The much-awaited acquisition of quick commerce (qCommerce) start-up Blinkit by Zomato was eventually announced last week, which saw the former lose around 40% of its valuation. Blinkit has been playing catch-up with its bigger rival BigBasket for some time now. After operating as a grocery marketplace for nearly three years until 2017 — the business model involved aggregation of inventory directly from stores and supermarkets — Blinkit pivoted towards an inventory-led play and scaled down its marketplace operations after careful planning.
In contrast, BigBasket adopted a full-fledged inventory-led model prior to Blinkit, and by 2018 it even claimed to have doubled its margins to reach 18% per order, according to a media report. Blinkit’s pivot towards a larger inventory model did not start until a funding crunch hit the grocery segment. In 2016, the company, formerly called Grofers, had to shut down operations in nine cities to conserve cash. By 2018, it started to invest heavily in its private labels and warehouses, which eventually helped improve economics and enabled it to raise more funding from existing investors like SoftBank. By 2021, Blinkit began moving towards a more structured pivot into the qCommerce space.
However, between the last funding round in June 2021 and the acquisition this month, qCommerce start-ups witnessed multiple hiccups and drawdowns in their execution. Although there is a large enough total addressable market (TAM) for q-commerce, it is still unclear as to whether there is a market opportunity for all major players to co-exist. Moreover, it is becoming increasingly clear that consumers wouldn’t try out qCommerce without discounts or subsidised delivery charges, which according to analysts raised huge questions marks on the sustainability of the model.
“In a consumer survey we did recently, we found that about 80% of the consumers who actually used quick commerce were only triggered by the zero delivery offers or due to steep discounts using vouchers and card and bank offers. Given this consumer behaviour, it’s going to be difficult for a business model to survive for long in the Indian context,” said Viswanath P, strategy and transformation specialist at Grant Thornton.
According to Zomato’s shareholder’s letter, as of May, Blinkit had an average order value (AoV) of around `509 across 7.9 million orders. The average customer frequency stood at around 3.50 per month. Despite this, Blinkit reported a loss of around `66.1 crore in May 2022 over revenues of `58 crore. But Deepinder Goyal, CEO and co-founder and Zomato said in the shareholder’s letter that he expects AOVs in quick commerce to be higher than food delivery in near future. He also pointed out other opportunities where Blinkit could monetise better.“…I would argue that ad sales revenue in quick commerce would be higher than food delivery, given the much larger digital ad spend budgets of consumer packaged goods (CPG) brands. And thirdly, the last-mile delivery cost will be lower than food delivery given the shorter delivery time, leading to a higher number of orders delivered per hour,” Goyal said.
However, Zomato’s bet on maintaining shorter delivery times to keep down delivery costs has irked a few analysts, who point out that even a small deviation from the 10-15 minute delivery promise would hurt unit economics considerably. An average delivery person typically expects to earn anywhere from `500-700 a day from platform work, and to sustain that kind of earnings he or she should be doing at least 50 deliveries a day, according to Viswanath of Grant Thornton.
“Managing delivery costs is very critical in making this model viable. A delivery partner expects a minimum earning of `500-700 / day. If he manages to make 40 deliveries the cost per delivery comes to around `13-17. On a percentage basis this itself account for ~40% of the margin earned by quick commerce players on a typical `300 ticket purchase,” Viswanath said. Another concern pointed out by analysts is Zomato’s dependence on ad revenue to supplement Blinkit’s overall income.
Aditya Kondawar, partner & vice president, Complete Circle Capital, said the promise of ad monetisation as a supplementary revenue could diminish if Blinkit loses any active or (transacting) customer base which currently stands just around 2.3 million as of May. “If Zomato or Blinkit decrease their discounts and subsidies for users in the near future, it is likely that user funnel gets impacted, and then it will obviously impact the ad revenue. Ad publishers usually look at demand, frequency, and other user metrics to bid for ads, and hence Zomato must ensure that Blinkit does not lose significant active user base,” he added.