Is quick commerce for real? Investors question Zomato’s foray into it with Blinkit

Investors are highly sceptical of the quick commerce model and are concerned about the competition that Zomato-owned Blinkit would face from the likes of Amazon, Flipkart and Reliance Retail, brokerage firm Jefferies said. 

“We recently hosted Deepinder Goyal, Founder (of Zomato) and Akshant Goyal, CFO for investor meetings in the US. Investors are generally convinced on the food delivery moat and the discussion was mainly around the unit economics. However, skepticism is high on quick commerce (Q/C), given no proof of concept yet in any large market in the world,” a note from Jefferies read. 

Zomato’s management is bullish on the quick commerce business and sees Blinkit as a large driver of growth and profitability going forward, it said. 

The food delivery giant officially announced the acquisition of grocery-delivery start-up Blinkit in June. The Rs 4,447 crore all-stock deal is expected to power Zomato’s quick commerce play where its rival Swiggy has taken huge strides in building out a large business vertical. 

“Quick commerce has been our stated strategic priority since the last one year,” Zomato’s founder and CEO Deepinder Goyal said in a blog post announcing the deal. He says quick commerce’s close synergies with Zomato’s core food business give the company the right to win in the long term. 

“A lot of investors expressed a fundamental question on Blinkit’s existence, with comments like ‘why someone wants grocery delivery in 10-min?’. In the event of success, there is concern on competition from Amazon, Flipkart & Reliance Retail. Management is confident on the opportunity and, in fact, sees a possibility of Q/C becoming bigger than food delivery in the long term,” the brokerage firm said. 

As per Jefferies, Zomato indicated that several of Blinkit’s dark stores are at contribution break-even and more are likely to reach there over the next year. In Jul, overall contribution loss was 10 per cent of Gross order value (GOV), with adjusted EBITDA loss at Rs 0.9 billion (19 per cent of GOV). Jefferies believe the margin upside will arrive from better mix of categories (such as beauty and personal care, pharma etc.) and ad revenues.

Zomato management is confident that quick commerce’s long-term margin will converge with foodtech. For FY23-24, Zomato’s total investment (including loss) for Blinkit should be at $320 million including $150m pre-acquisition loan, the note said, adding that the average order value for Blinkit has been at Rs 580 in first quarter. 

There was a general acceptance among investors for food delivery’s growth potential given the concept is well accepted across markets, though some questions were raised around the pace of growth, cultural aspects, availability of labour and women workforce participation. In fact, the note said investors have been positively surprised with the accelerated path to profitability recently. “We get a sense that investors still are not fully convinced on the breakeven guidance by Mar-Sep’23. In this context, the meeting of target itself could be a positive surprise. Also, contribution margin should steadily rise from 2.8 per cnet in 1QFY23 led by higher restaurant take-rates (readjusting older contracts), ad revenues, higher customer take rate, delivery efficiency etc,” it read. 
 

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