Real numbers: The economics of express deliveries - The Morning Context

source

34 highlights

• It’s 2015 all over again. “Hyperlocal” as a buzzword is back in fundraising pitches and investor discussions. Only this time, the phenomenon is more ambitious than ever before—bigger and bolder, so to say.

• Multiple startups have now either launched express delivery verticals or ramped up their existing services.

• Back in the mid-2010s, hundreds of millions of dollars in venture funding had gone into making delivery times convenient for the consumer. At one point, Sequoia Capital was invested in at least seven hyperlocal startups in India.

• But as things stand today, it seems the startup ecosystem is not done with the hyperlocal problem.

• One, that the increase in internet usage and online commerce combined with the rapid acceleration that the COVID-19 pandemic has triggered in everything delivery means a bigger opportunity than ever before for express groceries.

• Two, this phenomenon has taken off globally. Billions of dollars are flowing into grocery delivery companies at the moment across the US, Europe and China. Philadelphia-based Gopuff, the poster boy of faster grocery deliveries, was valued at $15 billion in August. Instacart is valued at $39 billion.

• However, the fundamental economics of grocery delivery has largely not changed: that beyond a point faster deliveries are just too costly to be viable and that the realities of the Indian market—at least for now—are very different from Europe or the US.

• For level-headed veterans of the industry, though, while there’s no denying that the allure of ever quicker delivery and greater convenience is irresistible, the real question in online grocery is, what is that perfect balance between speed and cost that will win you the market?

• Grocery delivery models were split between the hub model and hyperlocal or point-to-point delivery. The early contest between BigBasket and Grofers was about the clash of these two approaches.

• It was also a question of owning inventory (BigBasket) versus delivering items stocked at existing neighbourhood stores (Grofers), but Grofers and everyone else quickly came to realize that controlling inventory was vital for both margins and maintaining the user experience.

• Note: The numbers that follow are all ballpark figures gathered from founders, investors and executives who work or have worked in e-commerce, online grocery or logistics/delivery.

• Estimates for the cost of a van, in fuel and labour (and rentals if you outsource the fleet operations) vary widely, depending on the size of the vehicle, whether only the driver doubles up as the delivery person or you have an additional person, and how many trips you’re doing (which affects fuel). It can range from as low as Rs 5,000-6,000 to as high as Rs 10,000 a day for a large e-commerce company. Let’s take the high end. A van/truck can make 400-500 deliveries in a day from a single hub, for a high volume/utilization business; this translates to a per order cost of about Rs 20-25.

• “Our average cost of delivery in this business is Rs 5 per order and the average order value is Rs 150-160. So, if you look at the percentage of order value, it’s one of the cheapest home delivery businesses, extremely economical,” BigBasket co-founder Vipul Parekh told The Economic Times for a July article.

• In a good month, a rider makes anywhere between Rs 18,000 to Rs 20,000, which comes out to be Rs 600-660 a day. Let’s assume that the rider is working 12 hours on any given day (which tends to be the norm for full-time riders). And if they take one hour to make a delivery, that’s 12 orders in a day, and so an average cost of about Rs 50-55 per delivery.

• If you change this to 15-minute deliveries, can a rider service four orders in the same hour? The cost incurred by the company remains the same in that case, but revenue goes up significantly. This hypothetical scenario doesn’t quite work out, though.

• Here is why: the delivery rider can’t possibly make four deliveries in one hour in case of 15-minute deliveries. For one, the chances of those four orders being in the same area are extremely low. Two, the chances of those four orders being placed at the same time are even lower. Which means that for most orders, the rider would have to make a trip back to the dark store. And if they have to service another area, they have to make a longer trip.

• This is why basic delivery costs are not linear between, say, 45-minute and 30-minute deliveries. And it goes up even more sharply for anything that is below 30 minutes.

• Now, for express deliveries, let’s follow the riders to understand how the economics work.

• Consider the hub delivery model, where you load up a van or small truck with dozens of orders and send it out to deliver all of those orders, usually scheduled in advance in time slots of, say, two or three hours.

• And as the delivery time goes down, other costs grow too. The lower the time frame, the more dark stores are needed. For anything below 30 minutes, the companies need a dark store every 2-3 km.

• There is also the inventory cost. Stocking a wide range of items—stock-keeping units, or SKUs, in retail parlance—and duplicating that variety across every dark store balloons up your storage needs.

• The economics further changes between neighbourhoods; which is why Dunzo always talks about servicing a certain number of PIN codes.

• Given the number of factors that go into making express deliveries happen, it is hard to put a standard cost number to an order. But a rough estimate for a 15-minute delivery easily crosses Rs 70 per order.

• An investor in the sector explains the express delivery phenomenon as a triangle, with the three sides being a wide enough range of inventory, extremely short time-frames and a need to keep costs low. “You can’t have all three; you have to compromise on something.”

• Both the margins and average order values in express grocery delivery are abysmal. In the case of 15- to 30-minute deliveries, you’d get orders that are largely top-ups; the basket size is just about Rs 200-250, on average. And on that, the margins are less than 10%. So for a cost of more than Rs 70, you are barely making Rs 20. You could charge a delivery fee of about Rs 25-30, but that still doesn’t cover the cost.

• Two, you can’t bundle orders. “The key to unit economics is the number of people to whom one delivery person can cater,” says a founder

• Again, if in one round, the rider is carrying two orders instead of one, the cost is immediately halved. But that is only possible if the time frames are higher. In a 15-minute delivery, only a massive stroke of luck can bring you multiple orders from nearby locations at the same time.

• In the case of hot food delivery, the margins are much higher, around 20-30% in commissions, and still the unit economics are not great; the companies have been trying to bundle orders on every ride.

• The pitch for most now is to become the “Gopuff of India”, but the catch is that there is a lot going on for Gopuff in the US.

• Gopuff’s average order value is around $20-25, or Rs 1500-1900, roughly. Alcohol is among Gopuff’s best-selling products, which increases the basket size significantly. The company also charges $1.95 as a delivery fee on all orders, plus an additional $2 for alcohol delivery; this, despite the fact that it also requires a minimum order value of $10.95

• Gopuff, which owns its inventory, also has the liberty to mark up prices on products, which isn’t allowed for retail in India.

• The investor who spoke about the impossible triangle of express deliveries says the sweet spot, or “magic period”, is 30-60 minutes.

• Additionally, what retailers have known for decades is that you need a private labels play to eke out halfway decent margins in groceries. The likes of BigBasket already do this in a big way, across a range of essentials and also fresh produce that the company sources directly from farmers.

• At the moment, though, the only way to sustain the new hyper-express delivery phenomenon is with capital. Hundreds of millions of dollars will flow, and “and the triangle will expand for sometime,” says the investor quoted above. “But take the money away and it shrinks back to what it was.”