Palicha also says the critics claiming quick commerce is taking away Kirana business is just a misinformation campaign. “We like data. We like facts. We do not like anecdotal, subjective narratives. We have been through these things since before we started the company and so far all of them have been disproven with data and facts and that is the way that we like doing it.
You have made the impossible look easy and you came into quick commerce not as the first entrant but at number four and five and now you are commanding market share. What is the secret sauce that has pole-vaulted Zepto so quickly, so smartly and so efficiently? How have you managed to do that in a market dominated by big boys?Aadit Palicha: Our philosophy is very straightforward. This game is all about execution, excellence and that means both technology and ops excellence. From pretty much day one, we have had a bend towards physical discipline which does not mean being overly frugal and not investing in the business but being very aggressive and detail-oriented about the returns that we generate from any capital that we allocate towards the business and any capital we invest.
We have benefited from excellence in fiscal discipline. We have got billions of dollars of scale with a fraction of the capital and all the formats of the internet over the past decade have taken, including food delivery, ride-sharing, and e-commerce. We have done it a lot more efficiently if you look at the cumulative capital we have spent and the scale that we have achieved. The fact that we are just singularly focused on this,
We have got some of the best internet talent in India working at Zepto. We spend 70-80 hours a week, day in and day out, trying to crack this model with a great degree of detail and that has benefited us at a very high level. That is the secret sauce.
Zepto has a valuation of $5 billion as per the last round. Did you ever imagine that you will cross a billion dollars?
Aadit Palicha: The honest answer is no. I mean we never really started this company with the intent of starting a company. It was just Kaivalya and I. We had a cool idea for a project. We were two kids that loved coding growing up and we were childhood friends and we really had nothing to do during the pandemic. We said, let us build something interesting and fun for our neighbourhood.
At that time, the biggest problem was getting groceries delivered in Sher-e-Punjab, at least in the first wave of the pandemic. And so we just started coding and building a project and it just kept getting feedback from customers. We kept giving small tweaks to the product, and kept growing, and eventually we aligned on the dark store model and that is when we saw real product market fit and customer love and that is when it became a real company.
So, the honest answer is we never expected this. We never started with the intent of building a company or creating value. We just did it because we love building. At least we loved coding back then and we find it fun to solve problems for customers and we still do, so that is why we do what we do.Many believe Quick Commerce is an urban phenomenon. It is apt for Indian cities because you save time. Critics would say, can this service work outside Delhi and Mumbai? What are your thoughts?
Aadit Palicha: We have got data and we now live in 25 plus cities across the country, including cities like Nashik, Rajkot, Surat, and obviously the Ahmedabad and Chandigarhs of the world. But even going deeper there, places like Kota, where we are about to go live, places like Vellore, and so on and so forth. We started getting into these tier two, tier three cities and what I will tell you interestingly enough that those cities are performing better than metro cities when we launched stores there and the reason for that, like if you look at the time for every dark store that we launched to hit a thousand orders per day, in metro cities it used to take five to seven months, in these cities it is taking two months or even six weeks. For example, I publicly gave an example of Nashik. It went from zero to 1,000 orders per day per store in six weeks, which a place like Bombay took five months to do. And the reason why that is happening is because the customers in these markets, places like Nashik, Kota do not really have great offline options. We are giving them 13,000, 14,000 SKUs, a lot of selection that they do not have access to. They do not have access to great service like you have in Bombay or Bangalore or Delhi.
In these other markets, there are no good offline options. You have no access to that selection and we are able to structurally create value by vertically integrating the supply chain and give customers better prices as well. So, better prices, better selection, better service than what they used to. We are seeing the adoption rates play out better in these cities than in metro cities, and that is why they are growing faster.
On top of that, there is a cost arbitrage because the rent is cheaper, the last mile and manpower is structurally less expensive, the backend supply chain is less expensive as well. So, the adoption rates are similar. The cost arbitrage is better. I am today publicly saying that these cities, just the cities beyond the metros, the 10th city to the 40th city will actually probably grow better and have better economics in the metro cities. Now, is that true beyond the 40th city? I am not sure.
