Zomato is coughing up as much as ₹4,447 crore to acquire Blinkit (formerly Grofers) in a proposed all-stock deal as it eyes a pie of the quick commerce market, which analysts at Kotak Institutional Equities say has the potential to touch about ₹20,400 crore by FY2025 and ₹60,300 crore by FY2030.

The markets, though, are visibly unhappy — Zomato’s stock has shed over 13% through the last two trading sessions. The reasons are perhaps not unfathomable: for one, the quick commerce model is cash guzzling; lower AOVs (average order value) and high delivery costs make the unit economics unattractive.

Also, Blinkit is a loss-making startup — although the firm’s AOV is about ₹509, 28% higher than Zomato’s, Blinkit is still losing ₹84 per order. The company’s annualised cash burn stands at $165 million. “Blinkit’s loss per order is higher than our expectations, largely on account of lower throughput per dark store (613 orders per day per dark store). As Blinkit plans to restrict its presence to only 15 cities, we expect its scalability will be lower than food delivery,” analysts at Edelweiss said in a note.

Analysts at Kotak believe the investments made by Zomato in Blinkit are ‘fairly substantial’, more so given that investments can further increase due to competitive intensity. “We believe Blinkit will require investments beyond the $400 million envisaged by Zomato,” they say.

So, now the obvious question is: Why is Zomato acquiring Blinkit? Analysts say the Deepinder Goyal-led food delivery company is building a long-term play through the acquisition. “Revenue growth in food delivery is tapering out. How do you continue growing? Quick commerce opens up a new market as the grocery market is much larger than the food delivery market. Even if a company can get a small share, it will add to its revenues,” says an analyst who did not wish to be identified.

By Zomato’s own admission, quick commerce is poised to emerge as a significant channel of demand for customers in the long-term, at least in the top cities. “Grocery is the hook for quick commerce, but it is not just about grocery. Quick commerce extends across multiple categories, including beauty & personal care, electronics, OTC, Pharma, stationery, other gift items etc,” the firm said in its letter to shareholders, while announcing the deal last week. “I will not be surprised if Zomato goes on to acquire someone in the fresh meat and seafood space like a TenderCuts. As growth from food delivery slows down, companies like Zomato will look at other segments,” says the analyst.

Larger share of the consumer wallet

For Zomato, the Blinkit acquisition opens up avenues to get a larger share of the consumer wallet. “The probability of food delivery customers being open to quick commerce is high,” says Atit Danak, partner and head, CoNXT practice at Zinnov. Simply because the consumer profile is often similar: typically people with high disposable incomes, who do not mind paying extra charges for convenience subscribe to food delivery apps and the same goes for quick commerce. Even in neighbourhoods for that matter, food outlets and grocery shops are often located in close proximity. An integrated app with food and grocery segments embedded in it can also potentially exploit delivery synergies, says Rajat Tuli, partner at Kearney. In fact, Zomato plans to do the same. “Post the deal closure, we are going to start experimenting with various ideas that we have and see which all bear fruit, including having the Blinkit tab on the Zomato app,” the company says. Also, repeatability in case of groceries is high. When it comes to food delivery, people do not order every day of the week, says Amit Nawka, partner deals and India startup leader at PwC.

Better synergies in tough times

The delivery business in general is facing headwinds and consolidation may help navigate the crisis. “The economics of the business has fundamentally changed over the last six months — fuel prices have become more expensive and the scarcity of delivery personnel has driven up delivery costs. This is eventually translating into higher AOVs and customers are having to shell more,” says Danak.

Also, with cities opening up and traffic being back on the roads, the average delivery per person has reduced. What would have taken 10 minutes last year is now easily taking 15-17 minutes. In terms of quick commerce, the only way to stick to faster deliveries would mean establishment of more dark stores which entails capex.

“A Zomato and a Blinkit together have better odds of success than them going it alone, especially given the similarity of customer persona,” says Danak. (Delivery) Fleet utilisation will become efficient as delivery personnel can be deployed to service more orders across these two use cases. “For Zomato, retaining its delivery fleet will get easier as the company can commit a certain proportion of earnings to them,” says Danak. Higher fleet utilisation can reduce the delivery cost of the fleet by 5-10%, depending on the density of the orders and proportion of the benefits retained by the platform, analysts at Edelweiss say in a note. “Zomato is looking to achieve synergies from delivery fleet integration, which will increase order density and lower delivery cost per order,” they said.

Case in point: Swiggy model

That quick commerce and food delivery can together work better has been demonstrated by the Swiggy model already, says Danak. “In the case of Swiggy, as people started to eat out, orders for food started to reduce but the Instamart growth made sure they grew from a numbers perspective,” says Danak. Swiggy has been able to use its delivery fleet efficiently and redeploy the same for other requirements. “Swiggy’s integrated app helps to drive high user engagement and most importantly lowers the customer acquisition costs. As a result of higher SKUs (stock keeping units) and larger delivery area, Instamart has high fill rates, higher AOV and the delivery timeline is longer (35-40mins) than those of pure play quick commerce players,” say analysts.

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