Swiggy Finally Turns Profitable
Most digital companies take a long time to achieve growth in sales. Then they take longer to achieve operating profits. Only after that comes the bottom line or net profits. That is something hardly too many of the digital plays in India have seen first-hand. It is, hence, great news when a highly valued digital play turns profitable and promises to sustain profits through reduced cash burn. That is what Swiggy has done.
How Swiggy turned profitable in March 2023 quarter
Swiggy has finally turned profitable as of March 2023 and that is good news for the so-called food-tech platforms. For long, they have struggled with rising costs, cash burn, volatile sales, huge discounts, and valuation uncertainty. Swiggy may have just shown the way how to swing back to profits from years of persistent losses. The founder of Swiggy, Sriharsha Majety, attributed the performance to Swiggy’s sharp focus on innovation and extremely robust execution. Of course, this profitability factors in all corporate costs, but excludes the employee stock options costs. That is understandable since it would still take a long time to be able to foot that bill for these companies.
Swiggy has also announced that it had made strong progress on the profitability of its quick-commerce business (Instamart) too. In fact, Instamart is all set to hit contribution neutrality in just 3 years, which is another term for being able to cover the core delivery costs. It may be recollected that Swiggy had forayed into the food delivery ecosystem in 2014 and operate out of their headquarters in Hyderabad. Today, the entire online foodtech industry is dominated by just two players viz, Swiggy and Zomato. While the latter is listed on the bourses, the former is yet to be listed.
Making some inorganic leaps
Just last year, Swiggy acquired Dineout, and as of today Dineout is the leader in the dining out category. It has over 21,000 restaurant partners across 34 cities and almost acts like a dual brand in the business. In this space, it often makes more sense to buy out niche players rather than try and create things from scratch. While Swiggy created Instamart from scratch for its quick commerce venture, it opted to buy dine-out for its eating out venture. As Majety has been saying for some time, Swiggy is providing a big push to the quick commerce Instamart business and that appears to have paid off successfully. While Swiggy has sunk in disproportionately high investments into Instamart, it continues to remain bullish on the quick commerce business. Instamart, within just 3 years has touched contribution neutrality and that is great news for the company.
Scratching deeper in the food market
In India, food consumption still remains a massive industry and only the surface may have been scratched till now. Food consumption in India is currently estimated at over $600 billion but the big opportunity could lie in bring more of the unorganized segment in the food chain into the online digital platform. That is just about happening, but cloud kitchens could be the way ahead. Ironically, Swiggy must be celebrating this event for one more reason as it comes just few days after their valuation downgrade.
Interestingly, the US-based fund house, Invesco, had slashed Swiggy’s valuation from $8.2 billion to $5.5 billion. Of course, these are not official investing estimate but more for internal purposes to give a fairer view to their own shareholders. For instance, Byju’s still is able to raise funds at 3 times the revised valuations post the write-down. So, the write down may not mean much. However, it would be a double celebration for the top management of Swiggy. It has not been all roses and, like other digital players, even Swiggy had laid off 380 employees due to slowdown in growth of its food delivery business. But that was par for the course in a tough market and the profit break-even is good news in that backdrop.
To an extent, the likes of Swiggy were fortunate that the digital funding crisis struck in 2021 and that forced them to tighten their belts. It was clear that the days of unlimited funding at fancy valuations was over. Swiggy was among the first to cut down on cash burn without cutting down on investments in verticals like Instamart. That is now paying off. Today, for any start-up, and Swiggy is no exception it is imperative to re-look at their cash burn and employee costs. The current funding winter has made it harder for companies to raise fresh investments and deal volume in India have been shrinking rapidly. It is good that Majety and team have made the best of the crisis and put their house in order. Turning profitable, of course, is only the first step. The bigger challenge will be to stay profitable on a sustained basis.
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