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  • Writer's pictureNishant Mittal

Why Zepto is a TERRIBLE Business Model: Analysis

Updated: Oct 9, 2023

Zepto's founder was in the news recently. Defending the "merit" of his company's business model, he was telling people that it's not a totally hopeless case that people always thought it was. Well, he's clearly a genius.

Let's do a deep dive. And when we're done, let's also take a moment to acknowledge what it reveals: A serious lack of depth amongst some incredibly affluent people. As an entrepreneur, you'd like to believe that the VC ecosystem is out there to fund startups which have the potential to firstly make a lot of money, and then transform the industrial landscape for good. But the fact that a company like Zepto was allowed, let alone encouraged, is a massive indication of something entirely different. What's that little something? We'll find out. For now, let's get into the logic and math of it all.

What makes a "good" business? This is a simple question, but the answer to it depends upon whom you're asking. A politician will answer it in a certain way. A bureaucrat will say something else. Someone with an employee mindset will have a different view, than that of a seasoned entrepreneur. Further away, a Consultant will probably draw an elaborate, jargon riddled framework with a hilariously cringe abbreviation at the end. It depends on whom you're asking.

But if you think from a simple perspective of a "builder". Someone who wants to build a business which can make money and grow real fast (consistently and sustainably, for a long period of time), the answer lies in the intersection of the following three sets:

1. Favourable Macro Indicators

2. Ease of operations, and

3. Good margins (which don't wash away too soon)

Nishant Mittal Analysis
Defining characteristics of a solid business

That's about it. It's not that complicated. You don't need an Ivy League MBA, or a PhD, or a Magic 8 Ball which can look into the future. Just some common sense. A company can't go really big unless the 'Macro Indicators' are positive. If there's no 'ease of operations', it'll not be able to grow (and will be in a state of perpetual firefighting). And everything aside, even if the company does go really big, but doesn't have good margins (which don't get washed away), what's the point? You have all the three sets? That's a home run. Zepto has NONE. But before we come to that, let's study these in some detail.

1. Favourable Macro Indicators

What's that? It's a bunch of indicators which work at a nation level. Different management books have covered these differently. But I personally like PESTLE analysis (by Francis J. Aguilar) the most.








These are pretty much all the macro indicators that a person needs to think about. Let's say you're in Taliban controlled Afghanistan. Would you start a chain of Gay Bars? Not unless you want to be stoned to death. Damn the unfavourable PSL. But at the same place, would you like to sell them some nice Cotton Kurtas Made in Lucknow? Could think about it. Similarly, would you start a Limo company in Somalia? No. Why? Unfavourable Economics. But would you set up a no-frills food processing company there? If you must, you can think about it. Why? The only industry that works in Somalia is Agriculture. Yet, the country doesn't have much for food processing. Favourable economics. You get the point.

2. Ease of Operations

This is a very important factor that's pretty obvious, but still often missed by the wonderful VCs. This is despite them always talking about "scalability". Go to a startup conference and you'll realise that "scalability" is their absolute favourite word. It's said so many times, that after the conference even you can't think about anything else. I remember pondering upon "scalability" even in the washroom after one such event. Something tells me I wasn't alone. It gets weird pretty quickly.

Every business can be scaled up, theoretically. But "ease of operations" define whether it actually will. Nobody can stop you from multiplying a General Store by hundreds of billions to build The Great Walmart, on paper. But there's a reason why there's just one Amul. One Mumbai Dabbawala. One Sarvanna Bhavan. One Ferns N Petals. And so on.

Sheer will and hard work can move mountains and make miracles, but that's not a business strategy. "Ease of operations" define how smooth a company's life will be. Luck aside.

"Ease of operations" means less operational overload. Less moving parts. Less dependence on people. Stable processes. Stable machinery. AC offices. Or most preferably - a bunch of coders in Pajamas printing billions. That's called "easy".

