Q-commerce Is Booming. Could Rentals Upset The Applecart?

The most commonly understood q-commerce sector is grocery delivery, with services like Blinkit, Instamart and Big Basket Instant ruling the roost. Food delivery services like Swiggy and Zomato complement this entire ecosystem.

However, the ambit of q-commerce goes beyond instant delivery (the typical 10-minute service category) and involves Same Day Delivery (SDD) or Next Day Delivery (NDD) over different product categories.

This has allowed q-commerce to diversify into different product categories such as pharmaceuticals, electronics, books and gift items. Today, many e-commerce services adopt SDD/NDD to stave off the onslaught of q-commerce platforms.

The Total Addressable Market (TAM) for q-commerce in India is estimated at around US$ 45 billion. The current market size, estimated in 2024, is around US$ 2.8 billion, indicating the sector's huge growth potential.

Deloitte suggests the q-commerce market in India will be worth US$ 40 billion by 2030, nearing the present TAM. The big question, of course, is whether the TAM will grow or shrink by then. 

Has Q-commerce Gone Beyond Sustenance Threshold?

The sustenance of q-commerce has been under discussion for quite some time. To think of it, lockdown led to many services being digitalised. For instance, EdTech boomed during the lockdown phase but faced an absolute downturn with formal school and college services resuming.

Similarly, WFH-related innovations too are slowly winding down as businesses turn back to the office. However, q-commerce shows no signs of abatement even as the retail sector was normalised after the lockdown phase. 

A suitable parallel for comparison for q-commerce would be digital payments. With demonetisation and shortage of physical cash, digital payments got a fillip and gained traction. Once the supply of physical money was restored, India reverted to being a cash-first economy, with total cash circulation doubling over the pre-demonetisation period.

However, digital payments continue to grow as it has created a niche for itself, especially P2P (peer-to-peer) and small ticket payments. 

Similarly, q-commerce has created a niche for itself in terms of both product and service categories. Blinkit sales more than doubled over a year. It is now nearly half as big as the food delivery business of its parent company Zomato, and growing six times faster.

Zomato’s competitor Swiggy started its q-commerce service Instamart in 2020 and now covers over 43 cities listing over 20,000 items that include electronics and wearables. While the earlier average delivery time was around 17 minutes, they have now shaved it down to 13 minutes.

The question on the q-commerce’s sustenance stems from two considerations: consumer trends and operational expenses. 

Consumers Loving Q-commerce

As far as consumer trend is concerned, there seem to be no signs of any fatigue yet. Indian consumers have now started to expect instant delivery as a norm, and are getting piqued by ‘delays’.

A survey by Invesp suggests a staggering 80 per cent of urban online shoppers in India desire same-day shipping, with 61 per cent expressing the desire for even faster deliveries, within one to three hours of placing an order.

However, all this comes at a cost, which is presently borne mostly by the service providers. As is the norm with many such innovative services, the new service providers charge zero to low fees during the promotional period as they burn cash in the course of their scaling.

But as businesses mature, they have to eventually work out the unit economics and start charging their customers for their services. This experience has been played out in cab-hailing apps or even food delivery apps to a certain extent. 

This, in turn, brings the focus on operational expenses and unit economics of q-commerce.

What About Operational Expenses?

All e-commerce logistics run on hub and spoke model for a region. Businesses establish warehouses or fulfilment centres that serve as the nerve point for their operations. The hubs serve as the base for its delivery wings that complete the last mile fulfilment. Conventionally, the bigger the business, the bigger the fulfilment centre.

Q-commerce thrives on a hyperlocal model and requires a more nuanced approach to scale. Under q-commerce, businesses have to develop multiple hubs in a city, depending on the type of commodity, the customer density, delivery timelines and delivery service providers on the ground.

What sells briskly in one neighbourhood might barely move in another, forcing businesses to figure out how each hub can best service the specific needs and preferences of its nearby markets. The hubs for q-commerce are what is known as ‘dark stores’.

