While some see it as a move to distract investors away from arch-rival Swiggy’s $1.25-billion IPO scheduled for mid-November, others fear an escalation of cash burn in the quick-commerce space, hurting unit economics, with Zepto too looking to raise fresh capital despite scooping up $1 billion over the past four months.
The slug of capital that will be needed to sustain growth in the high-burn quick commerce sector is resembling the trajectory of ecommerce a decade ago, especially as Zomato’s Blinkit, Swiggy’s Instamart and Zepto diversify into categories like fashion and electronics, said an investor who has been tracking consumer internet companies.
“This (Zomato’s potential QIP) impacts everyone as the signalling is that there will be an incoming price war in the overall quick commerce sector,” the person said.
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Zomato on Thursday announced in a stock exchange filing that the food and grocery delivery company is looking to raise fresh funds through a QIP.
People in the know said Zomato wants to strengthen its balance sheet with this fundraise and will aim to mop up upwards of $400-500 million through the QIP, if its board approves the proposal on October 22.
“The QIP announcement may hurt the IPO pricing for Swiggy which is yet to be decided,” another person in the know said.
Karan Taurani, senior vice president at Mumbai-based investing bank Elara Capital, said Zomato may see a higher level of interest for its fundraise compared to Swiggy, because of its “track record of superior execution”. Zomato’s raising cash could be in response to its rivals’ fundraise as well as increased competitive intensity, he said.
“We believe that the real reason for Zomato raising cash could be threefold–one, taking advantage of the high level of interest in the quick commerce segment, due to big cash infusion multiple times for competitors in the recent past…two, (they) have a much higher cash balance versus competitors as Zomato is the market leader in both segments (food and quick commerce segment), and, three, increased competitive intensity due to large ecommerce giants coming into quick commerce,” Taurani said.
Zomato’s stock fell 4.9% to close at Rs 257.40 on the BSE on Friday.
“There will be question marks on Blinkit which has been close to hitting profitability,” said the investor cited above.
Analysts and industry executives who have followed Zomato’s success in the public markets after its listing, however, said the company was rewarded for turning around and clocking profits and, hence, it will steer clear of opting for a price war.
“We’re in our silent period at the moment and are unable to respond to your query,” a Zomato spokesperson said in response to an email query.
Flush with funds
But the competition in quick commerce is increasing, and all the players have deep pockets.
“Quick commerce is not a two or three player market any more… In a few months, it will turn into a seven-player market,” a senior executive at a quick commerce firm said. “While there will be leaders in local pockets, it won’t end up being a winner-takes-all market because everyone is playing with deep pockets.”
ET reported on October 18 that Zepto has held talks to raise $100-150 million in a top-up round from domestic family offices and high net-worth individuals at a valuation of $4.6 billion.
Besides the top three players, Tata Digital-backed BigBasket is also putting its weight behind quick commerce, having pivoted fully to rapid deliveries. Walmart-owned Flipkart entered the space in August with the launch of Minutes while Reliance Retail’s JioMart has once again started offering quick commerce services in a few areas of Mumbai, after multiple failed attempts. Ecommerce giant Amazon is also learnt to be chalking out plans to foray into this space.
ET reported on October 9 that beauty and fashion retailer Nykaa was also amping up its quick commerce play.
The quick commerce market is projected to grow from $3.8 billion in FY24 to $78 billion by FY34, according to a CLSA report.
Zomato’s consolidated revenue for the April-June period increased 74% year on year to Rs 4,206 crore, while it reported net profit of Rs 253 crore. Blinkit contributes about a fifth to the company’s adjusted revenue.
In the company’s June quarter earnings, Blinkit CEO Albinder Dhindsa had played down the impact of its competitors’ high spending on “marketing and subsidies”.
However, industry executives and analysts believe the pressure is getting to Blinkit, which currently holds 35-40% market share, according to various estimates.
“Until a few months ago, Blinkit gave very few free deliveries to its customers…but now that is changing as it looks for incremental growth and enters the markets that are Swiggy’s or Zepto’s strongholds,” a person tracking the company said.
“If you look at the way Zepto has been raising capital, and Swiggy’s IPO, the idea (behind Zomato’s QIP) may be to shore up your defences in the quick commerce battle that’s coming up. The economics are in place but it doesn’t hurt to be a shark and go after the market,” said Abhishek Pathak, internet and IT sector research analyst at brokerage firm Motilal Oswal.
“At this point, investors believe that the quick commerce model can make money…every dark store having upwards of 1,000-1,200 orders a day is certainly profitable. But the picture becomes completely different if the company is communicating that I can turn profitable tomorrow, but I’m here chasing a GOV of $20 billion and not $2 billion. The model works so why not chase growth. The economics is fairly priced in at this point,” Pathak added.
During the April-June period, Swiggy Instamart’s adjusted Ebitda loss came in at Rs 318 crore, compared to Rs 312 crore in the same period last year. In its draft prospectus, Bengaluru-based Swiggy said it would deploy the bulk of its IPO proceeds – or, nearly Rs 982 crore – towards investment into expanding quick commerce operations.
Meanwhile, Blinkit’s adjusted Ebitda loss in the June quarter was Rs 3 crore – a significant improvement from Rs 133 crore in April-June 2023 period.