What's not easy? Managing a small hotel with fussy guests. And what's certainly not easy is trying to bring Lakhs of independent Mom n' Pop hotels under one brand with the goal of providing a standardised experience. That's not just hard. It's just unreasonable, even on paper. But still, a company got money on that idea, right? They were first a marketplace, then went inventory led, then became a marketplace again. All when where they should have actually gone to is the gutter. Do you recognise the company I'm talking about?

No matter how irrational, that's a story for another time. Let's get back to the topic.

3. Good margins (which don't wash away too soon)

This one isn't hard to understand. Ever since humans began doing business, they had a feeling for margins. Fat margins were good, thin margins were bad. Naturally, fat margins were thus chased and protected (with life, literally). Thin margins, not so much. Then people got acquainted with something called "scale", and thin margins became somewhat acceptable. But not too much. Margins were essential. They were the source of all the wealth. All the money. The lifeblood. The oxygen of this civilisation that we've have built from the mud. Margins were essential. And still are.

In fact, margins are so essential that sometimes they even make up for the lack of the other two sets. That's why drug peddling is such a business, if you think about it. You fight so your margins don't wash away. That's what that "moat" jazz is all about.

Analysing Zepto

Now when you look at Zepto through the above lens, you find out that it doesn't just fall short at all the three sets. It's a colossal failure. Like if those weren't simple sets but instead made of Poop, Zepto would be at the perfect intersection of those Poop sets. Not sure if it's an accepted English expression, but Zepto is 'Poop Perfect'.

Nishant Mittal Analysis
Why Zepto is a TERRIBLE business

1. Unfavourable Macro Indicators

Before we talk about Zepto, let's talk about the grocery delivery space as a whole. This space was first pioneered by Webvan in 2001, and then by Instacart in 2012. These guys were based out of US, which has an average population density of 36 persons/Sq. Km. Much different than India's, which stands at around 475 persons/Sq. Km. What does that mean? It means that Indians are over 13 times more crammed up in comparison. In US, a typical market is about a few KMs away from an average household, while in India, it's within a couple of hundred meters away. Fetching a few grocery items requires some effort in US, but here, it's just a few minutes walk. It's simply not that big of a problem because of shorter distances.

But let's say it's a luxury service. And lazy people would like to pay for "convenience". How many of such people exist in India? US' per capita income is around $63k, while India's is at $2.4k. That's a factor of over 26. There's a very, very small faction of people who can afford to avail this service at a regular basis in this country. According to a report by CMIE, only 7.1% of all households in India make INR 5-10 Lakhs in a year, and 0.9% make over INR 10 Lakh.

India has some 30 Crore households in total. Out of those, we're looking at just 30 Lakh households which make over INR 10 Lakh in a year. Where's the market?

But here's another catch! There's a fundamental difference from a socioeconomic perspective. It makes sense for someone in US to not worry about going to the market for daily errands, as there's no concept of "domestic helps" there. But India? Most of our rich have people for these kind of things. Wouldn't this shrink the market even further? Of course, it will.

From a macro perspective, Zepto as an idea is what they call - DOA. Dead On Arrival. It's dried cow dung on fire. The fact that it exists is unbelievable.

2. No "Ease of Operations"

Zepto is an operational nightmare. It's ridiculously costly, insanely messy, and extremely "people heavy". Not just people, it's also extremely capital heavy. Each dark store of this company costs something, and if you look closely, the costs are huge! The space, manpower, machinery, training, the packaging, delivery fleet, and so on! Then there's the overarching technology, hubs above those dark stores, regional centres above those hubs & the executive team. These aren't small costs, and this isn't a lean operation.

It could have been better if the operation was a bit "optimised". But the 10 Minute Delivery promise deliberately chooses the least efficient way of delivering groceries. Let me repeat that. The '10 Minute Delivery promise' deliberately chooses the least efficient way of delivering groceries. The idea is the worst it can get, even on paper. Let me explain.

Let's say you're a delivery executive. What would be the best way to utilise your time?

