Unit Economics & Profitability of Quick Commerce | Insight
Quickness seems to be heavy on economics. Is it?
Quick commerce, also known as q-commerce, refers to the rapid delivery of goods, often within minutes or hours of placing an order. It leverages advanced logistics, technology, and localized delivery networks to meet the immediate needs of consumers.
Unit economics involves analyzing the direct revenues and costs associated with a particular business model, expressed on a per-unit basis. A "unit" in unit economics can be any quantifiable item that represents value within the business. The choice of the unit depends on the nature of the business and what provides the most meaningful insight into its financial performance.
In our case, the two most common units are an order and a dark store. As we move around different insight posts we well get to know better in what context which unit is better.
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Let’s now look at the profitability calculations of quick commerce on a per order (unit) basis.
Factors contributing to a marked increase in profitability
We recognize several elements that are contributing to the profitability surge for QC platforms.
On the revenue side, the drivers are:
Average Order Values (AOVs)
Product margins
Advertising income
Customer fees (including delivery, handling, platform, and small order fees).
On the cost side, the levers are
Delivery expenses
Dark store expenses
Replenishment expenses
Path to Profitability
Increase Average Order Value (AOV)
Offer city or locality specific assortments: Tailor product selections based on local preferences and demands.
Offer/promote high order value category SKUs: Focus on selling items that naturally have higher prices, such as pet food, baby care products, beauty and personal care items, and office supplies.
Offer personalized product suggestions: Use customer data to recommend products that are likely to interest individual shoppers.
Collect delivery fee and packaging charges: Charge customers for the costs associated with delivering and packaging their orders.
Minimum order value/free delivery threshold: Encourage customers to purchase more by offering free delivery for orders above a certain amount.
Lower Cost of Goods Sold (COGS) Percentage
Source directly from brands/FMCG producers: Buy products directly from manufacturers to eliminate middlemen and reduce costs.
Better negotiating power owing to large scale: Use the company's size to negotiate better prices from suppliers.
Offer private label with better margins: Develop and sell your own branded products, which typically have higher profit margins.
Improve AOV mix through high margin categories: Focus on selling products that have higher profit margins, especially those outside of the usual grocery items.
Better optimize inventory and control to reduce wastage: Implement effective inventory management practices to minimize waste and spoilage.
New Revenue Streams
Charge delivery fee below minimum order value: Implement a delivery charge for orders that do not meet a minimum value threshold.
Advertising/Promotional income from Brands: Generate income by allowing brands to advertise or run promotions on your platform.
Charge subscription fee for loyalty programs: Offer subscription-based loyalty programs that provide customers with perks and charge a fee for these services.
Optimize Operations
Derive operating leverage due to scale benefits: Gain efficiencies by operating at a larger scale, which reduces costs per unit.
Improve day-to-day processes due to learning curve: Enhance operational processes over time as the company gains more experience.
Reduce warehousing and transportation costs through optimized fulfillment center infrastructure: Lower costs by improving the efficiency of warehouses, hubs, and distribution centers through better design and management.
Lower Last-Mile Delivery Costs
Ensure lower drop rates: Increase the success rate of deliveries, ensuring packages reach their destinations more reliably.
Enable multi-drop (batched) deliveries: Combine multiple deliveries into a single trip to reduce transportation costs.
Optimize route planning for delivery partners: Use advanced routing algorithms to create the most efficient delivery routes.
Cross train delivery partners to do multi-function deliveries: Train delivery personnel to handle multiple types of deliveries, such as food and medicine, to maximize efficiency.
Is profitability possible?
Traditional retail has established its profitability after optimising itself for Indian customers and cities over last many years. And their robust infrastructure and margin distribution allowed them to be competitive against all technological challenges they have faced in recent years.
Q-commerce is lucrative because it resembles a lot of traditional retail and is its biggest challenger in recent times.
To guess the profitability of q-commerce, we can compare its PnL with traditional retail structure and check if there are any possibilities of making money.
More money-making avenues:
Traditional retailers (both online and offline) mainly make money from the product margins set by brands and suppliers.
QC platforms make money not just from product margins, but also from ads and delivery charges.
High-Margin Products:
QC platforms sell a significant amount of perishable items like fruits, vegetables, and meat, which have higher profit margins compared to other products like packaged goods.
Limited Discounts:
QC platforms offer fewer discounts compared to other retailers focused on low prices or scheduled deliveries.
Cost Efficiency:
They save money on store rentals because their stores (dark stores) are not open to the public and can be located in cheaper, less visible places.
They acquire new customers more cheaply since QC is a good match for the food delivery market, which already has a large user base.
Operational Efficiency:
They benefit from using technology for standardized processes.
They make optimal use of dark store space.
They have high inventory turnover (products sell quickly).
They experience minimal losses and increasing average order values (AOVs).
With strong execution and scaling, QC platforms are expected to generate large and sustainable profits over the medium to long term.
References:
Quick commerce companies: On ‘quick’ path to profitability: Challenges for quick commerce companies - The Economic Times (indiatimes.com)
3278.pdf (jmfl.com)
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Hey everyone, I'm Garvit Sahdev 😎. I'm on a mission to gain a deeper understanding of the world, and to develop solutions that can trigger significant global change.
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