The density might become too low to even offset the tailwinds that I just mentioned. I can tell you that there is such a big Pareto distribution of demand just in the top 40 cities of India that we can build a very large business in just the top 40 cities without exaggeration in the tens of billions of dollars of scale and so that is the way that I look at it if that makes sense. We got the data. It seems to be working in tier two cities and we continue to hope that that trend maintains.
Quick commerce is a space where everyone seems to be recognising the size of the opportunity or is said in the startup world – TAM or the total addressable market. Now, TAM for quick commerce is large and competition is also intensifying, both from the incumbents and also corporates. How do you see the landscape changing at a time when everybody wants to focus on profitability and also gain commanding market share?
Aadit Palicha: We are looking at not just market share or profitability. My simple thought process is that at the end of the day, what is the return on equity in each of the stores that I am launching? Are they turning profitable faster and faster and are they doing it with more and more capital efficiency? The answer to that is yes. We have proven in the past as well that stores that used to take 23 months to turn profitable are now turning profitable in eight months. They used to take Rs 3.5 crore of capex and opex to turn profitable. Now, they are taking Rs 1.5 crore, largely because of execution and operating leverage.
We recently hit Rs 1,000 crore revenue run rate in our advertising business, that is scaling and giving us margin leverage or let us say vertical integration which gives us deeper margins and now as we are getting more and more scale, we are commanding more negotiating leverage there. Or for example, the ops excellence tracks, whether it is building better last mile utilisation, better forecasting to reduce perishable wastage, vertically integrating on a fruits and vegetables supply chain. All of that has given us alpha and that is why we continue to see our stores turn profitable.
My simple philosophy here is that we have proven the economics. As a two and a half year old company, earlier this financial year, we went from zero to over a billion dollars on top line in two and a half years and the business was getting close to EBITDA breakeven with 70% of our markets fully and free cash to positive and turning profitable faster and faster.
Once we have proven those core economics, the philosophy is simple. If you continue to see the stores turn profitable and they are turning profitable faster and faster, but you are still burning capital because you are launching a thousand stores, then that is a good place to be as long as the mature stores keep turning profitable. I do not really look at it as growth or profitability or market share of profitability, we look at it as a return on equity. As long as the stores keep turning profitable and they are turning profitable faster and faster, it makes sense to invest and that is basically our capital allocation thinking today. Obviously, there is a lot of execution to make that a reality, but that is the way that we look at it.
But do you see a price war in the quick commerce space where the delivery charges may be artificially down? Do you see discounts and other filter levels at play? Do you think there could be a Jio-like moment in the quick commerce space?
Aadit Palicha: I do not really see a price war playing out. All the players in the space are rational quality companies. Even just strategically allocating capital to random discounts is the least efficient way to get market share. The bang for your buck over the long term will be very poor and the internet ecosystem has learnt that lesson the hard way over the past decade.
Investing capital in a disciplined fashion in the right areas, let us say store launches, in new category expansion. Right now, we are investing hundreds of crores into Zepto Cafe where we are investing in semi-automated coffee machines, Chai Monks. We are investing in blast freezers. We are investing in speed ovens to improve the core experience. Those are good places to allocate capital and that will give you long-term compounding growth and market share. But bad places to invest capital are just random discounts which will pull you back the second you take them away and we have seen instances in quick commerce before that companies have failed because they took these poor decisions.
So, I do not think that we are going there. What I will say though, is that, at the end of the day, over the long term, what is going to matter is execution and are you just continuing to see better and better return on equity on your stores and better customer experiences and I think that we understand that. Again you can take a call to allocate capital aggressively, or not aggressively. We have taken a call to allocate capital aggressively. We think the buckets of our investing capital are high ROI. In a nutshell, I do not think that you are going to see something as blanket as a price war, but what you will see on our end is that we are not worried about launching stores and investing aggressively, but we are disciplined about the returns that we are getting in every rupee that we invest.
