This is the story of Grofers, the company which fulfilled our needs at home, today it faces some or the other problem every day. Grofers, which started in 2013, was going to get IPO in 2021. But suddenly it merges with Zomato in a $700 million deal. Moreover, while companies like Swiggy and Zepto reach new heights every day, Grofers is on the brink of shutting down. Why did the brand we knew as Grofers, change its name? Did Swiggy and Zepto hit Grofers hard? What went wrong that a company working for so long has to face all this today? What happened to Grofers?
Case Study: What Happened To Grofers?
The story began in 2013 when Saurabh Kumar and Albinder Dhindsa noticed everything getting done through phones, be it food delivery or booking a cab. Everything got done with a click on your phone. They got an idea at the time. They thought of how everything is done via phone, then why go out for groceries? This could also be done via phone.
This was the start of Grofers, In very little time with great funding, Grofers started expanding itself at a fast pace. Soon, Grofers completed over 50,000 orders a day and dominated the market. Till 2021, Grofers and Big Basket were the only companies in India’s online grocery delivery services.
Then something changed and the fate of the companies dominating this space changed forever. Many startups similar to Grofers also started in 2013, but from Local Banya to PepperTap, none of the grocery delivery startups were successful.
But why is that so? Well, very few people know that as simple as the online delivery space seems, it is that much more complicated on the inside. It has many aspects that aren’t visible on the surface but become responsible for the failure of startups.
The question is what are these things? It is unit economics, that is per order if the company profits or has a loss. From the surface, we only see what’s shown to us but the unit economics which decides a company’s profitability or failure. Many of us think that Grofers succeeded due to a lack of competition because when Grofers was on top, there was no competition in the market.
But that’s not true. Peppertap, Local Banya, GrocShop, FlashGroc, and Getnowmarket, all were also in the online grocery delivery space. But Grofers alone did something that made it survive. From PepperTap to Local Banya, they had a single vision, to deliver groceries to homes within 1-1.5 hours. It’s an amazing idea but it has a huge disadvantage. It would disrupt the entire company’s cost structure.
Grofers had a genius strategy for this. But to understand this, you’ll have to first understand How the online grocery delivery business works?
So, most startups would work in this way. The customers would order on the app. This would go to the shopkeeper they had tie-ups with. And then a company delivery boy would collect and deliver it.
This model had 3 major problems.
- No control over quality. Whatever quality the shopkeeper had, only that got delivered to customers.
- The lack of inventory. Customers could only shop from the shopkeeper’s inventory. If the shopkeeper doesn’t have inventory, the customers would face many problems.
- High cost but low margins.
Due to this, most grocery delivery startups would get customers by offering discounts, but the customer would leave them due to poor service. But you know what? Out of all the startups, only Grofers changed its entire working model. First of all, Grofers closed its 90 minutes delivery because they understood after looking at the market that no one is in such a hurry that they want their grocery in 90 minutes.
Then, it closed its operations in many cities and focused only on metro cities. They set up their warehouses in metro cities which gave them 3 main superpowers.
- Super inventory. As Grofers is a technology business, they have data from which they know what products to keep and which products customers don’t usually order. Hence, they can stock up on their best-selling products as all the warehouses are owned by Grofers.
- Stackable items. Grofers delisted all the perishable items on its list, which means the items that rot quickly, and only kept the items that could be stored for long. This resulted in a low storage cost.
- Good margins. They got good margins because of 2 reasons. Number 1, as there are no middlemen, all their margins are higher as compared to having middlemen. Number 2, keeping private label products. They got a higher margin on private-label products as compared to branded products.
Why did the brand we knew as Grofers, change its name?
Everything was going amazingly well and after COVID, it was as if Grofers won the jackpot. Everyone was at home and everyone needed groceries. So, who would deliver it? Grofers. The growth was solid. Seeing this, Grofers decided on IPO in December 2021.
But then, Zepto enters the market. Business is war. Zepto, a startup made by two 19-year-olds, shook Grofers to its core when it entered the market because where Grofers delivered groceries in 2-3 hours, Zepto delivered it in 10 minutes and surprised all.
Soon, the grocery delivery market was moving to quick commerce. To say, there was no competition in the market but if people got used to 10-minute deliveries, then who would use Grofers? During this time, Grofers turned into Blinkit.
Did Swiggy and Zepto hit Grofers hard?
But within 3 months, Blinkit had to merge with Zomato. I know what you’re thinking, the company was doing well, then what happened to it after rebranding? Well, to understand this, we need to get 2 things.
- The quick commerce operational model, and
- Society’s behavioral design.
Any quick commerce model has 3 backbones.
- Dark stores. These are the places where inventory is stored.
