It's all going dark

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Ever wondered how quick commerce platforms like Zepto and Blinkit can get you things quickly? They use 'dark stores'. There's nothing scary about it; it's just a space or a mini-warehouse where companies store their products so they can be quickly packed and delivered to nearby localities.

The name of the game in the highly competitive quick commerce sector is to deliver as fast as possible. So, companies would ideally have several dark stores spread across the city to cover as much ground as possible. That's exactly what's happening since business is booming, and property owners are more than happy to rent spaces.

More demand

Quick commerce companies have reshaped retail leasing in urban areas. That said, India's dark store journey began quite late. The first dark store was launched by BigBasket in 2018 to ship orders faster under its express delivery service. Since then, their growth has surged and is on par with cities like Shanghai and Tokyo. Consumer demand is increasing as more people see quick commerce as convenient.

Companies have had to respond, and they are. Swiggy Instamart announced plans to enter tier 2 and 3 cities by increasing its dark store network earlier this month. Blinkit plans to more than double its dark store network to 2,000 by FY2026.

This is only the beginning. According to industry analysts, inquiries from landlords looking to lease 1,000-4,000 sq ft spaces for dark stores have increased by over 40% over the past 2-3 years.

New stores are popping up almost every 5 km in densely populated areas in large cities. In the next three years, the demand for dark stores will increase by 15% from 22.8 million sq ft to 27.1 million sq ft.

The nitty gritty

Setting up dark stores isn't free. Companies operate these stores mostly on a rental basis. A dark store rental is typically lower than retail spaces. Landlords usually rent out entire buildings or a floor to dark store operators monthly. There's usually a 9-12-month lock-in period and a two to three-year lease term.

According to Savills India Research, the highest rentals are in Delhi at ?150-200 per sq ft per month. Mumbai comes next at ?80-150. RealtyCorp Director Sunil Singh believes landlords can earn nearly double the retail income by leasing spaces to dark stores. One deal that he was involved in was a 1,800 sq ft space leased to Blinkit in Bengaluru's Frazer Town for ?60 per sq ft. That translated to ?1.08 lakh per month. Before the pandemic, a deal in Domlur was for ?50 per sq ft for a 1,500 sq ft space, with a ?75,000 monthly rental return.

If these spaces were leased to a traditional grocery or Kirana store, the rental returns would've been 30-40% lower. It's why landlords with land parcels in less accessible areas like off the main roads or narrow lanes are capitalising. According to brokers, the rental yield for dark stores in prime residential areas ranges from 3-5%.

Benefits

For quick commerce companies, having large warehouses was good for storing large amounts of inventory, but that defeated the purpose of 'quick' in quick commerce. The idea was to have smaller spaces spread across an area for efficient and timely deliveries. Here's how dark stores are beneficial:

• Companies don't need a lot of space. Dark stores aren't big. On average, they're about 1,000-5,000 sq ft. They're also not open to the public, so the entire space can be utilised.
• People expect timely deliveries. Since dark stores are located near end consumers, deliveries can happen quickly.
• Companies don't need all the bells and whistles that come with a traditional store or large warehouse. They just need to have adequate inventory. That ensures costs are kept low.

What's next?

Despite the boom, affordable spaces are becoming tough to find. Blinkit has struggled to find available properties in Bengaluru for its expansion. There's another challenge - lack of regulations. There's no official legislative framework from local or central authorities to govern dark stores. That means not all dark stores are compliant with local laws.

In Bengaluru, for example, the BBMP has said dark stores often operate under trade licenses meant for retail stores. The same thing is happening in Noida. There's some hope on this front. The Centre has begun meeting quick commerce companies to better understand the regulatory needs. Ideally, municipal bodies will need to take the lead. There are signs that the regulatory environment will improve in the coming days.