Zomato-Blinkit deal: the high cost of instant gratification

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Zomato Ltd. finally announced the acquisition of Blink Commerce (Blinkit), formerly known as Grofers India. But investors are visibly unhappy; Shares of Zomato fell nearly 6% on Monday, a day when the benchmark Nifty50 index rose about 1%.

Expensive valuations paid to buy the fast-trading company, uncertainty over unit economics and fiercely competitive operating conditions are some of the factors unsettling investors.

Kotak Institutional Equities believes that Zomato is making a fairly large investment in a business where investments may still increase due to competitive intensity. “Zomato’s investment in Blinkit will be $1.05 billion, comprising: $100 million (paid August 2021), $700 million (announced June 2022; subject to approvals) and $250 million million to invest in fiscal year 2023-24,” the analysts said. in a June 26 report.

The $250 million mentioned above is part of the $400 million that Zomato had earmarked for its growth plans for rapid commerce businesses in calendar years 2022 and 2023. According to Zomato, most of this capital will go towards fund Blinkit’s losses over the remainder of the next two years. Note that Zomato has already awarded $150 million ( 1,125 crore) as debt to Blinkit.

The current deal includes the purchase of Hands On Trades’ warehousing and ancillary services business. Zomato already owned 9% of Blink Commerce and 8.4% of Hands On Trades. Although the deal with Blinkit was expected, the acquisition of a loss-making company at a time when Zomato is also suffering massive losses adds to the uncertainty. In FY22, Zomato recorded a consolidated net loss of 1,220.5 crores.

Blinkit operates in the quick trade market by delivering groceries and other essentials instantly (say 15-20 minutes) compared to the traditional “next day delivery” grocery model. With consumers becoming more convenience-oriented, the industry has become highly competitive.

In a report titled, Blinkit Acquisition: Some Knowns & a Lot of Unknowns, analysts at Jefferies India said, “Blinkit is in a high-growth space, but the business model, at least for now, is tougher than the food delivery given high competition, lower underwriting rates, presence of strong consumer packaged goods brands, etc. Blinkit itself is tweaking the business model and has closed around 12% of dark stores in the past five months. »

Quick trade companies set up “dark stores”, strategically located close to the customer and collect a specific set of frequently ordered storage units. In May 2022, Blinkit’s dark store count was around 400 and it reported an Adjusted EBITDA loss of 108 crore, less than 204 crore seen in January 2022.

Zomato believes that overall profitability will also depend on how aggressively it expands and opens new dark stores. “It is possible that this company will break even at Adjusted Ebitda (earnings before interest, taxes, depreciation and amortization) in less than three years,” he said. However, by Zomato’s admission, “this is an educated guess at this point and not guidance.” Some analysts are skeptical of this assessment.

After this agreement, the Blinkit app and brand will operate separately from Zomato. The company believes that “super brands” will work better in India than “super apps”. While this acquisition would allow for cross-selling opportunities, customer acquisition costs would be higher compared to Swiggy, which operates Instamart, its fast-commerce vertical.

There are a few bright spots. The acquisition would result in better utilization of the delivery fleet and lower delivery costs. Additionally, Blinkit’s average order value (AOV) in May was 509 vis-à-vis Zomato’s 398 in FY22. Blinkit’s higher AOV could possibly help increase Zomato’s GOV.

Even so, the road to profitability is stretched. JM Financial Institutional Securities analysts expect Blinkit to only become profitable by FY27 due to limited financial and operating data, nascent operating history, and intense competitive intensity. “We believe that Zomato Group’s path to profitability (post-acquisition) can be extended by at least one year (from FY25 to FY26),” JM analysts said in a report. of June 26.

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