Inside Zomato's Bold Plan to Take Over Quick Commerce: Will It Pay Off?

Why Zomato's Capital Raise is Important for Growth

Zomato recently announced that they plan to raise Rs 8,500 crore by selling more shares, and this caught the attention of many investors and analysts. However, raising such a significant amount of capital also comes with potential downsides, including concerns about share dilution and the financial strain of managing an expanded balance sheet. This move is important because it shows that Zomato wants to secure its market position and grow faster, even though they already have a lot of money in the bank. However, expanding too quickly also comes with risks, such as operational challenges, stretched resources, and the potential for investor concerns over unsustainable growth. At first, it might seem strange for a company that already has Rs 10,813 crore in cash to ask for more money. Why would they need more if they already have enough? The answer is that Zomato has a long-term plan that goes beyond just having cash on hand. In this article, we will look at why Zomato's decision to raise more money is a smart move for growing its business, staying ahead of competitors, and creating long-term value.

Expanding Opportunities in Quick Commerce

Figure 1: Growth in the number of Blinkit stores, currently totaling 526 stores as of Q4 FY24, with a plan to reach 1,000 stores by March 2025.

The main reason Zomato is raising this money is to grow its Quick Commerce (QC) business. Quick Commerce is a fast-growing part of the market where companies deliver groceries and other everyday items to customers very quickly, sometimes within minutes. More and more people want the convenience of fast deliveries, and this is what makes QC so attractive.

To grow in this area, Zomato has been building up Blinkit, its Quick Commerce arm. Blinkit, which was previously called Grofers, has been growing rapidly. Figure 1 shows that Blinkit currently has 526 stores as of Q4 FY24, and Zomato plans to expand this to 1,000 stores by March 2025. This kind of growth requires a lot of money for infrastructure, technology, and supply chain improvements. The extra money Zomato is raising will help them keep up this fast growth and stay ahead of their competitors. Quick Commerce is a very competitive field, and being the first to set up a reliable, widespread service gives a big advantage.

The additional money will help Zomato grow Blinkit in different ways, such as expanding into new locations, making deliveries faster, and improving the overall quality of service. In Quick Commerce, things like how quickly and reliably you deliver make all the difference. By improving these aspects and with the goal of expanding Blinkit's store count to 1,000 by March 2025, Zomato aims to win over more customers before its competitors do.

Zomato knows that succeeding in Quick Commerce isn’t just about opening more stores. It’s also about using smart technology to make the supply chain better and deliveries faster. Blinkit has been investing in technology like AI (artificial intelligence) to predict what products customers will need, optimize delivery routes, and make everything more efficient. This means customers get their deliveries on time, which makes them happier and more loyal. With the new money, Zomato can keep making Blinkit better, adding features that make it stand out from other services. This includes things like using local storage facilities for faster deliveries and offering personalized shopping experiences to make customers feel valued.

Economies of Scale and Profitability

Figure 2: Reduction in Blinkit's EBITDA losses from Rs 125 crore to Rs 8 crore over the last year.

Zomato’s plan is not just about getting bigger, but also about getting more efficient. Quick Commerce involves a lot of upfront costs, like warehouses, logistics, and technology. However, as Blinkit serves more and more orders, these costs get spread out over many deliveries, which means the cost per delivery goes down. This concept is called achieving economies of scale, and it’s key to making Quick Commerce profitable.

Right now, profit margins in Quick Commerce are very small, so getting more efficient is very important. Zomato has already shown some success in this. Blinkit’s financial performance has improved, showing positive adjusted EBITDA in March 2022 and aiming for a steady-state EBITDA margin of 4-5% as expansion continues, as shown in Figure 2. With the new money, Zomato plans to keep growing Blinkit so that it can spread its costs even more, making each order more profitable.

Also, by getting bigger, Blinkit can negotiate better deals with suppliers, buy in bulk to lower costs, and reduce waste. All of this will help make the business more profitable. As Blinkit grows, Zomato can also use data to improve how it manages products, reduce the chances of running out of stock, and make sure it always has what customers need. These steps are all important to make Quick Commerce work well and be profitable in the long run.

Competing in a Tough Market

Figure 3: Market share comparison of Quick Commerce players in India, including Blinkit, Swiggy's Instamart, Zepto, and BigBasket.

Quick Commerce is a highly competitive market in India because of the increasing consumer demand for convenience and rapid deliveries, making it a big opportunity for businesses to capture significant market share. Companies like Swiggy's Instamart, Zepto, and BigBasket are also trying to expand quickly, and they’re all raising lots of money to do so. Figure 3 shows a comparison of market shares between these major players, illustrating how competitive the Quick Commerce space is. In this environment, Zomato’s decision to raise more money is partly to defend itself. However, this defensive strategy could backfire if it leads to increased competition, resulting in a price war that erodes margins. Additionally, raising more capital might lead to further dilution of existing shareholder value, which could negatively affect investor sentiment. If it doesn’t grow fast enough, its competitors could take over.

