Zepto CEO Aadit Palicha doesn’t run the quick-commerce app. Then who does?
Zepto founders, Kaivalya Vohra and Aadit Palicha; Illustration by Manali Ghosh
Synopsis
The model that the Nexus Ventures-backed unicorn has built in the backend is very different from the conventional framework on which e-commerce giants such as Amazon and Flipkart run their businesses in India.
You may have ordered something on quick-commerce app Zepto and had your items delivered at your doorstep in just 10-15 minutes. Simple and smooth, isn’t it? The sudden rush to deliver groceries has propelled Zepto’s growth and the startup became one of the quickest to break into the unicorn club (USD1 billion-plus valuation) last year. The three-year-old company became synonymous with instant delivery and its bespectacled founders quite a
( Originally published on Apr 22, 2024 )
You may have ordered something on quick-commerce app Zepto and had your items delivered at your doorstep in just 10-15 minutes. Simple and smooth, isn’t it? The sudden rush to deliver groceries has propelled Zepto’s growth and the startup became one of the quickest to break into the unicorn club (USD1 billion-plus valuation) last year. The three-year-old company became synonymous with instant delivery and its bespectacled founders quite a sensation.But the app, at least technically, is not run by the young Stanford-dropout founders of Zepto – Aadit Palicha and Kaivalya Vohra. Puzzled? The model that the Nexus Ventures-backed unicorn has built in the backend is very different from the conventional e-commerce model through which companies such as Amazon and Flipkart operate in India (they run the marketplace themselves). The Zepto app and website, on the other hand, are operated and managed by entities you may not have heard of – Geddit Convenience, Drogheria Sellers, and Commodum Groceries, which also sell products on the platform. They also operate Zepto’s dark stores. If you check the invoice for any order placed on Zepto, you may find that it is billed by one of these entities. Let’s break this model down.Online franchise modelZepto essentially runs as an ‘online franchisee model’, according to sources close to the company. Geddit, Drogheria, and Commodum operate as Zepto’s licensees. A licensee company, as per a legal expert, gets the right to operate the platform and market their products on the licensor’s platform. So effectively, Kiranakart Technologies Pvt Ltd, the Indian incorporated entity helmed by Zepto founders Aadit Palicha and Kaivalya Vohra, is a B2B wholesale company and a tech service provider to the retailers who run the platform. Several brands ET Prime spoke with said they get their purchase orders from Kiranakart Technologies, which then supplies to Geddit and the other seller entities. These entities then sell the product on the Zepto app. Geddit and the other entities also operate the dark stores that Kiranakart Technologies leases out to them. To be sure, every e-commerce company in India has famously devised its own business structures with a web of companies to tiptoe around the country’s stringent e-commerce rules. Here’s what Zepto’s looks like. 109485599According to a company spokesperson, “Kiranakart (a B2B company) owns the Zepto app, platform, and the brand. Kiranakart has a commercial arrangement where it has licensed the Zepto platform and the brand to the multiple licensees and they operate the Zepto app and the website basis terms and conditions aligned”. But according to legal experts and former Zepto employees, this model is convoluted. In fact, some former employees even say that Zepto is a ‘B2B2C’ model. “Kiranakart Technologies runs an inventory-led model. It buys from brands. On books, it will show that Kiranakart sold to Geddit and Geddit is selling to customers, but that’s just a paper trail,” said a former employee. Multiple former employees said global consultancy firm EY was involved in this structuring. “When senior executives would join Zepto, this consultancy firm was called in to explain the model to them,” one person said. EY did not repond to ET Prime’s query. When asked whether EY helped the startup create this structure, the Zepto spokesperson said, “We on a continuous basis work and engage with multiple advisors to advise on regulatory and compliance matters”. Another senior former executive at Zepto called this structure “a smokescreen” that ensures the quick-commerce company’s control on all parts of the business. “They are controlling price, inventory, and the platform. They decide what should sell on the platform,” this person added. However, Zepto vehemently denied this. “We are a B2B company, and we don’t undertake B2C business. Kiranakart does not decide the pricing, the cataloguing and stocking of products sold on the app,” the spokesperson said. The licensee entities also said there was no control by Zepto on their operations and sales. “Drogheria is the licensee of Zepto. We purchase goods from about 100 suppliers and Kiranakart Technologies is one of them. We make the decisions on retail sales including the products and pricing,” said Tanishq Surana, one of the directors of Drogheria Sellers. Legal labyrinth According to some legal experts, this structure could be suspect. “Tomorrow, say a local entity can set up a store. But it uses, say for example, the Walmart name. And it also buys goods from Walmart. On the face of it, it doesn’t violate the FDI rules,” a legal expert pointed out, adding, “But it can definitely attract scrutiny”. However, Zepto said it is “a law-abiding company and we comply with all the applicable laws”. Incidentally, Zepto is reportedly in the process of a reverse-flip, which means it is looking to move the domicile of its holding company from Singapore to India. But even if Zepto becomes an Indian company, it would continue to have significant FDI, given its cap table. 