Short answer: Group many deliveries and then set you off to sail.

To understand in detail, a technical-management subject called Operations Research comes in handy. While this article isn't the best place to learn Operations Research, just know that there's something called A Traveling Salesman Problem (TSP) which basically groups a number of deliveries, and makes a schedule so that the executive can cover all the houses one by one, in a single trip. It's an artful and efficient way of going through life.

Let's say a company offers a '90 Minute Delivery' promise. Considering a delivery executive can load a maximum of 10 orders in his bag, he'll set off to sail when he gets those 10 orders and deliver them in one single round trip. This way, if he takes 10 minutes to load the deliveries and set himself up, and the average time between two deliveries is 7 minutes (which is a fair estimate), he'd be able to do all these 10 deliveries and come back to the hub in roughly 100 minutes.

Nishant Mittal Analysis
Intelligent way of planning deliveries

But in the case of a '10 Minute Delivery' promise, the delivery executive has no choice but to take a separate trip (starting from the hub) to deliver every single order. He gets the order, picks up the stuff, sets his phone (this alone takes three minutes). He then runs off, parks the bike, rings the doorbell and delivers the order... And his ten minutes are up! Then he comes back to the hub, and the total round trip costs about 20 Minutes. The maximum he can do is 3 deliveries in an hour. On paper. No piss breaks, heatstrokes, bike malfunctions, accidents, navigation errors, etc. counted here.

Comparing it with almost 10 deliveries in 100 minutes in the last scenario, this one makes 3 deliveries in 60 minutes. It's exactly half as efficient. So dumb that it's beyond belief!

For the third and final time, what Zepto chooses to do is the the least efficient, and most expensive way of delivering groceries (which is already a very expensive thing to do). I somehow feel this fact isn't as recognised as it should be.

A lot more can be written about the absolute atrocity that the Zepto model is, operationally. But I guess you get the point. It's a disaster. An embarrassment. An insult to human intelligence. And most strikingly, not that "scalable" as you'd expect a VC darling to be. It deserves a lot of shame.

3. No margins to begin with (forget about them getting washed away)

At the moment and until now, Zepto doesn't and hasn't charged a lot for deliveries. However, the deliveries themselves don't happen for free, magically. The company does stock procurement, inventory management, facility maintenance, fleet management (of delivery executives and vehicles), personnel management, technology management, packaging, and so on..

So basically, at the moment, the company does every single delivery at a negative gross margin. It makes a loss on every sale. In FY 22, it bought inventory worth INR 213 Crores, and sold it for INR 140 Crores. This is like you buying a chocolate for INR 10 and selling it at INR 7, later calling it "business". Then came the advertising expenses (of INR 175 Crore) amongst other things; leading to a total loss of INR 390 Crores, at a revenue of INR 140 Crores.

Please note that the grocery delivery space as a whole itself runs on razor thin margins. These losses are not "temporary". They'll not turn into heavy profits after the "habit loops kick in", or "adoption reaches critical mass", or whatever fancy jargon people in this industry are known to spew. This business model is inherently flawed and has fundamental problems which can't be turned around beyond a point.

This, for a lack of a better word, is a shame.


It's a travesty that despite the information shared above being publicly available since time immemorial, companies like Zepto are still at it by selling at negative gross margins. My friend recently ordered chocolates and chips worth Rs. 110, for 55 bucks. And the parcel was delivered in a neat handbag worth at least INR 9 (at scale). While people laugh, this should be criminal. Because while these startups may or may not have a future, they'll end up killing the SMBs which are the backbone of this country.

What's the fault of your neighbourhood Kirana store? One day he wakes up and he sees these idiots splurging money and selling things at a loss. What's he supposed to do about it? He knows it doesn't make sense, and he's right. But what can he do except for waiting it out? He can wait and hope that the madness stops somehow. But what if these deep pocketed guys go on for years? He'll have to shut down his shop. And mind you, that'll not be a tragedy just for him. It'll be a tragedy for the consumers, the community and the country. 85% of employment (even in US), still comes from SMBs. And selling at negative gross margins to unfairly kill SMBs like this should be deemed criminal, in my opinion. The CCI needs to step up its game.

