The success of quick commerce (QC) businesses such as Zomato Ltd (Blinkit), Zepto and Swiggy Instamart hinges on removing layers in the supply chain and enhancing channel efficiency to offset delivery cost. Up till now, leading FMCG players such as Hindustan Unilever Ltd (HUL), Nestle India Ltd, Britannia Industries Ltd, Dabur India, Marico, Emami and Godrej Consumer are enjoying deep urban and rural distribution networks, a source of competitive advantage, as they discourage new entrants in a category with a dominant leader.
But such staples marketers face risks, as their distribution advantage erodes -- Indonesia is a example.
"We note that as the market share of local grocers in Indonesia fell with the rapid growth of mini-marts, which enabled increased contribution, the market share of dominant leaders like Unilever Indonesia contracted sharply. In India, we could see a similar trend as kiranas cede share to quick commerce and modern retail," CLSA said in a note.
CLSA said quick commerce is reshaping India's retail supply chain by flattening distribution, giving new brands increased visibility and price competitiveness.
"As Blinkit’s parent, Zomato will be the largest beneficiary in the listed space, while Marico and Hindustan Unilever face substantial risks as their distribution advantage erodes. We forecast Blinkit will achieve adjusted Ebitda and net profit positivity by FY25, contributing up to 34 per cent of our FY26 EPS for Zomato," CLSA said.
Modern retailers usually buy products from staple companies at a 22-25 per cent discount to maximum retail price (MRP). But the successful retailers such as Avenue Supermarts Ltd (DMart) can work with lower 14-15 per cent gross margins, allowing them to pass on the discounts to customers and win share.
In the case of general trade channel, the various parts of the value chain combine to take 19- 33 per cent of MRP as margins. However, because these margins are shared among multiple players, the ability to undercut is limited, CLSA said.
"As a result, the maximum retail price determined by the consumer companies is more sacrosanct, allowing them more control over pricing. While quick commerce is currently margin accretive for consumer companies with a 20-22 per cent discount, they too have the ability to pass savings to the consumer, effectively taking away some pricing control from FMCG companies," CLSA said.
Marico CLSA said Marico has built its fast-moving consumer goods (FMCG) business on its strong hair oil (Parachute) and edible oil (Saffola) brands. It expects Parachute to stay dominant in its category, but think incremental growth will be challenging given competition from quick commerce (QC), modern trade (MT) and private brands.
"Saffola has been losing ground and we expect QC to intensify the pressure. We raise our margin assumptions to reflect changes in commodity costs, increasing earnings by 3-4 per cent and our target price from Rs 460 to Rs 470, but retain our Underperform," it said.
Hindustan Unilever Hindustan Unilever (HUL) has been the dominant fast-moving consumer goods (FMCG) company in India across several categories, with the most extensive distribution network and the widest array of products. As quick commerce (QC) rapidly scales, CLSA believes smaller competitors are bridging its urban distribution moat by either undercutting HUL on price or offering QC operators greater margins, or both.
"We believe this will negatively affect HUL’s working capital and gross margins in the medium term and retain our Underperform rating. While HUL’s 55 times FY26 multiple has contracted compared to its five-year history, it remains well above the 10-year average. We believe this long-term premium does not factor in increasing challenges to HUL’s dominance," CLSA said while suggesting a target of Rs 2,161 on the stock.
Zomato CLSA said Blinkit is a key ingredient in Zomato’s recipe for growth. It sees Blinkit contributing 65 per cent of the DCF portion of Zomato’s valuation, which incorporates Blinkit’s stellar climb towards 64 per cent of gross order value by FY30 by deepening its presence in existing cities and entering new cities. Blinkit should achieve 1.3 per cent market share in relevant categories, being among the largest food and grocery retailers nationally, it said.
"We raise our target price from Rs 350 to Rs 353 and cut our FY25-26 net profit estimates to reflect Zomato’s Paytm acquisition. Zomato is our top pick in India consumer due to its rapid growth and Blinkit’s market share," it said.