Here’s why Zomato is reportedly cutting a $300 million cheque for Grofers

• Zomato is reportedly in talks to invest $300 million in grocery delivery startup Grofers, a company it was once planning to acquire.
• Zomato had recently announced its $1.1 billion initial public offering plan, in which it had mentioned that it has kept the door open for future investments.
• However, the $5.4 billion company is not a new player in the grocery segment.

IPO-bound foodtech unicorn Zomato had a short-lived stint in grocery retail in 2020, but it looks like the Deepinder Goyal-led startup still has one eye on the sector. According to an ET report, Zomato is in talks to invest $300 million in grocery delivery startup Grofers, a company it was once planning to acquire.

Zomato had recently announced its $1.1 billion initial public offering plan, in which it had mentioned that it has kept the door open for future investments. “We will from time to time continue to seek attractive inorganic opportunities that we believe will fit well with our strategic business objectives and growth strategies,” said the company in its Draft Red Herring Prospectus (DRHP).

As per the ET report, Zomato is exploring a comeback in the grocery sector, through a subsidiary, instead of going all in by itself. And it makes sense, as the margins in the grocery sector are low. According to brokerage firm CLSA’s report, “Groceries in the country are distributed largely through Kirana or mom-and-pop brick -and-mortar stores, where overall supply chain margin varies from 14-20%, of which the distributor books 4-6% and the retailer makes 8-14%. Given the tight margins available, prospects for profitable operations for an aggregator are low.”

However, the $5.4 billion company is not a new player in the grocery segment. During the COVID-19 pandemic, Zomato had announced that it would let users order groceries through its app. “Grocery delivery has always been on our long term radar since it fits into our vision of ‘better food for more people’. Given the current need of our customers, we quickly sprung into action to serve,” Zomato’s chief operating officer Mohit Sardana had said then.

As per the CLSA report, between April to September 2020, Zomato delivered 1.1 million grocery orders, consisting of 7.8 million products.

Zomato also runs a business-to-business subsidiary company called Hyperpure, through which it supplies ingredients like vegetables and fruits, poultry, groceries, meats, seafood, dairy, beverages, and eco-friendly packaging materials to restaurants.

And one of the reasons behind investing in Grofers could be to secure a strong foothold for the Hyperpure business, which currently sees tough competition. “The Hyperpure business model rests on creating an entire supply ecosystem to restaurants. There are several large, well-funded startups trying to create the last mile supply ecosystem like Udaan, Instamart etc,” said a report by Ambit financial.

Its rival Swiggy has already established itself in the grocery segment, as well as its hyperlocal delivery service Swiggy Genie.

Zomato could also be taking a leaf out of its successful counterpart in Southeast Asia, Grab, which is also headed for a market debut. Grab has created an entire ecosystem of deliveries – food and grocery.

Meanwhile, Grofers has reportedly backed out of its plan to list in the US through a special purpose acquisition company. Grofers, which finds competition from Mukesh Ambani-led JioMart, Tata-backed BigBasket and global e-commerce giant Amazon, has been on the lookout for funds and has also been in talks with Japanese investment giant SoftBank.

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