Zepto: On Track to Profitability? Understanding the Company's Financial Landscape

Startups are the driving force behind our modern world, omnipresent and continuously emerging on the horizon. They shape our daily lives, influencing everything from the publication of blogs like this one to how we access and consume information. Our reliance on start-ups is profound, the streamline processes while simultaneously fostering dependency. 
 

The start-up landscape in India is experiencing rapid expansion, boosting 111 unicorns, 42 of which emerged in 2021 alone. With a combined valuation of $349.67 billion, these unicorns signify the burgeoning entrepreneurial spirit in the country. Among these standout successes is Zepto, a Mumbai-based delivery service founded by Stanford dropouts, which soared to a valuation of $1.4 billion in 2023, securing its position as India’s first unicorn of the year.

However, stepping into 2024, Zepto has encountered obstacles along its journey. 

In this blog, we will learn about Zepto’s growth trajectory, its current financial standing, profitability,  and various facets of its operations.

A Brief on Startup in India

India has the third-highest number of startups globally. 111 of these are Unicorns, the most recent one being Zepto India. 

Startups are becoming increasingly a household term in India. However, most people wanting to build a business don't know how to start a startup company in India. People now want to know more about startups, what goes into them, what the process behind them is, and how to turn ideas into a startup. 

This movement of startup in India benefits the growth of the country as it is increasing the GDP of the country as well as creating more jobs directly or indirectly. However, the process is very simple. Any Indian citizen with an idea can start a startup by simply working on it, creating a business model around the idea, and making the startup registration on the Govt. website.

Zepto’s Background

Aadit Palicha and Kaivalya Vohra were two dropouts from Stanford University when they founded Zepto startup. They invested their time and money behind the idea of delivering one of the most basic needs for people, groceries, in 10 minutes. This startup started its operation in 2021 and took just two years to establish itself as a unicorn. Zepto serves customers with quick grocery delivery. Its operations were at first based in Bandra, Mumbai, which was later expanded to cities like Pune, Bangalore, Hyderabad, Chennai, Delhi, Kolkata, Noida, Ghaziabad, and Gurgaon. 

The two founders, Aadit Palicha and Kaivalya Vohra, were friends from school. They were technology enthusiasts and always experimented during projects in web and app development. This interest in technology led both of them to Stanford University for a course in Computer Science Engineering. 

However, the corona pandemic started in 2020, that changed the lives of millions of people worldwide, changed theirs too. During the pandemic, in Mumbai, they felt that the time required for a grocery delivery was too long, even required days. This was a problem that they faced and felt. So, in order to solve it, both of the school friends started delivering groceries in their neighborhood through retailers but the time of delivery was reduced to just 45 minutes. Both of them leveled up this small business to a brand named "Kiranamart." 

Though Kiranamart was relevant during COVID-19 times, both of the founders forecasted its decline in a post-pandemic world. Thus, they needed to level up their product. Thus, they created places in operating cities called "Dark Stores," which were used for the storage of different grocery items, which facilitated fast delivery. This led to the birth of Zepto, where groceries were delivered in under 10 minutes. 

The Industry Zepto Is In

Zepto startup falls under the grocery industry. Groceries are an essential need for everyone, whether it's people living in urban or rural areas. Every Indian household has two or three retail or wholesale grocery shops in their mind for their daily requirements. However, with the Internet booming the e-commerce industry, more things are now available to order online than ever before. With companies like Flipkart, Snapdeal, and Amazon rising to fame in the early 2010s, more e-commerce brands with specific domains came into the picture in the past few years. The startup investment in such ventures has also increased significantly. 

Such one domain is the Indian online Grocery Industry. According to the reports from IMARC's group, this online market is valued at around $6.8 billion as of 2022. Looking forward, it has the potential to be valued at $37 billion in 2028. These two points in the valuation trajectory between 2023-2028 show a remarkable growth rate of 31.3%. 

This sector was dormant in the field of e-commerce, but with the rise of changing customer habits and, more importantly, the COVID-19 pandemic, the scenario has changed significantly. This is also implied by the improving standard of living, especially in urban areas, which has led to the demand for convenient and quick delivery of essentials.

Below is a bar graph showing an average of e-commerce share in India in different sectors from 2021-2026:
 

                                              Source

Zepto’s Business and Revenue Model

Zepto's working model behind their revenue and all the financial figures is actually a solution. A solution that other e-commerce companies couldn't figure out. While startups like Groffers and Blinkit took part in the E-grocery market, they could only satisfy their customers in a short time. The main reason behind this failure is the long delivery time. Grocery is a daily necessity, and people cannot afford to wait for days to receive a simple requirement like toothpaste. The unique thing about Zepto is that its success came from solving this simple problem with the introduction of dark stores in every operating city. 90% of Zepto's deliveries take place through these dark stores and mini-warehouses and the rest through retail stores.