- Overly paid delivery boys. As quick commerce delivers in 10 minutes, so the delivery boys always have to be available. This is why the delivery boys have to be paid well.
- Is an efficient delivery management system.
If you want to deliver within 10 minutes and have an inefficient inventory management system, then you will never be able to deliver within 10 minutes.
Quick commerce operational model
So, this model works in this way. Imagine you are a customer and you placed your order on the app, it goes to a central database, and then to the dark store closest to your house. The order is received and packed within a minute and then a delivery boy leaves to deliver it to you. Finally, the order reaches your house in 10 minutes.
Now we come to society’s behavioral design. Mainly, 2 people contribute to this behavioral design. Number 1, families, and number 2, Millenials. That means bachelors, normal young people and who live alone or in groups but not in families.
So, the order size in family dynamics is big but the important thing for Millenials is urgency. They want their order as fast as possible.
When families order, they usually have no urgency, but Millenials have a smaller order size but with urgency. So basically, the perfect customers for quick commerce are Millennials, not families. Families too but in a very small percentage.
Family orders are big and hence more profitable. But as I said, there’s no urgency when families place orders. But on the other hand, there are a lot of urgencies when Millenials order but they order very little, which is not profitable.
Zepto, Instamart, and Blinkit, if we closely analyze them, their work is not to profit at present, their work is to alter society’s behavioral design that people get used to 10-minute deliveries. But the biggest issue here is market dynamics.
Zepto, Instamart, and Blinkit, their real customers, from whom they can profit, all of them live in urban cities. But in these urban cities, if you look closely, markets are available at short distances. Now look at this very, very carefully, companies have 2 target customers, families and youngsters.
Urban families either have children or servants and sometimes they have both. This is why in case of a family’s urgent need children or servants can get things from a nearby store. The other set of customers is youngsters who have urgency and don’t have servants either. So, they desperately need their order but when they order, their order size is not as big. So, it is difficult for companies to profit from them.
For example, Have you ever thought about why people don’t use dishwashers in India? You’ll hardly find 1 out of 100 homes using dishwashers. But why is that so? Well, the answer is very cheap alternatives. The servants in India are a lot cheaper. It’s cheaper to hire a maid than to buy a dishwasher in India. You can scold a maid, even ask them to do extra work but a dishwasher will only wash your dishes. But in foreign countries, it’s expensive to hire servants and even a middle-class family can’t afford servants. This is why they have to use a dishwasher in any case. The same thing applies to grocery delivery too.
In India, most families that want their groceries delivered already have more affordable and customizable options. As the prices are low now, we get excited about 10-minute delivery. But when it will come to prices, there are very high chances that we will give it a second thought.
I know what you are thinking, Swiggy and Zomato do the same thing, food delivery, then why are these startups doing so well? Well, there is a difference. Swiggy and Zomato do hyperlocal deliveries, meaning you’ll get your favorite food at home. You will be okay with paying extra for that. Plus, these companies never offer 10-minute deliveries. So, they don’t have a time constraint either. It’s simple, to have food, you can’t visit 10 restaurants. Plus, you can’t ask someone to get food for you from a restaurant 5 kilometers away. It’s not that easy.
But it’s not the same with grocery delivery. In urban cities, there are some grocery stores every 100-200 meters. And as soon as the companies raise their prices, people will shift to better alternatives. The reality is that the quick commerce model is highly dependent on funding. Without funding, it isn’t easy to sustain the model. As long as the companies have funds, they’ll keep going.
This is where Grofers’ downfall started. Zepto directly started with quick commerce. That’s why they got substantial funding at the start. But when Gofers became Blinkit, they didn’t just change the name of the company, the company’s entire operational model changed.
Blinkit can provide service today because Zomato invested $700 million dollars in it. But the funding will end someday.
And this is where the most important lesson of this case study is, The name of the lesson is the cycle. Very few people know about the startup ecosystem cycle. That’s why when these companies get IPO, many of us end up losing our money. To solve a market problem, these startups create an idea. For ideal execution, they raise funds from investors. The money is used for cash burn to acquire customers. With customers, they also get revenue. The higher the revenue, the higher the valuation. When the valuation gets pumped up, an IPO is formed on that basis. Who invests in this IPO? You.
So basically what happens is, that these startups use the investors’ money for cash burn, they give you discounts, acquire you, and then at the time of IPO, wealth is created from your money.
So in short, most of us still think that the startup ecosystem is amazing. We get a good service and people get jobs. No doubt it does and the startup ecosystem is good. But understand that if a company tries to acquire you as a customer using heavy cash burn, then now or later, the money comes out of your pocket when the company launches IPO. As many people don’t know about this startup cycle, many people lose money by investing in these IPOs.
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