109485596ET Prime has learnt that some government officials had reached out to the company regarding some compliances in the past year. When asked about this, Zepto said, “We receive various queries from authorities from time to time and as a law abiding organisation, we have adequately responded to such queries.” Meet the entities running ZeptoGeddit Convenience, incorporated in June 2021, is one of the earliest entities working with Zepto. This company is owned 50:50 by two individuals – Manoj Sethia and Priyanka Modi. Sethia also holds directorial positions in other firms such as Girnar Spintex and Ananta Finserv, as per Tofler. Geddit also earned a revenue of INR2,079 crore in FY23 and a profit of INR3 crore. It is not clear how much of the revenues were accrued from Zepto. The company director Manoj Sethia told ET Prime it was engaged in offline sales as well. Drogheria, registered in Bengaluru, and Commodum, registered in West Bengal, made relatively lower revenue in FY23. Commodum reported a revenue of INR2.8 crore in FY23 with losses of INR87 lakh. Drogheria’s revenues stood at INR1.7 crore during the same period while losses were at INR78 lakh. It also pointed out to ET Prime that it doesn’t sell only on Zepto but carries out sales of groceries both online and offline. Drogheria’s directors Nathmal Golecha Jain and Tanishq Surana also hold directorial positions in other entities, as per Tofler. Golecha is also a director at Multimedia Finsec, Samyakth Finsec and Credit Wise Capital. Meanwhile, Surana holds a directorial position in Narangi Plastics. Meanwhile, Zepto is in talks to add at least five-six more such entities to the list of its licensees in the next few months, according to a source privy to the development. Employee overlap?What further adds to the complexity of this structure is that Zepto itself may have hired several employees of Geddit, Drogheria, and Commodum, as per sources. There is also a lot of overlap between some employees. For example, as per LinkedIn, a human resources (HR) manager at Zepto also serves in the same role at Geddit Convenience, as per her profile. Another senior HR executive who works with Zepto Cafe business says on LinkedIn that he is employed at Geddit Convenience. Some customer support executives also seemed to have moved from Zepto to Geddit in the last one year, as per their LinkedIn profiles examined by ET Prime. This also holds true for the other sellers. A customer service executive at Zepto moved on to Drogheria Sellers as team coach of operations last year. “The hiring for these seller entities was done by Zepto’s HR,” said a source close to the company. However, Zepto denies this. In response to a query about the hiring of employees at licensees by Zepto itself, the company spokesperson said, “This understanding is not correct”. The licensees reiterated the point. “We have our own HR team who manages our hirings along with the HR consultants,” said Surana of Drogheria Sellers. How Zepto earns its revenueFor a regular e-commerce marketplace, revenues would come mainly from commissions from sellers, apart from logistics fees and other charges. However, Kiranakart Technologies’ revenue comes from the sale of products to Geddit and the other entities, as well as the royalty paid by these entities for the use of the IP (which is the platform). 109485591Here’s how a source describes a typical transaction. “Kiranakart buys products from brands and sells it to its sellers. Suppose it bought an item for INR100 and sells it to the seller for INR130, INR30 becomes its revenue. The seller (let’s assume Geddit) sells it to a customer for INR135. So INR5 will be Geddit’s income. Of this INR 5, it will keep a small percentage, maybe INR2, and pay INR3 back to Zepto as royalties. This margin will keep varying depending on product categories”. In recent interviews, Palicha has also talked about how the advertising revenue for Zepto has grown in recent months while its ‘Zepto Pass’ subscription has also crossed 4 million. However, this revenue accrues not to Kiranakart Technologies but to Geddit, Drogheria, and Commodum. “Think of this as the McDonalds’ franchisee model, or what Varun Beverages is for Pepsi,” a person close to the company said. The final cutThe Zepto app, though developed by Palicha’s Kiranakart Technologies, is not being operated by that entity but by Geddit, Drogheria, and Commodum which are essentially inventory-based retailers. To some extent, this has led to concerns about accountability. For example, the Consumer Protection (e-commerce rules), 2020, state that seller details should be specified to the consumer for every product. The rules also mandate that the e-commerce company appoint a grievance officer. But currently, on the Zepto app, grievance redressal details are of the individual sellers including Geddit instead of Zepto. Many product listings on Zepto also do not mention the names and details of the sellers. Amazon and Flipkart had faced intense backlash from the trader community for their seller structure and the control they exerted on their key sellers. With quick commerce rapidly disrupting the businesses of neighbourhood mom-and-pop kirana outlets, will this model, too, ruffle a few feathers? (Graphics by Mohammad Arshad)