Swiggy’s Instamart is a success but a grocery entry can become Zomato’s ‘poison pill’ says report

• Zomato is re-entering the grocery delivery segment for the third time by acquiring quick commerce player Blinkit (formerly known as Grofers).
• Earlier, in April 2020, Zomato had ventured into the grocery delivery business but pulled out later because of a huge logistics mess.
• Again in July 2021, it took a chance and ended up burning millions of cash.
• Meanwhile, its rival Swiggy has comfortably continued Instamart services on its platform for two years.

Zomato is again trying its hand at something that it has failed twice at – grocery delivery. This time around, the quick commerce delivery segment that it’s entering into is crowded and filled with players like Dunzo backed by Reliance Industries, Tata backed BigBasket and of course, Zomato’s traditional rival Swiggy, with its Instamart offerings.

And, brokerages are not thrilled with its third time coming.

“We claim for Zomato that building a grocery business will work as a ‘poison pill’. It would need reasonably high investment and hence cash burn and is likely to be a significant logistical challenge to execute as well but still Zomato can’t afford not to do it,” said a report by HSBC.

What’s a poison pill and how does it work?

A poison pill is an action that can intrinsically lower the value of an organization – a strategy adopted by companies to save themselves from a hostile takeover. However, analysts believe that this venture will have the same yet unintended effects on Zomato.

Both Zomato’s vain attempts were after the Covid-19 outbreak in April 2020 and faced a logistics nightmare. In July 2021, it took a dive yet again and ended up burning millions instead.

This time around however it is likely to do it via the acquisition of Blinkit, formerly known as Grofers. The Zomato board is expected to make a decision on the same this time. So why are analysts worried about this foray which has worked well for Swiggy.

Swiggy can do it but can Zomato do it too?

For one, a bulk of Swiggy’s grocery customers are its existing food customers. Being on the same app offers much needed ease of use, and the loyalty programme benefits are seamless too – along with the advantages of merging food and grocery delivery orders.

Moreover, Swiggy can gain pure grocery customers too and target them for their food offerings, thereby hurting Zomato’s core food business.

“Consequently, Zomato has to build its grocery capabilities quickly and in our view has to merge the apps effectively to leverage its customer base for grocery. Running it separately is unlikely to create much value as customer acquisition cost will be high for Blinkit, with inferior customer stickiness,” says HSBC.

To build a successful business, Zomato has to cross-sell to its existing customer base, integrate the tech stack and also add infrastructure to ensure delivery — a cost and execution abilities that its food business never needed.

Quick commerce delivery and full kitchen offerings would need them to maintain and manage stock keeping units (SKUs). “The former are ‘instinctive’ purchases, while the latter are planned.

Theoretically, instinctive purchases are less discount-driven and more need-driven, while planned are more discount- and assortment-driven,” the HSBC report says.

While the going might get tough with challenges, Zomato also cannot afford to ignore this fast growing segment – and if well executed can provide it with incremental returns.

“We expect Zomato to follow global peers in terms of expanding beyond food delivery and explore adjacencies in the form of grocery delivery, alcohol delivery, medicine delivery, on demand delivery and insta shopping,” said a report by JM Financial.

The total grocery market was valued at around $573 billion in gross merchandise value (GMV) terms in 2020, according to Redseer estimates. Further, driven by Covid-19 tailwinds, the online grocery delivery market is expected to report a CAGR of around 49% over the next 5 years to reach $24 billion by 2025.

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