Dunzo could have been a Zepto. So why did it fail?

Quick commerce, or instant grocery delivery, has taken off over the past three years, becoming a rare bright spot for internet startups during a prolonged funding winter. Last month, Zepto's valuation reached a stunning $5 billion, just three years after its inception. Goldman Sachs forecasts that India's quick commerce market will grow from $5 billion currently to $42 billion by the end of the decade. Despite Dunzo's role in discovering the potential of this market, it has long fallen behind competitors like Zepto, Swiggy's Instamart, BigBasket, and Zomato-owned Blinkit.

One of the main factors behind Dunzo’s downfall was the spread of its business and the absence of focus on a core business for many years. It was founded as a marketplace platform by chief executive Kabeer Biswas and three others in 2015. It built a cult brand among millennials in Bengaluru for reliably delivering anything from cigarettes and groceries to parcels and flowers, any time of the day. It charged very little and kept delighting its niche user base. Compared with other delivery startups like Swiggy, its growth was relatively slower but it also burned much less cash. Dunzo still hit a peak valuation of $775 million in January 2022, when it received $240 million in funding, mostly from Reliance, which owns about a fourth of the startup.

By then, it had become clear that the general purpose, consumer-to-consumer business of delivering parcels had few takers. Swiggy and Zomato were utterly dominant in food delivery while loads of specialty startups handled medicine deliveries. That left the fast-growing, nascent market of groceries and Dunzo pivoted accordingly.

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It spent big on marketing during the 2022 IPL to push its instant groceries service. It invested heavily on setting up dark stores to deliver speedily; its old model of picking up items from local grocery stores was unsuitable for instant delivery. Dunzo’s move seemed to make strategic sense. Not only was the instant groceries market exploding, its largest investor Reliance was eager to expand its online groceries service too. If Dunzo succeeded, it would be an obvious target for Reliance.

However, within six months of the January 2022 funding round, Dunzo scaled back its consumer business to focus on its business-to-business service, which burned less cash. Despite subsequent job cuts to conserve funds, the company's efforts were in vain.

Focus deficiency

The problem was that Dunzo was simply not built for focus and hyper-efficiency (in terms of delivery speed and consistency, not margins — all grocery services burn substantial cash). Dunzo’s rivals, Swiggy, Zomato, BigBasket, had spent years learning how to operate dark stores. Their core businesses were stable and scaled up. In comparison, Dunzo lacked scale and clarity in its core business.

Additionally, Dunzo had functioned as a marketplace with little experience in running its own stores. Managing inventory is a different ball game than relying on third parties. The laggard in a fast-growing market, Dunzo didn’t have the time, the capital or the team to make the switch. The brand it had painstakingly built held little value in the face of fierce competition. Such is the nature of most consumer internet businesses—switching to another platform is seamless and costs nothing.

Dunzo can take some solace in the fact that even India's two largest e-commerce firms, Flipkart and Amazon, have struggled with grocery delivery so far, despite nearly a decade of efforts. These giants are now scrambling to launch their quick commerce services. It may not be too late, but the lesson from Dunzo's collapse for Zepto, Instamart, and others is clear: brand value and track record count for little in the grocery delivery market.