Will quick commerce turn into quicksand for these startups?

For some, quick commerce and e-commerce appear to be the quickest way to riches.Swiggy has launched the Snaac app to deliver food in 15 minutes, matching peers Zepto and Blinkit. Thanks to generous investors who invested money through share sales by the likes of Swiggy and Zomato.While investors are making money trading their stocks, there is a lot of money being lost — which the startup world calls “cash burn”. And some of them are losing quicker than they deliver. So much so that Kabeer Biswas, one of the founders of delivery platform Dunzo, is said to have discussed quitting as the company struggles, ET reported.If investors are pouring in thousands of crores of rupees, it is not without bright prospects for growth. In a country squeezed by high trader margins and cities choked by traffic snarls, the top two companies — Zomato and Swiggy — have grown their businesses over the past two years.The market has rewarded them with valuations that remain an elusive dream for many profitable companies.Zomato, the bigger of the two listed firms, is valued at ₹2.4 lakh crore, a bit more than Nestle, after a recent slide. Swiggy, which listed recently, is at ₹1.1 lakh crore, as much as Britannia.It is normal for new-age companies to derive valuations that are many times that of the established but tired businesses that have competition. Recent attractions being a large addressable market and their profits could grow many times compared to established companies. At least, that is the assumption.For the delivery companies, the entire nation is the market, on paper. And the number of households is the promise.Food services and retail are large markets witnessing rapid online penetration, but they are still relatively nascent and have high growth headroom. For instance, compared to categories like electronics and fashion, where online penetration is approximately 22% and approximately 18%, respectively, it is 11% in food as of 2023, Swiggy said in its share sale document. medium nocaptionhttp://youtu.be/OfFBrnZNJhw?si=QHNMf1UnAqqnS1ONUnlike other categories like large electronics and fashion, where demand is concentrated at specific times of the year, these categories see greater frequencies and stickiness from consumers.Some questions appear to be emerging on these assumptions.“Investor exuberance around the quick commerce outlook is high,’’ says Yogesh Aggarwal, head of research at HSBC Securities. “We continue to believe in the potential of quick commerce. But Street expectations look no more undemanding. We think the total addressable market is much smaller for this industry than broadly understood. This may not matter in the near term as growth likely stays solid with continued supply expansion in 2025, but worries may start to emerge in two to three years.’’Analysts’ current estimates for the quick commerce industry is at about $50bn gross order value (GOV) by FY30, which implies 6 crore customers ordering eight times a month. This is a significant share of the total addressable market (TAM) captured in five years. While not an impossible target, it will not be easy to achieve, believes Aggarwal.The pessimism appears to be slowly seeping into investors’ minds, especially when it comes to the valuations without much visibility on earnings growth, though GOV is soaring. Zomato is off 18% from peak, and Swiggy 20%.Every bull market brings with it novel businesses (how much of home delivery is novel when the local kirana shops and neighbourhood hotels were delivering for years on a call is a different issue though) to public markets.Investor psychology is to get attracted to those businesses that cannot be valued rather than the ones that could be easily valued.During the days of the internet boom, it was ‘clicks’ and ‘eyeballs’ that drove market value rather than their earnings per share. This may be an era of ‘gross order value’ and ‘total addressable market’.“What is it that permits investors to get away from rational thinking, like the thrust of a rocket ship that breaks free of the limits imposed by gravity and attains escape velocity? There’s a simple answer: newness,’’ writes Howard Marks, founder of Oaktree Capital in his latest memo. “If something’s new, meaning there is no history, then there’s nothing to temper enthusiasm. After all, it’s owned by the brightest people — and they have made a fortune. Who’s willing to throw a wet blanket over that party or sit out that dance?’’Many companies of the dotcom era vanished, some have risen from the debris. This time maybe no different.