Zepto plans to scale Zepto Cafe to major cities next year

Hyperlocal grocery delivery startup Zepto said on Friday that it is looking to expand its Zepto Cafe offering to major cities including Delhi-NCR, Bengaluru and Hyderabad by June 2024.

Shortly after announcing a $200 million fundraise at a $1.4 billion valuation, Aadit Palicha, Co-founder and CEO of Zepto, told reporters in a media briefing that building Zepto Cafe in Mumbai has been exciting and the startup will look to scale the service once its operational efficiencies are mastered.

The firm rolled out Zepto Cafe in pilot mode in Mumbai in April last year, aiming to offer quick deliveries of food items including tea, coffee, samosas, and croissants. The firm will also expand the service into newer areas in Mumbai soon.

The service was introduced with the aim of driving better margins and expanding order volume. The thought process behind the cafe is to have an offering where people can order both groceries and snacks at the same time, the company had said.

When you step into a 7-Eleven store in the US, you could essentially do this...have coffee and buy some ready-to-eat snacks. That’s what we also want to provide through a quick format,” Aadit Palicha, Co-Founder and Chief Executive Officer (CEO), Zepto, told YourStory in an interaction earlier.

Palicha noted that Zepto Cafe, despite being a small category, will help boost average order values (AOV) as users are likely to order tea, coffee, and snacks along with groceries. It also offers 3x higher margins than FMCG products which is expected to help Zepto inch closer to its profitability ambition. The firm currently sees an AOV of Rs 400-450 and said it is growing 40% year-on-year.

However, the cafes—which are mini cloud kitchens inside dark stores and sourced from brands such as Mumbai's A1 Samosa, Chaayos, Blue Tokai, and Rachel's Sassy Teaspoon—require a great deal of operational discipline. "Once we nail the operational efficiencies, it will aid the journey to profitability. We're going to go slow with the expansion," Palicha added.

For instance, preparation time at the cafe runs into 15 minutes and Zepto will try to bring it down to 10 minutes with time and scale, he said.

The company is also keeping an eye on other evolving ecommerce categories and aims to enter electronics, beauty, pharmacy, and meat segments among others in the next 12-18 months. Palicha added that Zepto will be in a better position to look at other categories once the startup is EBITDA positive and is generating sales upwards of $1 billion.

However, Palicha emphasised that grocery will remain the core business for Zepto. "Grocery is the mother of all categories. It is bigger than all categories including electronics, furniture, etc combined. Grocery is our DNA and we will continue prioritising," he noted.

Dark stores and cash burn

The grocery delivery firm, which now aims to hit EBITDA-level profitability in the next 12-15 months, says the majority of its over 200 dark stores are already profitable.

The Y Combinator-backed grocery delivery firm aims to float an initial public offering (IPO) by early 2025, making its push for sustainable growth more important than ever. Palicha did not divulge details about how much money the firm is looking to raise through the public listing, but said that the latest fundraise is a pre-IPO round part of a "capital-building exercise".

"The thought process behind raising the capital ($200 million) is to make investments in stores in the next 1-3 months. In the next 9-12 months, the investment will generate money and fuel our journey to profitability," Palicha said.

Running dark stores is capital intensive which may lead to high cash burn and customer acquisition cost. However, Zepto's Palicha said that the burn has reduced 70% this year compared to last year, signalling a positive outlook given its goal of growing sustainably.

Zepto said this was achieved mainly by improving sourcing efficiency, productivity at dark stores, and supply chain optimisation.