Food & Grocery Startups: Profits or Valuation Games?

Swiggy’s Revenue Jumps, Losses Narrow: A Mixed Bag for Hyperlocal Delivery Startups

Swiggy’s operating revenue surged by 36% in FY24, marking a significant milestone for the food and grocery delivery giant. The company reported losses of Rs 2,350.24 crore for the financial year ended March 2024, a 44% reduction compared to the previous year. Despite these improvements, the challenges faced by hyperlocal delivery startups remain daunting. In stark contrast, Flipkart’s valuation saw a $5 billion drop over two years, highlighting the volatile nature of the e-commerce landscape. Meanwhile, Zepto’s FY24 financials revealed expenditures of Rs 5,747 crore against revenues of Rs 4,454 crore, underscoring the struggle for profitability in the quick-commerce sector.

Grocery Startups: Profits or Valuation Games?

The rapid growth of urban populations has fueled the popularity of 10-minute delivery apps like Zepto, Blinkit, and Swiggy Instamart. However, despite their convenience, these startups face mounting losses. Industry experts suggest that their focus is less on profitability and more on achieving high valuations.

Mr. Praveen Khandelwal, National President of the Confederation of All India Traders (CAIT), told TICE News, “Most hyperlocal delivery apps are incurring losses due to high operational costs. Their primary aim is to attract customer footfall and not lose market share to competitors. This valuation-driven strategy often leaves profitability sidelined.”

Echoing similar sentiments, Mr. Ashish Jain, CEO of The Startup Board, highlighted the financial challenges these startups face. “Costs associated with warehouses, logistics, and technology make it difficult for hyperlocal delivery startups to break even,” he noted.

Unit Economics: The Achilles’ Heel

A closer look at the unit economics reveals the financial hurdles:

• Delivery Costs: Maintaining a large fleet of delivery agents and warehouses adds significantly to operational costs.
• Discounting: Aggressive pricing strategies to attract customers erode margins.
• Low Average Order Value: Grocery orders typically have lower ticket sizes, making profitability elusive.
• High Operational Costs: Expenses include utilities, rent, technology, and labor, which collectively weigh on the bottom line.

For instance, a single warehouse’s monthly operational cost is approximately Rs 75,000. To break even, it needs to handle at least 80 orders per day, a target many startups are yet to achieve.

The Data Behind the Struggles

While startups like Blinkit and Dunzo have achieved rapid growth, their financials paint a grim picture:

• Blinkit’s gross merchandise value (GMV) declined by 4% to Rs 2,616 crore in FY22, with losses surging 2.58X to Rs 1,440 crore.
• Dunzo’s losses doubled to over Rs 460 crore in FY22, even as revenue from operations grew 2X to Rs 54.3 crore.
• Zomato’s Q3 FY23 losses widened to Rs 346.6 crore, though revenue increased by 75% to Rs 1,948 crore.

Sustaining Losses: A Strategic Gamble?

Despite their financial struggles, these startups continue to attract investors due to their high valuations. As Mr. Khandelwal explained, “For these companies, the goal is not immediate profitability but sustained customer engagement to increase their GMV and, consequently, their valuation. This attracts investor interest even in loss-making ventures.”

Mr. Jain elaborated, “The current model is viable only if startups can endure losses long enough to achieve scale and profitability across their operations. Regular delivery models with larger order sizes offer a more sustainable path compared to instant deliveries.”

Are E-Grocery Startups Meeting the Same Fate as Supermarkets?

The parallels between today’s hyperlocal delivery apps and yesterday’s supermarket chains are stark. Both faced high operational costs and relied on discounts to lure customers. However, supermarkets eventually succumbed to unsustainable losses, a fate that experts warn could befall e-grocery startups unless they shift their focus to sustainable business practices.

A Call for Regulation

Industry leaders like Mr. Khandelwal have called for stronger government policies to regulate the hyperlocal delivery sector. “The government must ensure transparency and feasibility in these businesses. Unchecked promises and unrealistic operational goals can destabilize the market,” he stated.

A Glimpse Into the Future

Syed Anwar, founder of Swift Delivery, offers a contrarian perspective. “Many startups manipulate financial projections to inflate their valuations. This approach is unsustainable. A business should aim for at least 3-5% profitability from the outset. At Swift Delivery, we’re committed to demonstrating a sustainable model,” he asserted.

The road ahead for hyperlocal delivery startups remains fraught with challenges. Whether they can pivot to sustainable practices or continue playing the valuation game will determine their survival in the ever-evolving e-commerce landscape.