Having extra money will help Zomato react to what its competitors are doing, whether that means moving into new areas, offering better promotions, or improving technology. In Quick Commerce, small things like being a bit faster in delivery or having slightly better customer service can make a big difference. The new funds will also allow Zomato to make strategic decisions, such as buying smaller competitors, forming partnerships, or introducing new services, which will help them stay competitive.

Zomato is also planning to use some of the extra money to make Blinkit’s brand more visible and attract new customers. In such a competitive market, having a strong brand that people recognize and trust is crucial. Zomato will invest in advertising, special promotions, and loyalty programs to make sure more people use Blinkit. This will not only bring in new customers but also keep existing ones coming back for more.

Another key area for Zomato is investing in better technology to stand out. They are looking into things like using robots in warehouses to make sorting faster and reduce labor costs. By focusing on being technologically advanced, Zomato hopes to provide a better service that outshines competitors.

Financial Flexibility and Risk Management

Figure 4: Comparison of cash reserves between major Quick Commerce players, highlighting Zomato's Rs 10,813 crore in cash reserves.

Even though Zomato already has Rs 10,813 crore in cash, as shown in Figure 4, it’s important to understand that Quick Commerce uses up money very quickly. It costs a lot to build and maintain the infrastructure needed to deliver goods quickly, and these costs can empty reserves fast. By raising an additional Rs 8,500 crore, Zomato is making sure it has enough money to keep growing aggressively without running into financial problems if things don’t go as planned.

Having more money in reserve also makes Zomato flexible in handling challenges. The market can change very fast, and new rules or more competition could create unexpected problems. With extra funds, Zomato will be ready to handle these challenges. It will also allow them to invest in new technologies, improve customer experiences, and pursue other growth opportunities without worrying about running out of funds.

Having a strong cash reserve also helps Zomato work well with suppliers. They can negotiate better deals and make sure they always have enough products in stock. If demand suddenly increases, like during a holiday or a special event, they will have enough working capital to handle it. The financial cushion also allows Zomato to deal with any unexpected costs without affecting their overall growth plans.

Long-Term Shareholder Value

One common concern with raising more money by selling shares is that it can dilute the value of existing shares. In simple terms, when a company issues more shares, each share becomes worth a little less because it’s spread over a larger base. Zomato plans to manage this by using the money effectively for growth. They will focus on expanding Blinkit and improving efficiency, which in the long run should make the company more valuable and benefit shareholders.

The Quick Commerce sector is still very new, and there is a lot of room for growth for companies that establish themselves early. Zomato is betting that by investing in Blinkit now, it can become a leader in this space, which will bring big rewards in the future. The fact that Blinkit has already reduced its losses and grown its store count shows that Zomato’s strategy is working.

By focusing on growth today, Zomato aims to benefit in the future. While raising money now might dilute shares, it’s a necessary step to build the infrastructure and market presence that will create long-term value. Zomato doesn’t just want to survive in Quick Commerce; they want to dominate it, and raising funds is a part of that plan.

Zomato is also committed to giving back to shareholders by combining growth with efficiency improvements. As Blinkit gets bigger and starts making a profit, these gains will show up positively in Zomato’s financial results. They may also use some of the raised money to buy other companies that can add to their Quick Commerce capabilities, helping Zomato grow even faster and improve profits.

Conclusion: A Smart Move for the Future

Zomato’s decision to raise Rs 8,500 crore by selling more shares might seem like a lot, especially since they already have cash reserves. But it shows that they are thinking ahead and want to make sure they have the resources to succeed in a changing and competitive market. Quick Commerce is growing fast, and companies that can scale up quickly are the ones that will come out on top. By investing in Blinkit's growth, Zomato is making sure it can lead this race, take advantage of new opportunities, and deal with competitive threats effectively.

The money raised will help Zomato expand Blinkit’s reach, become more efficient, and stay flexible in a challenging market. While there might be some short-term costs for shareholders, the potential for long-term value is worth it. In a market where speed, quality, and scale are key, Zomato wants to be the leader, ultimately bringing value to its shareholders.

Zomato is making sure it has the resources not only to be part of the Quick Commerce revolution but also to shape it. With this plan, Zomato wants to be a long-term winner, changing the way we think about convenience and delivery services in the future. By focusing on long-term growth, Zomato is not just investing in its business, but also in the future of the Indian consumer economy. The Quick Commerce market will keep evolving, and Zomato wants to be at the front of this transformation, creating value for both consumers and investors. This decision shows Zomato’s ambition to set the standards in the industry and lead the way in delivering convenience in modern times.