Daybreak - Is Zomato declaring war in the quick commerce space?

Episode Date: October 28, 2024

Zomato planning to raise 8,500 crore rupees again. This comes just three years after its grand IPO where it had raised almost the same amount. The company's stock prices have doubled in the last ten months. Interestingly, this fundraise is going to be through a qualified investment placement or QIP when a listed company raises capital from domestic markets without the need to submit any pre-issue filings to market regulators. Only qualified institutional investors are allowed to participate in this kind of a fundraise. All this just as rival Swiggy is prepping for its IPO. And the quick-commerce trio—Blinkit, Instamart, and Zepto are gearing up to expand beyond the metros and into smaller cities. Plus new, deep-pocketed companies like Reliance Retail and Flipkart are also joining into the race. In a letter to shareholders, founder and CEO Deepinder Goyal wrote that the fundraise is intended to ensure a “level playing field with competitors who continue to raise additional capital” and to “strengthen its balance sheet”. There was no mention of how the funds would be used.At first, this seems like Zomato declaring war in the quick-commerce space. Some analysts believe it could be a move to show the market that it has a balance sheet that is the “strongest of all.But is that all there is to it?Daybreak is now on WhatsApp at [phone]. Text us and tell us what you thought of the episode!Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Ramon Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Things have been going pretty well for Zomato lately. Its stock prices have more than doubled in the last 10 months. But it's planning to raise another billion dollars. And this comes just three years after its grand IPO where it raised almost the same amount.

Things, however, are a little bit different this time around. You see, as of now, global investors own more than half of the company. But interestingly, this fundraise is going to be through a qualified investment placement or QIP. QIP is essentially when a listed company raises capital from the domestic market without the need to submit any pre-issue filings to the market regulators. Only qualified institutional investors are allowed to participate in this kind of a fundraise. And the reason why we are talking about this today is because of the timing of this decision.

It is happening just as rival Swiggy is preparing for its IPO. And the quick commerce trio, Blinket, Instamart and Zepto are gearing up to expand beyond the metro cities into smaller towns. Plus, new deep-pocketed companies like Reliance Retail and Flipcott are also joining the race. In a letter to shareholders, founder and CEO Dipinder Goel wrote that the fund race is intended to ensure a level playing field with competitors who continue to raise additional capital and also to strengthen its balance sheet. There was no mention of how the funds are going to be.

used though. At first, this seems like Zomato is declaring war in the quick commerce space. Some analysts also believe that it could be a move to show the market that it has a balance sheet that is the strongest of all. But is that all there is to it? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Das Sharma, and I don't chase the new cycle. Instead, every day of the week, my colleague Rahad Philippos and I will come to you with one business story. That is worth understanding and worth your time. Today is Monday, the 28th of October.

In India, e-commerce regulations do not allow companies with more than 49% foreign ownership to legally own their own inventory. This rule was designed to protect small retailers. And this is why foreign-owned e-commerce companies have to operate under a marketplace model. So to pave the way for switching to an inventory-led model, these companies need to change their shareholding patterns, which will ultimately help them insulate their businesses from future regulatory risks. You see, a national association of 4,000 FMCG distributors has already complained twice to the

Competition Commission of India about quick commerce companies. The latest one was about undercutting their business by offering high discounts. And the last time was also just a few months ago, and it was because, and I'm quoting from their letter, these companies, meaning quick commerce companies, exercise significant control over their inventory, which directly violates the law both in letter and in spirit. The question is whether convenience and technology can be used as an excuse to dismantle the traditional retail sector. End quote. The CCI has already ordered a probe into the matter.

So it makes sense. These companies should ideally secure 51% domestic shareholding. Now, Zomato's shareholding table tells a part of the story. Like I told you earlier, currently foreign institutional investors own about 52% of Zomato. Two years ago, this was 58%. Meanwhile, domestic institutional ownership has climbed to 17%. Two years ago, it was just a little over 6%. Now, just for your information, Reliance, which we know loves coming in and disrupting the market,

owns its inventory and retails private label products at Geomot because its ownership is predominantly Indian. Ankosh Agarwal, the founder of Surge Capital, which is an equity research firm, told the Ken's reporter Akriti Bhala that a franchisee store may technically own the inventory, but quick commerce companies often m entail full control since the inventory is stored in their warehouses, which allows them full logistics control from end to end. But in the recent analyst call, Depender Goel did say that owning the inventory has its pros and cons and that the marketplace model works well for the company, its sellers and also its customers. He said that the company will continue to evaluate its business model as the quick commerce sector evolves.

But here's the thing. It's not just the matter. Most of Zepto and Swiggy's investors are also foreign. More on this in the next segment. Stay tuned. You know, this excitement surrounding Quick Commerce is very similar to the frenzy around e-commerce back in the 2010s. But there are some key differences.

After 2019, when e-commerce regulations played spoilspot, for example, Amazon has had. had to shatter its largest sellers, Opario retail and also cloud tail. But quick commerce companies are not pushing legal boundaries in the same way. In fact, they are playing by the book and showing early signs of viability, which is something that has eluded e-commerce for years. Blinket is close to breaking even, while Instamot has been narrowing its losses sequentially. And for Zomato, while the financials are looking good lately,

it still needs another growth engine, and for that, Blinket still has a lot of room. Ankhutkanodia, the founder of an investment advisory, told the Ken that if they don't expand quick commerce beyond top eight or ten cities, the business will plateau-like food delivery. Even opening a dark store affects profitability in the short term, as seen with Blinket due to the costs of setting up warehouses. In the analyst's call, it was no one. that there would be a margin pressure for a few quarters because of fixed costs from dark store expansion. Blinket will continue to open both company-owned and franchisee-owned dock stores depending on the availability of franchisee partners. According to Karin Thore

Taorani of Illara Securities, the cost of opening a dark store ranges from 80-lack to 1-crow If Blinket opens all the remaining duct stores without franchisee investment, total costs could reach anything between 1,000 to 1,200 crore rupees, plus additional expenses for high-cost inventories like smartphones and gold coins. But the quick commerce segment is attracting money from all directions. We are in a time where fashion platforms like Mintra and Numi are also dabbling with quick deliveries. But Zumato's fundraise near Swiggy's IPO could further deepen the quick commerce market as investors doubled down on the segment. But this move could also impact Swiggy's valuations.

Plus, Swiggy's investment bankers will have to make sure its pricing is even more appealing relative to Zomato's. So from the perspective of a market leader, Zomato is raising capital again because, well, it can. And of course, it is also future-proofing its business. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories,

newsletters and podcast extras. To subscribe, head to the Ken.com and click on the red subscribe button on top of the Ken website. Today's episode was hosted by Sinika Sharma and edited by Rajiv CN.