Various problems that arise in maintaining the working model are tackled with the use of technology. These technologies enable better placement of different products, knowing about the needs of people in an area, and identifying short and traffic-free routes for faster delivery. Zepto deals with delivering more than 2500 items as groceries, which includes snacks, beverages, cooking items, home utilities, and many more. With this, Zepto regularly gains 100,000 new customers. Customers order the services of Zepto in a few simple steps:

• Order their requirements from the app.
• Once the order is relayed to the dark stores of the respective city, they dispatch it as soon as possible through delivery boys.
• The order is then delivered to the doorstep within a few minutes.
• Customers make the payment.

One of their best and unique features is free delivery, i.e., no delivery fee is charged regardless of the number of times an order is placed. Moreover, Zepto also partners with local retail grocery stores based on a commission-based model, in which they keep a certain percentage of commission from the orders delivered through these stores. 

All in all, the business and revenue model of Zepto startup gives it immense potential to grow and increase its revenue for investors.

The Rise of Zepto

In a high-competition market with ultra-big competitors like Flipkart, Amazon, Zomato, and Swiggy, zepto India has paved its way brilliantly. Companies like Flipkart and BigBasket delivered goods but took days or weeks to do so. But Zepto rose above all of those and introduced 10-minute delivery, which is even more convenient than people shopping from a nearby retail store. This brilliant idea attracted many investors within a few months of its founding.

But before moving on to the stats about Zepto, we will look into the different startup stages of funding and how to calculate valuation of a startup.

1. Pre-seed Funding: At this stage, a startup can be self-funded. The funds may come from the founders themselves or their friends and family.
2. Seed-Funding: May also include angel investors and micro venture capitalists for funding. 
3. Series A funding is the first round of proper Venture Capital funding and other sources, like super angel investors. Funding occurs in exchange for company stocks. In this stage, the startup's product has to be ready.
4. Series B funding: Funded by Venture Capitalists, this stage of funding aims at meeting customer demands.
5. Series C and so on: These funds are for the company's expansion. It aims to launch new products and reach new markets.

The valuation of a startup depends on various factors and can be calculated in many ways. But, the most simple and commonly used is the equity and funding amount-based valuation. Suppose you have a startup and receive a funding amount of Rs 1000 in exchange for 1% of your company stocks (equity). This will land your company valuation at Rs 100,000. I.e. [(Funding amount/ equity percentage) x 100]. The valuation determined by this method, however, changes with time and funding rounds. 

Funding and Investors in Zepto

Zepto, a Mumbai-based grocery delivery company, has raised a lump sum of $597.8 million in seven funding rounds. 
 

The below table shows the series of Zepto funding between 2021-2023:
 

Source

Zepto was valued at $1.4 billion in 2023 with the raising of $200 million in their Series E Zepto funding round. This made them achieve the unicorn status also making them the first one in India in 2023. The Stone Group led this particular funding round. The most recent Zepto funding round came in Nov 2023 when it raised $31.3 million in a Series E funding by Nexus Venture Capital.

A major 20.9% of shares of Zepto are owned by Nexus Venture Partners, followed by 20.2% by Lazarus Trust. Below is a pie chart showing the equity percentage among all the shareholders of the Zepto startup:

Source

Detailed Revenue Journey of Zepto

Revenue is a measure of success for a startup. Once investors pour in money to grow the startup, it must expand its resources, advance its technology, and level up its marketing and distribution to generate expected revenue and stay profitable.

Zepto, the only unicorn in India from 2023, grew its revenue tremendously from 2022 to 2023. With 100 new stores in different cities, its revenue from operations leaped from just INR 141 crore in 2022 to a massive INR 2,024 crore in 2023. 

However, Zepto's expenses saw a significant spike, too. In FY22, the company's total expenditure was around INR 533 crore, which grew to a mammoth total of INR 3,350 crore in FY23. Due to this, Zepto has only been incurring losses for the last two years, from INR 390 crore in FY22 to INR 1272 crore in FY23. However, this should not necessarily darken Zepto's future, as it is still a budding startup.
 

Here is a bar graph representing Zepto's revenue, expenses, and loss (in crores) in FY22 and FY23, respectively.

Even if Zepto ended up as a loss-making company in FY23, it was still ahead of other e-commerce companies like Blinkit, Zomato, and even BigBasket.

Now that we know about its revenue figures let us see how Zepto makes money. 

