Building Grocery stores might turn Poison Pill for Zomato

Building Grocery stores might turn Poison Pill for Zomato

Market Outlook
by Shreya Anaokar Last Updated: 2022-06-13T15:52:10+05:30

On June 17, Zomato is likely to sign off on the Blinkit acquisition. Many investors of Zomato are looking toward Zomato’s strategy to acquire Blinkit while others question the merit of entering into the Grocery (hyperlocal) business.

Before diving into the details, there are possibilities that Zomato’s grocery business might turn into a “poison pill” for Zomato. It would need reasonably high investment and hence cash burn and is likely to be a significant logistical challenge to execute as well, but still, Zomato can’t afford not to do it. The more important question is, what would be the ideal market positioning for Zomato’s grocery business to effectively compete with Swiggy, Dunzo, Zepto, Amazon, etc. 

The bulk of Swiggy Instamart (grocery) customers are existing Food Delivery customers. Being on the same app offers much-needed ease of use for both Food Delivery and Grocery customers. In particular, for loyalty programs like Zomato Pro and Swiggy One, merging Food Delivery and grocery orders provides significant savings to the customer and drive stickiness and loyalty. Going forward as the share of organic customers of Instamart grows, they are more likely to target Food Delivery customers as well for Swiggy, thereby hurting Zomato’s core Food Delivery business. 

Consequently, Zomato has to build its Grocery capabilities quickly and has to merge the apps effectively to leverage its customer base for grocery. Running it separately is unlikely to create much value as customer acquisition costs will be high for Blinkit, with inferior customer stickiness.

On one extreme is Quick-commerce (10-15-minute delivery), with highly constrained 1-2k Store Keeping Units, and on the other extreme is a full kitchen offering (delivery next day) with 25-30K Store Keeping Units. The former is “instinctive” purchases, while the latter is planned.

Theoretically, instinctive purchases are less discount-driven and more need-driven, while planned are more discount- and assortment-driven. Somewhere in the middle are 4-5K Store Keeping Units, cater to both ends with certain benefits and compromises for both instinctive buyers and planned buyers. Zomato has to attempt to build its grocery business closer to the middle of this framework and leverage technology to design and manage its dark stores where a large warehouse that can either be used to facilitate a "click-and-collect" service, so as to offer 4-5K Store Keeping Units with 10-60 minute delivery turnaround time.

Cross-selling to Zomato’s customer base, integrating the tech stack, and building fulfillment infrastructure are top priorities for Zomato to build a successful grocery business.

There are broadly three horizons of the Grocery delivery business. On one extreme is Quick-commerce (10-15-minute delivery), with highly constrained Store Keeping Units (1-2K), and on the other extreme is a full kitchen offering (delivery next day) with 25-30K Store Keeping Units.

Key variables which drive the offering are the Number of dark stores, the Size of dark stores, inventory and picking space and other operational costs, the Frequency of replenishment for each Dark store, and  Delivery cost, which varies as well based on the size and timing of the order.

Zomato has to attempt to build its grocery business closer to the middle of this framework and leverage technology to design and manage its dark stores so as to offer 4-5K Store Keeping Units with a 10-60 minute delivery turnaround time.

Historically, operational synergies were key to building hyperlocal business for Food Delivery players (to improve rider utilization). However, due to the industry pivot towards Quick-commerce, operational synergies are tough to realize in the near term and the focus is to leverage the client base and capture the big grocery total addressable market.

 

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About the Author

Shreya Anaokar is a Content Writer at 5paisa. She has completed her Master’s in Finance and Graduation in Statistics from the University of Mumbai. 

Disclaimer

Investment/Trading is subject to market risk, past performance doesn’t guarantee future performance. The risk of trading/investment loss in securities markets can be substantial. Also, the above report is compiled from data available on public platforms.

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