Rise Of Dark Stores

Dark stores are the network of micro-warehouses that form the backbone of q-commerce. Each dark store has around 30 employees for operations (packing, loading etc), which are complemented by around 90 gig workers who act as delivery personnel.

Dark stores are usually local commercial establishments of around 2500-4000 sq.ft. The advantages of dark stores are — (a) they can be located in remote corners of a locality, and (b) the space requirement is not high. This allows for q-commerce services to tap into any commercial spaces in and around residential areas as dark stores.

Between 2023 and 2024, India saw the addition of at least 5-6 million square feet (msf) across all urban fulfilment segments, out of which quick commerce leads at 2.5-3 msf with dark stores. According to a joint study by JLL and Miebach Consulting, the demand for dark stores is projected to grow at a compound annual growth rate (CAGR) of 12 per cent, reaching 37.6 msf by 2027.

Swiggy seeks to invest Rs 559.1 crore over FY25-28 on 538 additional dark stores to complement its present 605 active dark stores. Zomato aims to have 2,000 dark stores by 2026, while Zepto seeks to double its count to 700 by FY25.

Dark stores in a sense have revitalised the demand for commercial properties originally designed for physical stores. The real estate boom around malls and plazas took a hit as physical stores were adversely affected by e-commerce and many businesses could not afford the high commercial rentals with declining footfalls.

Rent For Dark Stores Skyrocketing

Things worsened during the pandemic. Thus, real estate businesses have a high inventory of commercial properties which is now being effectively utilised by q-commerce. In fact, dark store rental rates have been skyrocketing thanks to the growth of q-commerce, and cities like Delhi have rental values as high as Rs 150-200 per sq ft.

For q-commerce services, the rising rental rates are still not a major hit. Blinkit says its new stores break even at Rs 7,00,000 in daily gross order value. The fact that they are on an expansion spree suggests that the threshold is being presently exceeded.

One of the critical metrics of any e-commerce service is the ratio of fulfilment expenses to Average Order Value (AOV). As long as the ratio is less than 1, the business is profitable; it becomes unprofitable once fulfilment expenses exceed AOV.

Localising hubs help lower last-mile expenses for q-commerce services, as they effectively bundle multiple low AOVs together in one short delivery cycle. Thus, the rise in rental is more than offset by the proximity and concentration of delivery.

Diversifying product categories is another strategy by which these platforms not only raise AOV but also scale operations; platforms which were earlier operating in 4,000-5,000 SKUs (stock-keeping units) are now running 20,000-25,000 SKUs. A SKU is an identification code depicted as a machine-readable bar code for a store or catalogue product.

Today, q-commerce businesses are offering new innovative services such as curbside pickup or in-store pickup where the consumers can actually pick up an item at their convenience from a local shop at their locality at a time of their convenience. This allows for greater cost optimisation by the service providers.

Thus, q-commerce is still on a growth curve with lower operating costs despite rising dark store rentals simply because their daily gross orders have been increasing way faster than their operating expenses.

Will Q-commerce Bandwagon Hit Rental Wall?

However, the competitive rush to acquire dark stores in specific zones is bound to meet the physical limitation of commercial spaces in any confined geographical area.

After all, unlike the conventional e-commerce sector, just having one big warehouse for a city doesn’t work for q-commerce. Each q-commerce service provider needs to have multiple dark stores in confined geographies or circles.

Real estate as a sector is known to be prone to speculative cycles, and thus the rush to acquire dark stores by competing q-commerce service providers seems like a perfect trigger for speculative price increases in the dark stores market.

Such a speculative price hike may well advance the inflexion point for q-commerce when rentals reach a certain threshold level beyond which it will no longer be economically viable to keep expanding their hubs. In that case, the real estate sector may well be the spanner in the wheel for the Indian q-commerce juggernaut.

(The writer is a New Delhi-based economist with over a decade's experience in studying the digital sector. Views expressed are personal)