• The various companies in which Zepto sells its products give a share of their profits to Zepto. This profit margin has already been discussed with product companies available in Zepto's market.
• Moreover, they also make money through their app for promotional services. The companies whose products are displayed on the top search results and ad spaces of Zepto's app pay for such services.
• Another source of income is through the local retail stores on a commission-based model.

Why is Zepto in Loss?

Zepto is an e-commerce startup brand. For such startups to grow, they must expand and work on their distribution. Zepto had to do that, too. Zepto's major expenses are related to the factors that contribute to its expansion in new cities. In FY22, the company had spent around INR 175.5 Crores on promoting their app through advertising and marketing. Moreover, the recruitment of new employees and their benefits cost the company around INR 263 crores in FY23, while a total of INR 74 crores  was spent just on supply chain costs.

EBITDA margin tells us about a company's operating profit percentage in its revenue. For Zepto, the EBITDA margin went negative in FY22 with a value of -259.39%. One of the prime reasons behind Zepto's loss-making is the irregular loyalty of its customer base. Though it is known for super fast delivery, it is a little off schedule and has seen Zepto's customers switch to other options. Another reason behind the loss figure is Zepto's very limited revenue streams. It currently earns revenue only through two to three ways effectively. 

Is Zepto’s Loss a Cause of Concern for Investors?

Zepto is indeed facing losses and has not been able to break through. But the thing to keep in mind about Zepto is that it is still very young and has a lot more to come in the next few years. Such loss-making is normal for a budding company in their initial years. In the past few years, Zepto's loss-making trend does not imply that they are doing worse off in the market. Instead, its revenue has increased by 14fold from FY22 to FY23. It's just that operational costs were higher, resulting in losses. 

• However, Zepto must keep some things in check to increase their chances at profit. One such thing is maintaining the proportion of discounts and deals. 
• Zepto must also keep its delivery time in check between 10-20 minutes as it is the prime feature about Zepto.
• With high operational costs, Zepto must reduce some of its expenditures and increase sales to be profitable.

Understanding the Competition

Blinkit is Zepto's major rival at this moment. To compete and come out on top, Zepto must penetrate newer cities and build a larger customer base. On the other hand, Blinkit, with an identical business model as Zepto, continues to grow at a similar pace. Both have the unique feature of delivering groceries within 10 minutes. Thus, the only way to outpace Blinkit is to grow and expand faster.

However, Zepto also stood taller than Blinkit in terms of revenue jump, from INR 236 crore to INR 724 crore. It also left behind BigBasket, which only had a revenue jump of INR 338 crore, from Rs. 7,096 crore to Rs. 7,434 crore.

Revenue Jump (in INR crores)from FY22 to FY23

The Future of Zepto

There is a long way to go for the Zepto startup. It is currently well-invested in, has a dedicated workforce, ambitious founders, and a strong start. These factors must be well-utilized to pull in more factors in their favor. Zepto should focus on increasing its revenue and reducing its losses at the same time. One of Zepto's founders, Aadit Palicha, forecasted some interesting plans.

One of these is Zepto's Cafe. This year and in the following years, Zepto is planning to expand its Zepto cafes in more cities. The aim of such cafes is to make better margins and increase order quantities. As people would order coffee and snacks at the same time, the Zepto startup would benefit from this combo. 

Another positive news about Zepto is its lowering in Cash burn rate. A cash burn rate is the rate of expanding cash reserves in a business that is not profitable at that moment. Zepto has significantly reduced its Cash burn rate from INR 90 crore in FY22 to INR 55 crore in FY23. This will surely have a better impact on its earnings in the next few months.

Zepto aims to expand its dark stores and micro warehouses to more cities and towns. In 2 to 4 years, it also aims to be listed in an IPO and publicly listed.

Lastly, Zepto is also focussing heavily on its advertising. It has created a visible impact with its "Nahi Milega" ad, which has grown famous along with the character "Uncle Ji." Such marketing has shown promise in expanding what Zepto stands for to more and more people. Its ultra-fast and no-cost delivery service is all to preach for, and Zepto is doing so the proper way. 

Conclusion

In a remarkably short span, an online grocery delivery app founded by two teenagers has ascended to the rank of the 111th unicorn  in India. Its revolutionary 10-minute super fast delivery of groceries disrupted the e-commerce market in India. With a well-defined and operational business model, Zepto swiftly attracted investors within a mere 3 months, securing an impressive sum of $597.8 billion over the past 3 years. However, Zepto encountered initial financial challenges, witnessing a 6.3X increase in losses. Despite this setback, the company demonstrated remarkable resilience, leveraging its funding to expand its network of dark stores and intensify advertising efforts. While financial metrics are important, it would be premature to judge Zepto solely on its early losses. With a robust ecosystem, substantial financial backing, and ambitious plans, Zepto is poised for substantial growth in both revenue and profitability.