In today’s Finshots, we dive into the buzz surrounding Dunzo’s impending profitability or bankruptcy.

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The Story

Dunzo has been in the news this week.

First, Deloitte, the hyperlocal firm’s auditor, said they feared the firm was going bankrupt. They said Dunzo had more liabilities than assets. And that if push came to shove, Dunzo may not be able to pay its dues.

Then, Dunzo announced that it would actually become “corporate-level profitable” in 12 months!

And you have to wonder — what on earth is really happening at Dunzo? Who’s telling the truth?

So let’s take it from the top.

In 2015, Kabeer Biswas had an idea. What if he didn’t want to run to the laundry store to pick up his clothes? Could he get someone else to do it? He created a WhatsApp group and began taking requests from friends. He would do the deliveries for others. Soon the word spread in Bengaluru and everyone wanted a piece of this personal concierge service. Anything to avoid being on the roads doing random tasks.

Soon, the idea morphed into a full-fledged business called Dunzo. And if you wanted evidence of the firm hitting the fabled “product-market-fit”, it’s when a new phrase began brewing — “Dunzo it”.

The brand had become a verb. At least in Bengaluru where the company had set up HQ. And when something magical like that happens, you’d like to believe that the company in question has made it. That it has built a loyal customer base. That brand loyalty would allow it to diversify into adjacent businesses. And that it’s going to be tough for rivals to dislodge it from the peak.

So, the question naturally was — what’s next for Dunzo? What could it do beyond a simple pick up and drop service?

Because the company needed something that was a daily use-case. After all, you probably won’t send packages with misplaced keys or documents everyday, no? So Dunzo figured that one way to solve this problem would be to simply pick up and deliver daily essentials from the local supermarket or the neighborhood kirana store.

But not everyone was a fan of this model.

You see, one argument is that running a pick-up-and-drop service for supermarkets isn’t efficient. If people want stuff delivered in 10 minutes, everything has to work like clockwork. For instance, the most ordered items have to be placed closer to the pickup zone so that packing can happen faster. But you can’t force a supermarket to change their layout. They might have their own rationale for how they’ve displayed products.

The other argument is that isn’t lucrative either. You’re just depending on commissions for the orders you’re delivering. Also, you can’t negotiate with FMCG companies and earn higher margins on the products.

So in order to fix these problems, the simplest solution was to open your own store. Or what’s known as a dark store in quick commerce parlance. It’s just a warehouse — you store, pack, and ship products from here.

And Dunzo decided to do this. After all, when the pandemic struck, grocery delivery became all the rage. So it seemed to make sense to double down on grocery delivery. Especially since the massive heft of Reliance jumped in to back the company. The oil-to-everything conglomerate handed over nearly ₹1,500 crores and picked up a 26% stake in Dunzo.

But maybe that money just wasn’t enough. Because the problem was that setting all this up came at a massive cost too. It’s not asset-light like a pick up and drop service where you only need a fleet. You have to pay rent on dark stores which is super high in the affluent areas you’d want to serve. There’s the need to buy and store inventory. And your delivery rider costs will also soar because you need more personnel to stick to your 10–20 minute delivery promise.

As per The Ken, Dunzo’s cost per task (CPT) which is the cost that it incurs on every order was ₹80 when using dark stores. But under the earlier third-party store model, it was just ₹30.

The pivot didn’t seem to work, huh?

And there was a bigger problem too. See, Dunzo was already quite late to this party. There was a new upstart in town called Zepto which had quickly raised boatloads of money. And then there was Swiggy, Zomato (through Grofers), and BigBasket too. Also, maybe ‘Dunzo it’ and the brand loyalty hadn’t quite seeped into the psyche of non-Bengalureans. So Dunzo had to do something — it offered massive discounts and it splashed money on advertising during the IPL.

Now you know that burning cash this way simply isn’t sustainable. And when these discounts were rolled back, customers went in search of other alternatives.

The end result?

Dunzo lost a mammoth ₹1,800 crores in FY23. It was 8 times the revenues it made.

But if you want a bigger picture of Dunzo’s troubles, Inc42 says that while Dunzo raised $408 million from FY19 to FY23, it spent $401 million.

And finally, that’s what led to Deloitte saying that Dunzo doesn’t have enough money in the bank anymore. Remember that it couldn’t even pay salaries to employees a few months ago.

So, is Dunzo done for?

Well, we don’t know yet, but, Dunzo certainly doesn’t seem to think so. It’s pivoting or tweaking its model again. And it has actually returned to home base. It said, “Hey, our brand became a verb because we could pick-up and drop anything in a jiffy. So why not offer this service to other businesses?”

Dunzo wants to focus on being a logistics player through its B2B vertical called Dunzo Merchant Services.

Meanwhile, it has realized that the dark stores aren’t quite working out. It has already shuttered a whole bunch of them — some estimates say over 70%. And of course, it laid off hundreds of employees.

So yeah, with a small fundraise, a different business model, and a leaner team, Dunzo believes that Deloitte’s got it all wrong. Because the caveat also is that Deloitte was looking at the FY23 numbers. Over 7 months have passed since then. And Dunzo now thinks the elusive profitability is inevitable and that it’s just a few months away.

We’ll just have to wait and see whether Deloitte or Dunzo will eventually turn out to be right.

Until then…

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