1. Would this affect physical merchants who accept 0-confirmation, since transaction propagation will be longer and merchant/user might have wait a bit longer while there's queue?
No. The transaction will take a little bit longer (but likely not noticeably) than it would without dandelion. The effect of this is really just as if you had hesitated a few extra seconds before sending the transaction. There is no difference to these merchants as they will still likely receive the transaction at around the same time the vast majority of the network does. There is no queue.
I thought more hops before broadcast to Bitcoin network which means network delay between nodes and verification time would be noticeable for 0-conf.
2. Would this affect block size/weight limit size increase in future?
No. This is not at all related to transaction sizes, transaction formats, or consensus rules. It is purely a network protocol change. It could be deployed right now with no other changes to Bitcoin.
I only thought that since i thought that would make transaction propagation slower and few people might have concern with propagation when block size/weight limit size increase is needed.