Now, this is your third fundraise, which takes the valuation to about $5 billion. Are you consciously working towards taking the company public or there could be another fundraise before you go public?
Aadit Palicha: We are consciously working towards an IPO. We have stated that ambition publicly as well. Although it is difficult to comment candidly, the fundraisers are a function of when capital is available and what price and is it available from high quality partners or not, so it is difficult to comment what we will do before the IPO, but presumably we do a pre-IPO and then we do an IPO is the most likely scenario. But yes, the ambition would be to go public relatively soon, hopefully sometime next year. But again, we will see. There are lots of factors that might change between now and then.
Source-based data show your cash burn levels are high. How would you justify that?
Aadit Palicha: We are a private company, but to give you a sense, seven months ago we put out a note publicly that we were at one billion in GMV. At that point, we had spent a fraction of the capital that both our competitors had spent cumulatively to get to that scale. And we had the data to prove that which is why we were able to raise the billion dollars of capital that we did. After that, we took that call. Like I mentioned, our stores are turning profitable faster and faster. We are a two and a half year old company with this huge opportunity ahead and we have proven the ability to execute. Now it is the time to accelerate. We are close to EBITDA positive, in two and a half years we have scaled to a billion dollars, the business model is working. Why should we slow down today? In year 2.5, we should actually go in and invest. I think that is a simple thought process and we are seeing the returns of that investment.
Seven months ago, when we said we had a billion dollars on the top line, pretty soon, we are going to announce another big milestone which we are going to announce within this year that we had $3 billion in seven to eight months. So, from $1 billion to $3 billion in GMV in the span of seven-eight months within cumulative terms is a relatively small amount of capital invested and we will continue to compound that and we will continue to multiply on a scale of billions of dollars. There has been 200% growth in a span of seven-eight months which is pretty incredible and in cumulative terms, a relatively small amount of capital spent. Even if you benchmark us to our direct competitors, the food delivery businesses, ride sharing, and e-commerce, we have proven that alpha and we are seeing the mature stores continue to turn profitable.
There could be backlash for quick commerce; it is impacting kirana stores, the mom and pop stores. Are you eating into their market or are you simply expanding this market?
Aadit Palicha: There was a CAIT report that said that we were taking share from kirana stores and there was a letter also written by an association saying that we were taking share from kirana stores. And just to give you some background, since the day that we started this company, there have been inaccurate, misleading narratives about quick commerce. First it was nobody wants 10-minute delivery, or 10-minute delivery is killing delivery drivers, which we disproved with data, that it is actually safer than other formats of e-commerce because most of our deliveries are intra-neighbourhood, not on highways or freeways, or the economy will never work for 10-minute delivery.
This is just another inaccurate narrative that quick commerce is hurting the kirana store. Let me give you the data. In the same CAIT report that wrote that we were replacing the kirana store, they quoted a research study by Datum Intelligence and that research study said that quick commerce has taken $1.2 billion of sales from kirana stores. Now that same research study, if you look at page six, says that between FY23 to FY24, grocery consumption in India has grown by 46 billion.
So, if quick commerce, in their own report, has taken one billion, grocery consumption has grown by 46 billion in their own report and so it is mathematically impossible that the kirana stores are shrinking. Obviously we are growing, but the remaining 45 billion, where did it go? It went to the kirana store. So, the kirana stores are also growing. You can see it in their own data. The economy is growing. It has grown 7%.
We are expecting consumption to continue to grow. As for the kirana stores, from FY24 to FY28, look at Goldman Sachs consumption report, Datum Intelligence report – the consensus view across multiple credible reports is that between FY24 and FY28, Indian grocery consumption is going to add between $200-250 billion. Today quick commerce is $5 billion. Even if we grow 1,500% in the next four to five years, which would be and we get to $75-90 billion, we are less than half of the incremental $200-250 billion of consumption that is getting generated. So, where is an additional 100 billion going? It is going to the kirana stores.
