Zepto is well on its way to touch annualized sales of $3 billion in the next month or two, Aadit Palicha, Zepto co-founder and chief executive, told Mint, underscoring the firm’s potential for rapid growth that has attracted investors from around the world.
Zepto’s dark stores are turning profitable at a faster pace as the firm is adding newer categories with a higher average order value, which is adding to its bottom line.
“Right now, is not the time to slow down,” Palicha said in an interview with Mint.
On Friday, Zepto raised $350 million, the largest domestic fundraise in the history of India's startup ecosystem
Edited excerpts:
We've closed this financing not because we needed cash. Before this financing, we had around a billion dollars, and now we've got $1.3 billion of cash in the bank. So, we do not do this financing round with the objective of trying to raise more capital. The financing was done very candidly to increase domestic ownership. And that is exactly what we were able to achieve. We pulled off the largest domestic fundraise for a startup in Indian history. And we are moving towards domestic ownership next fiscal year.
The reason why we were able to raise a billion dollars of capital earlier this financial year is because we turned 70% of our dark stores profitable. The stores are now turning profitable faster. It used to take about 23 months for a store to turn profitable and now it takes about eight months. And the capital being spent for each store to turn profitable was also getting lower. It used to take about ₹3.9 crore of capex in operating burn for a store to turn profitable. Now it only takes about ₹1.5 crore.
In a nutshell, we had gone from zero to over $1 billion (annualised sales run rate) of top line in two and a half years. The business is moving close to Ebitda breakeven. Seventy per cent of our markets are profitable. And the inputs on return on equity are getting better in terms of speed to turn a store profitable and capital spent.
Within a quarter of the next financial year [FY26] we expect to be PAT positive.
However, our institutional investors told us—you already achieved so much scale, you're still growing 100%, the economics are working, and there is this huge opportunity ahead of you. Right now, is not the time to slow down. It is actually the time to invest in the business and go aggressive with store launches, which is exactly what we're doing.
We are launching in the magnitude of 100 dark stores a quarter. That is still a good place to be as long as our mature stores keep turning profitable.
It's mainly execution and operating leverage. For instance, we have added new categories like general merchandise, apparel, beauty and cosmetics, and electronics, that are additive to profitability because they are about 2-3x more gross margin per unit than FMCG. So, the share of those categories increasing has contributed to the bottom line. For example, you know, there are racks like the private label.
We have also scaled private labels. We’ve gone from zero to ₹700 crore (annualised run rate) in 12 months. Our advertising income has also scaled to ₹1,000 crore revenue run rate.
Our core supply chain is also getting efficient. We just started rolling out the first layer of automation in our back end motherhub.
As we're getting scale, we're getting fixed cost leverage and sourcing leverage. We're seeing AOVs [average order value] go up.
We grew roughly over 140% in FY24 over FY23. Our GOV was around ₹5,500 crore in FY24. This space is moving so fast, looking at FY24 numbers will not be productive.
In the 8 months since, we have gone from $93 million in gross order value per month to $250 million gross order value per month. In a month or two we will announce our annualised sales at $3 billion.
Our biggest lever is frequency and retention. We believe our retention rate is best in class in terms of how many users come into the system and how many of them actually continue to be active customers.
Retention is being aided by speed, quality, selection, and price. We've consistently maintained a 10-minute delivery speed. Our selection has expanded from 6,000 stock keeping units to 13,500 SKUs over the past 12 months.
We also run one of India's largest fresh fruits and vegetables supply chains that are fully vertically integrated, which I think is a novelty in this space. We have gone straight to the farmer to source a majority of our fresh fruits and vegetables.
On pricing, we have introduced new features like SuperSaver that are giving us a huge amount of growth right now, almost three times the AOV, right? The AOV for SuperSaver orders is over ₹1,000. At this AOV, we can give customers back some margin in the form of lower prices and still make money.
Our customer retention metrics are at 30-35% at the end of 12 months.
We already have hundreds of dark stores today that are run by small mom-and-pop entrepreneurs. These are ex-restaurateurs, or someone who used to formerly run a kirana store. Today, about 30% of dark stores are run by local entrepreneurs; by the next financial year it will be about 50%.
They employ between 30 and 40 people from the local communities. We give them the technology and the operating support to run the dark stores and then they own the store. They set up the capex, they take up the lease. That's going to be a majority of our dark stores by next year, i.e. run by local entrepreneurs.
This narrative revolves around taking business away from the kirana store, not only is it wrong but it's actually dangerous. Because it takes away from the fact that quick commerce is actually a net job creator. The wages of those jobs are meaningfully above minimum wages. And these jobs come from the informal sector.
We are in a position where we are operating the same e-commerce models that have existed for a decade—that Amazon or Flipkart have operated for over a decade at a huge scale in India. Do we have airtight compliance, not just in foreign direct investment (FDI), but even in goods and services tax (GST), and income tax, yes. In spirit, we'd like to be a compliant company. So, the honest answer is regardless of the noise that gets created over this (quick commerce) we are not really deeply worried about government overreach.
We are expanding on a base of billions of dollars, and we are currently not feeling the impact of competition. That said, (I have) huge respect for Amazon and Flipkart. We think, if they pick up anything, they'll do well. If they come into this space and they're able to execute, create a better value proposition in some areas—fantastic. We will learn from that.
But, the market is huge, so we don't really worry about competition too much. In fact, we look at competition as an opportunity to learn. Whatever they're doing well that we've not been able to crack, we'll pick it up from them. So, it's a good thing.
But ultimately, honestly, today, it's just a media narrative. To build a business in billions of dollars of scale, as quickly as we have—and we are crazy. We execute fast, very aggressively. We are a different style of company than Amazon and Flipkart, in that we are not bureaucratic.
We've created a business with a fraction of the capital than all formats of the internet before us have taken. To do that is not as easy as it sounds, regardless of your balance sheet. At the end of the day, the alpha factor is not your balance sheet, it's execution.
We're exploring it. In the next couple of weeks, you might see something, but we are constantly looking at new categories. The new category we are focused on right now is Zepto Cafe that's expanding pretty rapidly. We are launching 140 cafes a month right now. We think it's already ₹160 crore of revenue; we are living in just 15% of our stores. By next year we think it will hit ₹1,000 crore—if we scale it to all our dark stores.
This month, we hit about ₹86 crore in ad (revenues). So that's one of the biggest levers on advertising revenue. Quick commerce is about 86-87% of revenues, 13% is private labels and ads. Then, you've got the smaller businesses that are starting to scale like Zepto Cafe, which will take up another 4-5% of the business. These businesses are all within the core flywheel of quick commerce. We're not going to get into new businesses.
Absolutely. So, the share of direct-to-consumer (D2C) brands on our platform is actually very high and growing. The market share of all these new age brands is expanding on Zepto. They have added a couple of percentage points of share in the past two quarters and think it will keep growing. If let's say the platform is growing 3x, D2C brands are growing 4X. Incumbents are not small; but they are losing share. So, I'll give you an example, the ice-cream category was dominated by let’s say Magnum, Quality Walls, etc. and in the past 12 months brands such as Nic and Go Zero have taken so much share that they're getting pretty close to their (competition’s) scale.
It depends on your scale; what type of category you’re in. It's not the same for all brands. But it's less about where we make money from and more about what the customer is choosing on the platform.
