#6 Google-Dunzo Affair: The Conclusion (Part 2 of 2)

Read Time: 8 minutes

Quick recap of Part 1

1. Dunzo was in need of money and it was pitching a new story - that of building an on-demand logistics layer for the offline world (business of local commerce)

2. This was different from the earlier story it was pitching - that of finishing a user's to-do list (business of convenience)

3. Because of the loss-making nature of on-demand logistics, Dunzo was finding it difficult to raise money. Until Google decided to invest

You can read the entire post here.

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Before I begin, a quick shoutout to Ishaan, Vardhan and Himanshu for giving the right simplanation on why Google invested in Dunzo. You guys rock!

Continuing from last week...

So why did Google directly invest in Dunzo?

When you look for a pharmacy or salon near you on the internet, you are essentially doing a 'local search'. Local search is a problem that businesses have been trying to solve since the late 1990s. Craigslist (started 1995), Justdial (1996), Yelp (2004), Sulekha (2007) and Google Local Listings (started 2004 and merged with Google Maps in 2005) are among the popular examples.

Local Search V1

Built during the early 2000s, the first version of the solution for local search (let's call it Local Search V1) was about 'discovery'. Companies like Google, Justdial et al essentially built an online version of the phone directory (yellow pages) - a list of all local stores that you could quickly lookup through a search bar. Users wanted information about a store in the city and they got it with a few finger taps. Brilliant at that time!

Fast forward 15 years - users are now used to getting a car at their doorstep with the tap of a button. They can get food delivered home instead of going to the restaurant to eat or pick-up. They can shop for literally anything online and it will arrive at their doorstep in a few days. User preferences and behaviour had changed over the decade.

Local search, however, largely remained the same during this time. It pretty much did the same thing even after a decade - just provide information. While helpful, it wasn't enough for users. They didn't just want information. They wanted to get things done.

Local Search V2

The new consumer needed a revamped local search (let's call it Local Search V2). If Local Search V1 was about finding information about a store (discovery), Local Search V2 would have to be about buying from a store. It not only had to enable a user to find information about a store, but it also had to enable the user to pay the store (payments) and enable the store to deliver the product to the user (fulfilment).

Google realized that this was how local search was going to evolve. Users were increasingly beginning their search on platforms that provided the option for delivery than on Google (like Zomato/Swiggy for a restaurant and 1mg for pharmacies).

Areo Arrives

In response, Google launched Areo in 2017 (in parts of Bangalore and Mumbai). Areo was Google's attempt at Local Search V2 where, going by its tagline, it aimed to deliver the city to your door. Areo delivered not just products (food, groceries, meds, etc) to your home but also services (repairs, beauty salon, cleaning, etc).

Unfortunately, Areo never took off.

Why did it fail? An in-depth answer would require another post. So let's suffice with a surface level answer for now.

Adding payments over discovery is a relatively simple thing to do. The catch was adding fulfilment. Building a logistics platform needed a different DNA than what Google has. Google is a software focussed company but what Areo required was on-ground operational expertise and full-time focus. On-demand logistics is not an easy business to build like we discussed last week. I think Areo also failed because Google launched it as a new app instead of integrating it (fulfilment) into their existing products like Maps and Search which would have made for a far smoother user experience.

Regardless of Areo's failure, Local Search V2 was still the future. And Google had to figure out a way to add fulfilment over the discovery layer it had built.

Enter Dunzo

If you remember Dunzo 2.0's model from last week, you'll realize that they were actually building Local Search V2.

“Dunzo's new pitch was that it could enable any offline store in the city to fulfil orders that were coming from the online channel.”

Dunzo had discovery (all stores listed), payments, and fulfilment (anything dunzo-ed right to your doorstep!). To go by the corporate cliche, if you cannot build it, buy it. And that's what Google did with Dunzo. Not buy them out entirely but buy a part of them.

What exactly will Google do with Dunzo?

Dunzo has cracked the on-demand logistics game and is able to deliver almost anything to anywhere in a city within 45 minutes. Google can now just partner with the expert rather than build on their own. And since it gave them money, they will probably have to say yes when it asks.

Unsurprisingly, Google announced an integration with Dunzo in May 2020. What caught me by surprise though, was that it was an integration with Google Pay. To be honest, I thought it would be integrated into Google Maps and Google Search first. But I guess a user would probably never open Google Maps to make a transaction. I do still believe Dunzo will be integrated into Google Search in the future (see pic).

What's in this for Dunzo?

Yes, they did get funds from Google at an opportune time that saved them from near death. But is there a business advantage for Dunzo to be integrated with Google? Hell yes!

To understand how, we need to dive into another lesson in Hyperlocal businesses 101.

As an on-demand delivery business, there's a basic wage per hour that you pay the delivery partner. You could pay a bonus (based on no. of deliveries completed) over and above this basic wage but that is optional and let us skip that for now. This wage you pay is more or less fixed as trying to reduce it will mean delivery partners leaving your platform.

You also earn a fee for every order delivered (a part from consumer and a part from merchant). You cannot play around with this fee much since both parties are very price sensitive. So you can consider the fee you earn also as more or less fixed.

Taking an hour of time as the basic unit, Dunzo can make money on each unit (hour) only if it ensures the following equation (see pic).

This equation is from a must-read piece on the economics of on-demand delivery by Adam Price, Founder of Homer Logistics (now acquired by Waitr, an American food delivery company)

NOTE: When Dunzo crosses this optimum number of deliveries per hour, it is 'unit economic positive' at an hourly level and 'operationally profitable' at an aggregate level. This is step 1 of reaching profitability.
The next step would be to use this profit made every hour (called 'contribution margin') to pay off its overhead costs (rent, HQ costs, etc). Since these overhead costs are fixed in nature (they don't grow as the number of deliveries grow), after a certain point, all the money Dunzo makes every hour will be pure profit. This is when Dunzo will be net profitable.

Since fee earned per order and hourly wage are more or less fixed, the only needle Dunzo can move to reach profitability is the number of deliveries per hour. In other words, it has to attract as much demand (orders) as possible.

This is where Google’s integration will help. The additional demand from Google Pay (and later from Search) will contribute to maximizing the utilization rate of Dunzo’s fleet and accelerate Dunzo's path to profitability. Meanwhile, Google gets a boost to its local search game. Win-win.

Ok. Thanks. Bye.

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Follow-up on last week's flywheel

Few of you asked how the flywheel will look with all the three players (users, delivery partners and stores). So here it is

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More reads on the topic

80+ investors said no to Kabeer before he raised funding from Google; Here's how he built Dunzo - FactorDaily Podcast
Much of what I wrote in this 2 part series is based on what Kabeer spoke in this podcast. It's a must-listen to get a better understanding of Dunzo and the on-demand space in general.

Exclusive: Dunzo on its way to 4X revenue growth in FY20
I have skipped out mentioning the actual financial numbers of Dunzo in the article and kept it more conceptual. But if you want to have a look at them, here are the latest figures.