Always great to hear counter opinions, only helps in building a more well rounded thesis.
I think one thing is common if grocery players want to enter food or food players want to enter grocery; massive capital will be required. The advantage that food players have is that their core businesses are already close to break even and they have massive cash on the books. This is not true for hyperlocal grocery players. So if players like Zepto, Dunzo, etc want to enter food; they will have to fund burn of their core business and fund burn of the new foray. Who will fund this? No VC will fund a foray into restaurant delivery when there are already 2 established players; money isnt free anymore and VCs arent raising $100 bn funds which compels them to do nonsense “investing”.
Of the established profitable businesses like Jubilant/Dmart/etc, theoretically it is possible, but do they have the will to burn the amount of capital required to do it? I would put the probability of trying as very low and then probability of achieving success if they try to be equally low. Obviously anything can happen, we can only be open minded and relook our thesis if such things happen. But another question to ask is also what would happen if nobody enters? How much wealth would be created and are the risks worth it?
Well you are already seeing it become visible in terms of experience and to a large degree in terms of unit economics as well. If you think of the unit economics; there are 3 main variables: a) Take rates, b) Fulfillment Costs & c) Discounts/User acquisition costs
My thesis is The benefit of increased scale in the mid term will be most visible in b) and c). For delivery cost; the more orders in a given locality; the more efficient your delivery partners will be. This is somewhat visible in the numbers. The Order Values have gone up from Rs 300 to Rs 400 in the last 3 years (some one time gains here) but the delivery costs per order have actually come down from Rs 52 to Rs 45 (as of FY21 which is the last disclosed number).
The other large benefit is in discounts. The way I think about it is that discounts are largely a customer acquisition tool. When you have 5 million customers and you are acquiring 1 mn customers a quarter; the impact of discounts on your unit economics is very high. When you will have 30 mn customers and you are acquiring 1 mn customers a quarter, the impact will not be so high. The economics will keep improving as you gain scale.
The real fun will happen in the long term in a). The management has said that after a certain margin (8-9% contribution) they will give all the scale benefits back to the ecosystem either in the form of reduced take rate or delivery partner incentive. Does that sound familiar? It will become another shared economies of scale business over the long run like Costco/Walmart/etc.
Every year there is no new entrant, the task will become harder and harder. It is a bit like entering horizontal e-commerce today? Anyone can still enter it, realistically very few people (I suspect only Reliance) have the will, the resources and the ability to succeed. Obviously though, horizontal e-commerce is far far more moated and has far stronger national level network effects whereas here the network effects are local.
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