Food delivery platform Zomato expects its quick commerce app Blinkit to present a larger opportunity for profit going ahead, compared to its core food delivery business, as its third-largest segment shows encouraging signs of profitable growth.
“We are now seeing profitable economics not just at a store level but also at a city level – where some of our cities are now operating at similar contribution per order as the food delivery business in those cities. So even from a potential profit pool perspective, we think quick commerce is a larger opportunity than food delivery,” the company had said in its shareholder letter.
Zomato had acquired Blinkit (formerly Grofers) in August last year for Rs 4,447 crore and since then, has seen a steady growth in its gross order value every quarter. The company noted that in some cities, where both the food delivery business and Blinkit are operational, the latter’s gross order value is more than the core business.
“At this pace, where Blinkit’s gross order value (GOV) is growing at over 80% yoy, we wouldn’t be surprised if Blinkit’s GOV becomes multiple times larger than Zomato’s GOV in overlapping cities, which will more than compensate for the wider geographical footprint of Zomato,” the company said.
To maintain this growth in orders, the company is adding 100 more dark stores by the end of this financial year, particularly in areas where demand is more than the capacity of the servicing dark stores. The company is confident that the new stores will not impact segment margins negatively.
“Even if the aggregate margin falls as an outcome, we would not worry about that because the underlying business is solid and the fall in margin is then more a function of rapid good quality expansion in the business,” the company said in the letter.
Zomato expects Blinkit to achieve break-even by Q1 of FY25. In Q2, Blinkit’s contribution margin turned positive for the first time at 1.3%, mainly because of stronger volumes and better efficiency at its dark stores, analysts noted.
Blinkit’s growth has also encouraged many analysts to increase the price target on Zomato’s stock and hike the company’s overall profit and sales estimates. “Strong recovery in Q2 and improving metrics in food delivery business as well as quick commerce has led to increasing our overall revenue estimates by ~13% for FY24E/FY25E,” analysts with Dolat Capital said in a note.
However, while Blinkit’s growth has been evident over the past quarters, its competition is also getting stronger, with rivals such as Swiggy’s Instamart and Zepto. “We note that competitive intensity has slightly slowed in quick commerce, with funding concerns emerging in Dunzo, leaving four well-funded players in the market now (Blinkit, Swiggy, BigBasket and Zepto),” Nomura analysts said in a note.