So, the fact that people are saying the kirana stores are shrinking in the fastest growing G20 economy in the world, is just hyperbole. You can go down the road, you can interview someone, you can ask leading questions, and you can create false narratives. If I asked you three years ago, do you want a 10-minute delivery? You would say no. So, you can create narratives, but even their own data does not prove it at scale.
So what I will point out is that, even if we become very big, not only does the incremental consumption growth contribute to the kirana store’s growth, but we are also in a position where we are a net job creator. In the past 36 months, this industry has created 450,000 jobs and we can give the data and the backup for that.
In fact, there was a report that said 400,000 jobs have been created from TeamLease by quick commerce in just the first 36 months. These are net job accretive with better wages than what the people were making before they came into the system. If you look at the surveys that we have done, a young male in his 20s to 30s with no formal history of employment and no formal college education is the median Zepto delivery partner, Zepto packers, Zepto truck driver. The wages that they were making before they came into a Zepto or a Zomato or a Swiggy, that gig work ecosystem, were bringing in Rs 10,000 to 15,000, and were engaged in some form of informal employment. After they come into a Zepto or a Zomato or Swiggy, the amount that they are making is Rs 23,200. And it is net job accretive.
The biggest chunk of those people before they got into gig work were unemployed and so we have created four and a half lakh jobs in 36 months. It is wage accretive. It is Rs 23,200 on average, which is 30% to 40% higher than what even the employed folks were making before they came to our platform. So, we are wage accretive. Just imagine four and a half lakh jobs created in 36 months. We are expanding rapidly. In the past quarter, Zepto alone has added 25,000 jobs and our peers will add the same, and I am sure at similar rates.
In the next two to three years, we will create one and a half, two million jobs. Today, at least the current data that I have seen is that Indian Railways employs between 1.2 to 1.4 million people. We will create more jobs than Indian Railways and I think we should celebrate that. This is wage accretive. This is a net job creator and it is part of expanding consumption and the own data of the people that are making these allegations against us prove my point. So, again, right, so we like data. We like facts. We do not like anecdotal, subjective narratives. We have been through these things before since we started the company and so far all of them have been disproven with data and facts and that is the way that we like doing it.
$5-billion is coming soon. When will you reach $10 billion? Will it be before the turn of the decade?
Aadit Palicha: I cannot comment on when we would get there, but we are expanding and multiplying on a base of billions of dollars. We are doing it in a capital efficient manner. We are seeing the mature stores continue to turn profitable and turn profitable even faster than the hundreds of stores that have turned profitable in the past. We feel good about making upfront investments today to set up our business for scale and success next year and the year after that.
The last thing that I will mention is that if you look at the internet globally, whether it is Uber or Airbnb or Coupang or Mercado Libre or Nubank, or even the Chinese companies like Meituan and Pinduoduo, all of them invest billions of dollars. They burnt billions of dollars. Initially, people thought they were jokers, that this does not work, but the reality is they were executing deeply even while they were investing capital and today, all of those companies generate billions of dollars of free cash flow. All of those companies generate billions of dollars of free cash flow today.
Uber is a classic example. They had $15 billion of capital burnt. Today, they are generating about $6 billion of free cash flow. Meituan is another example and Nubank is another example. Coupang is another example. Billions of dollars burnt, now generating billions of dollars of free cash flow. That is a legitimate framework.
Bharti Airtel is another example of that framework. Investing capital in a disciplined fashion, as long as you can see the profitability is a good thing to do, and it will set us up to generate meaningful amounts of cash flow in the long term and that is the mantra at Zepto. It is all about long-term free cash flow to the firm per share and in 2026, 2027 we could be generating not a small amount but a huge amount of cash flow and that could be benchmarked to internet companies globally and I think the framework that we are implementing is the right framework.