Dunzo investment thesis
Why I wouldn't invest in the online hyperlocal delivery startup
This post was originally published here.
Summary
Dunzo is an on-demand parcel delivery startup founded in 2016, clocking $100MN+ GMV
It has improved its unit economics & built strong network effects from its logistics network, merchants, & customers
Indians are slowly but surely realizing convenience & willing to pay more for deliveries; food, grocery, medicine are large verticals
Merchant delivery marketplace is big with high growth but competition is fierce amongst demand aggregators (Zomato, Swiggy, BigBasket, Grofers, Jio, Amazon)
There’s uncertainty around true TAM, GMV post discounts, unit economics of food vs merchant delivery, & post-Covid retention
Leadership in delivery costs a moat in the “winner takes most” type of market
Problem
Users want to save time & need “runners” who they can rely on for small, daily life tasks
25MN high-income users culturally habitual to the convenience of “do this task for me”
50MN+ merchants having a limited online presence, limited by ways to do home delivery
Tech barrier hinders unorganized merchants from engaging with users online
Owning logistics is expensive & profitable only at a scale
Users find it hard to discover merchants & get stuff delivered
140MN two-wheelers (120MN owners) are underutilized assets with owners looking for additional income
~1MN partners working with delivery platforms
Solution
Dunzo is an on-demand logistics company, acting as an intermediary between local merchants & buyers who want things delivered at home
A managed marketplace where Dunzo “owns” discovery, logistics, & payments
Users can order chores or purchases from listed merchants using the app
Market
Demand
$700BN physical retail (90% unorganized)
20MN+ daily retail transactions (90% offline)
Delivery: food ($6.5BN), grocery ($3BN), medicines ($1BN)
Supply
13MN kiranas ($600BN turnover), 150K+ restaurants, 10MN street vendors ($4BN)
Intracity road logistics ($20BN)
8 cities, 11K merchants, 10K delivery partners, 5MN users, 25 mins delivery time
Annual GMV grew 5X to $100MN; ~20% returns/cancellations
Annual orders grew ~4X to 14.5MN
Annual revenue grew ~4X to $15MN
Unit economics (per order)
AOV = $6.9, merchant take rate = 10% of AOV, delivery fees = 5-10% of AOV
Revenue = $1.1, variable cost = $7.4 (delivery = $4.5) -> losing $6.3/order
EBITDA negative 11X of the revenue
Cash burn $46MN (FY20); spent $13 to earn $1
To become a $10BN business it needs $1BN revenue: 1BN orders (2.8MN/day); assuming 10 deliveries/partner/day -> 280K delivery partners
Positive signals
Contribution margin positive in pin codes in Bangalore; Chennai & Mumbai market maturing
Easier to operate in dense areas with short distances
Successfully acquires & retains customers
Low CAC (acquired 700K users through word of mouth) & high retention (80%) -> high LTV:CAC
~70% orders from repeat users. Monthly ARPU/repeat user up by 3X
High order frequency from power users -> top 1% users Dunzo twice/day
Growing AOV ($6.9) vs Zomato ($5.5), Swiggy ($5)
Powerful flywheel effects
Challenges
Hyperlocal startups succumb to death/pivot due to negative unit economics
Grofers pivoted from marketplace to inventory-led
Blitzscaling approach by competitors, deploying capital without much regard for economics
Low margins & high continual cash burn makes profitability a far fetched reality
Low AOV, discounts, cancellations/returns, affect the bottomline on the balance sheet
Expected contribution margin/order ~5%
Aggregating demand across verticals for maximum capacity utilization to lower delivery costs
The rationale for not investing
A strong reason for existence
Solving high-frequency problem & saving time for users, executing complex chores & P2P tasks
BUT market size for chores unknown & unit economics varies for food vs merchant delivery
Negative gross margins with no clear sight of profitability
Tough to scale & assume cost leadership in the current market structure
Need to aggregate demand in adjacent verticals to minimize delivery costs
Large competitors better positioned with consolidated demand in “winner take most” type market