Another travesty is that none of the information shared above is honestly "new". Anyone who's ever lived a normal life will understand. Also, studying things like population density, per capita income, basics of Operations Research, etc. and imagining their effect on people's buying patterns and a company's efficiency, isn't heavy science either. It's common sense. But when people who've never stepped outside their metropolitan offices (and metropolitan homes) suddenly acquire the power to decide on a country's startup ecosystem, this is what happens.

These people have mostly been at the top of the tree academically (Ivy Leagues, IIT, IIMs), and then financially (Investment Banking, Consulting, etc.) and their only "connect" with the "Real Bharat" is mostly through sanitised field visits. No wonder they think college project level ideas like Zepto can make sizeable businesses in India, and then pour thousands of crores on them.

These people aren't smart. They're the opposite.

Now my writing might seem unnecessarily acerbic to some. And honestly, you might as well be right. But to think of it, how can you bring any sort of change in this scene? In my view, only by calling out the BS as honestly as possible. Being polite will only bring more dirt on the noble pursuit that is entrepreneurship.

P.S. I'm building Seneca (a distraction-free smartphone). We're raising INR 40 Cr, and have raised INR 1.3 Cr already. Senior entrepreneurs and VCs should read the Open Pitch and INVEST.

P.P.S. You just read an honest (and hopefully valuable) article for free. If you like my writing, please consider making donations. Amounts don't matter, gestures do. Here's a big cheers to all my Patrons!

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5 commenti

Vishwas Joshi
Vishwas Joshi
20 giu 2023

one of the important factor in local kirana store via-a-vis "platform which is doomed, not scalable idea & only for top creamy layer of population" - which we forget is there is a personal connect of kirana guy with almost all customers he serves. Eg. Madam yeh sabun ki tikiya le jaaiye is baar, rin se jyada chalegi & madam being regular customer with connect will go with the decision of the kirana guy due to multiple factors 'madam buying from him from a long time', 'he has been referred by some trustworthy neighbor', 'he is nice with family kids', 'he knows personal preferences and recommends as per them' and many more iterations...

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Abhishek Arya
Abhishek Arya
09 ott 2023
Risposta a

Putting everything(SMB development, community etc.) aside and talking just from customers' perspective, these personal recommendations from the amicable Kirana bhaiyas have always been biased towards the brands that are available in the store(the one's giving them the maximum profit, probably). They have not been there to do some jan kalyan. Also, they have the minimum options available. That's the reason I have only used either Head N Shoulders or Sunsilk in my teenage years. That's why hypermarkets became popular among a specific sect of people providing them with more options at better discounts. But hypermarkets are few and far. I hope you see where I am going. Quick commerce serves this specific sect who don't like kirana bhaiya and love…

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Ujjwal Sen
Ujjwal Sen
18 giu 2023

Hi Nishant, Excellent article as always. Some comments:

  1. In Macro Indicators, could you clarify the connection between higher population density and the incremental value a customer gets from grocery delivery? IMO, the logic is as follows: In a given catchment area (apartment complex/ colony/ etc.), more people --> more demand --> more retail shops --> more diverse products and more availabilty (higher fill rate in SCM parlance) --> Shorter time to fulfill the demand. Higher pop density also makes it feasible for local shops to provide home delivery services, further degrading the incremental value of online grocery delivery.

  2. IMO credit services that local shops provide to housewives are an underrated differentiation point.

  3. In Operational Ease, the overall cost structure for Express…

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Nishant Mittal
Nishant Mittal
19 giu 2023
Risposta a

Love your response so much, mate! So very detailed and spot on. Really happy to have read it. "Operational challenges make the floor is so high, that the VCs who invested in this space probably account for 50% of the TAM". Haha. Well said! :))

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