Zepto wants to master its cold supply chain. Path to profit or frozen dreams?

Bengaluru: Hyperlocal grocery delivery platform Zepto is exploring ways to strengthen its cold chain logistics, aiming to enhance quality control and improve gross margins in its perishables category, according to several industry executives familiar with the matter.

The company has invited individuals and organizations with expertise in the fresh or cold supply chain to collaborate in its drive, as per co-founder and CEO Aadit Palicha‘s LinkedIn post last week.

Last month, the Bengaluru-based company partnered with the Transport Corporation of India (TCI) to expand its storage and distribution capabilities in the south.

Zepto’s drive to strengthen its cold supply chain capabilities—including sourcing, packaging automation, and ripening chambers—is the ideal next step for quick commerce platforms for margin expansion and quality control, industry experts said.

“Fruits and vegetables account for 8-10% of all sales on quick commerce platforms. It’s the largest category. It’s also a fast-moving category because purchase frequency is high,” said Satish Meena, advisor at market research firm Datum Intelligence.

This move will prompt these players to collaborate with cold chain logistics players and gradually ramp up investments to build in-house strength to improve the quality of perishable goods which represent a crucial stock-keeping unit (SKU) for all inventory-led grocery delivery players, they said.

“As Quick Commerce scales, there is a serious opportunity in logistics to build a “Delhivery for Fruits and Vegetables (FnV)”,”Palicha wrote in his LinkedIn post last week.

“Zepto currently operates one of India’s largest direct-to-farm FnV supply chains (20L+ units processed everyday and growing quickly). As we go deeper into the value chain, we are noticing serious gaps in our nation’s fresh/cold supply chain infrastructure. Everything from ripening chambers to packaging automation to ensure quantity accuracy to excellence in collection centre network design to maximise sourcing alpha,” he wrote.

While grocery and FMCG items like pulses and packaged foods offer quick commerce platforms gross margins of around 14-15%, fruits and vegetables can fetch them double, making it crucial for platforms to solve supply chain hurdles, said Anurag Jain, founder of Upside Health, a healthy desserts startup.

“User adoption in quick commerce has seen massive growth thanks to the convenience it offers. Gaining control of the supply chain is a step towards perfecting customer experience which is crucial for creating loyalty,” he said.

Jain was previously the co-founder of morning grocery delivery service Milkbasket which Reliance Retail Ventures Ltd acquired in October 2021.

Reducing refunds and returns is another key advantage, said Datum Intelligence’s Meena. While return rates for quick commerce platforms remain in the low single digits, minimizing these instances helps maintain profitability with platforms setting a high bar, he added.

Most platforms, including Zepto and Zomato-owned Blinkit, introduced quick returns in recent months aimed at securing customer confidence and trust.

Zepto did not respond to queries sent by Mint.

Tough challenge

That said, scaling cold chain infrastructure will require free-flowing capital and a lot of rigour, especially given India’s broken cold chain infrastructure.

Besides, the unavailability of proper equipment, frequent power shortages, regional disparities, and a deficit of skilled staff have long hampered the growth of India’s cold chain infrastructure.

India is the second largest producer of fruits and vegetables in the world after China. In terms of consumption, fruits and vegetables occupied the pole position with a share of 28% among all crops in value terms, indicating signs of growing preference among Indian consumers, as per a report by the government’s National Statistical Office (NSO) released last year.

The value of output of fruits and vegetables increased from ₹2,87,000 crore in 2011-12 to ₹4,34,000 crore in 2022-23 at constant prices, NSO’s data showed.

However, as much as 15% of its total production is lost between harvest and production due to the country’s tropical heat and the lack of adequate cold-chain infrastructure.

Despite these gaps, the potential is massive. The country’s cold chain logistics market is projected to hit a market valuation of $53 billion by 2032 from $14.5 billion in 2023, according to estimates by global industry analysis firm Astute Analytica.

Still, building this infrastructure from scratch requires substantial investment. Large consumer goods makers have built distribution and logistics systems over decades and hence enjoy economies of scale, unlike small startups, former Milkbasket co-founder Jain said. Quick commerce firms still operate on fairly small volumes as compared to FMCG players who transport perishable products like ice creams and milk to remotest regions of the country.

“From my experience, there are a lot of moving parts in the entire supply chain. Right from picking up the produce from the mandi (wholesale market) to storing it in dark stores, cold storage is a basic requirement. A cold room can be sized anywhere between a few hundred cubic meters to over 2,000 cubic metres and does occupy significant space,” Jain noted.

Moreover, firms will have to build the system specially for hyperlocal needs which add a fresh challenge as every state and city function differently. However, quick commerce platforms do have the advantage of existing supply chains at the city level which could prove useful, according to Datum’s Meena.

“The ultimate benefit is low wastage and high customer satisfaction. Even customer satisfaction is subjective which is why consistency in quality is essential,” Jain said.

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Zepto’s solid foundation in its private-label meat brand, Relish, offers a significant advantage given its established network. Launched in October 2023, Relish reached an annualized revenue rate of ₹150 crore within six months. The company expects the category to hit ₹1,000 crore ARR by March 2026, driven by its established cold chain network for meat, a product that requires similarly stringent temperature control.

Palicha acknowledged the road ahead is challenging. “Building this (cold chain logistics) requires a tolerance for capex investment, but more importantly, deep deep deep execution and tech capability building,” he wrote.