What is driving Zomato’s acquisition of Blinkit for Rs 4,447?

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Food delivery giant Zomato has officially announced the acquisition of grocery delivery startup Blinkit. The transaction has been in the works for several months. The Rs 4,447 crore all-share deal is expected to fuel Zomato’s rapid trading game where rival Swiggy has made huge strides in building a large vertical business.

“Rapid commerce has been our stated strategic priority for the past year,” Zomato founder and CEO Deepinder Goyal said in a blog post announcing the deal. He says fast trade’s close synergies with Zomato’s core food business give the company the right to win in the long run.

Before discussing the reasons for this acquisition, here are some quick facts:

  • Blinkit recorded an average delivery time of less than 15 minutes in May 2022.
  • Blinkit has visibility to approximately 4,000 SKUs (stock keeping units) across a variety of product categories.
  • In May, Blinkit achieved a gross order value (GOV) of Rs 402.8 crore, about one-fifth of Zomato’s average monthly food delivery GOV in Q4FY22.
  • Blinkit recorded 79 lakh of orders in May with an average order value of Rs 509.
  • It had 2.3 lakh customers transacting on the platform in May
  • Blinkit’s contribution margin came in at -16% of GOV in May

Goyal and Zomato CFO Akshant Goyal went into detail about the drivers of the acquisition and the synergies the two companies would achieve.

Total addressable market and better fleet utilization

Fast commerce is a natural extension of the food delivery business as it is also a hyperlocal business and it also fulfills a need for fast product delivery for customers. “Rapid trading will help us increase the share of customer wallet spent on our platform and also increase the frequency and engagement of our customers,” he said. Akshant said that fast trading will help the company increase its addressable market, potential profit pool and also make its business more defensible. Food delivery is always a two-peak business: lunch peak and dinner peak. Low morning and evening passenger utilization creates a huge hole in profitability at the unit level. Express delivery of groceries can solve this problem to some extent. “Peak times in food delivery demand are also complementary to rapid spikes in business demand outside of mealtimes. This will help increase the utilization of our hyperlocal delivery fleet and reduce delivery costs,” Akshant said.

Switch to spontaneous purchases

They answered the key question: do customers really need 15-20 minute grocery delivery? With a set of unique data points, Zomato said the macro trend indicates that people are turning to unplanned and spontaneous purchases. Compared to next day delivery, 15-20 minute delivery saw a 2.4x growth in average weekly conversion (percentage of app opens versus orders), a 1.6x increase average weekly new user retention and a 1.5x increase in average weekly order frequency. Additionally, the monthly order frequency on the Blinkit app was 3.5x in May 2022, which is higher than food delivery on Zomato.

Expand market size and product categories

The market size and product categories for fast trade are constantly expanding. “Grocery is the hook for quick trade, but it’s not just about groceries. Quick trade naturally extends into multiple categories, including beauty and personal care, electronics, pharmaceuticals, and more. over-the-counter, stationery, other gift items, etc. Non-grocery categories help the fast-commerce business achieve higher margins and achieve higher AOVs,” Goyal told Blinkit currently focuses on the top 15 cities.

Proprietary technology and experienced team

Why did Zomato choose the inorganic route for fast trading over building it in-house? The Gurugram-based company had tried to build an in-house vertical grocery store twice, but failed. Akshant said “speed” and “team” were the two main drivers behind choosing to do it inorganically.

“Blinkit’s proprietary technology platform, scale of business, relationships with third-party brands and sellers, and network of warehouses and dark stores made it a compelling choice for us to buy instead. than to build it in-house. It would have cost us a lot of time (and therefore a disproportionate intangible cost) to build this in-house,” he said. He also added that the Blinkit team has extensive experience in building a significant business, while Zomato would have to weaken the quality of its food delivery company’s talent pool to build a grocery delivery of this scale in-house.

Goyal said the company expects AOV and revenue from ad sales in fast-paced commerce to be higher than food delivery, while the cost of last-mile delivery will be lower than food delivery given shorter delivery time.

“The success of fast commerce is highly dependent on an effective hyperlocal delivery network. Zomato has a natural advantage here given the millions of food orders we deliver. That said, hyperlocal delivery alone cannot ensure rapid commerce success. This is where Blinkit comes in with its in-depth understanding of product supply chains that involve warehousing, movement of goods from warehouses to dark stores, monitoring inventory stored in various locations, optimizing preparation and packing of orders, among others. Blinkit’s proprietary technology stack, tailored for supply chain operations, is the backbone of its operations. Blinkit also has a wealth of experience in merchandising and facilitating relationships with a host of brands and third-party vendors, reducing our time to market,” said Goyal.

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