruno's business, let's look at all the factors influencing his profit/loss.

Revenue: Price paid by the customer for purchasing his products.

Costs: Store Rent, Inventory holding cost, Store employees, Delivery fleet labour

Influencing Factors

We spoke about a few influencing factors like order value, utilization etc. Let's look at how do these factors individually influence profitability. The charts below should explain.

This is interesting! There's a lot of play in getting delivery times low. This is one of the significant factors in getting Q Commerce to work. But there are diminishing returns. There is not much returns in doing more than 3 deliveries in an hour.

Is that it?

Nope, that's not all there's to it. There are a lot of other factors that go into influencing how Bruno sets up this business. One such example is Supply optimization. Now, Bruno is not going to have the same demand at 10 in the morning or 9 in the evening. His demand is going to fluctuate. But when he onboards his fleet, he onboards them for multiple hours together.

Similarly, there are factors such as how much inventory he stores, their expiry, picking process and many more.

Seems quite tough, feel sorry for Bruno?

It is a tough business. But Bruno being the smart puppy he is, knows that this is just temporary. As long as he can run this business at a not too much of a loss, he can really turn around his unit economics at scale.

When Bruno's business is large enough, he can influence customers, suppliers and employees in various ways which opens up opportunities to reduce cost or increase profitability. Some of these are

  • From suppliers, get better margins, increased settlement period
  • Optimization of his supply routes and supply planning
  • Subscriptions, loyalty programs with customers
  • Influence customers to pay for lower value deliveries
  • Advertisements from partners/D2C brands
  • Financial services
  • Even explore franchisees

Never underestimate the grit of Entrepreneurs. We wish Bruno the very best.

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