July 7, 2021
In April 2020, it was not a question of choice for Zomato to enter the grocery zone. The country shut down, restaurants closed and the food business got beaten. To keep going, the online food delivery Zomato started delivering groceries with ‘Zomato Market.’ Though getting into grocery and essentials was the need of the hour, as demand for food delivery suddenly evaporated, the bigger question was: Who would buy groceries from Zomato?
By September 2020, Zomato had delivered 1.1 million grocery orders across 185 cities. With a gradual lifting of the lockdown curbs, the company was getting back to its core business and focus: Food delivery. Though the company flirted with grocery delivery for half a dozen months, there were signs of a promising future.
Back in 2018, Zomato was committing itself a serious relationship by getting into B2B grocery business. It bought Bengaluru-based Company WOTU, rebranded it as Hyperpure, and started supplying restaurants everything they needed: Vegetables, fruits, poultry, groceries, spices and dairy beverages.
Three years later, Zomato is galloping. The Gurugram-headquartered company, which is about to get listed this month, reportedly buys a 9.3 percent stake in online grocery startup Grofers for $100 million. The investment values Grofers at over $1 billion and gives Zomato—which is reportedly seeking a valuation of $10 billion—a much-stronger blueprint and chance to make a dent in the grocery business.
Well why not the e- grocery market has leaped from $1.9 billion in GMV (gross merchandise value), to $3.3 billion last year, according to RedSeer. The contribution of fruit, vegetable, and staples, the consulting firm pointed out in its report released early this year, stood at a staggering 47 percent. What is interesting, though, is the projection. By 2025, the e-grocery market is estimated to be valued at over $24 billion.
Second, food delivery alone won’t make Zomato a force to reckon with, especially after the listing. It would need more engines, if not one which can be as big and promising as food delivery, to fire. Reason: Low transacting consumers. Though Zomato, Ambit Capital Research points out in its brokerage report in May this year, has a high monthly active user (MAU) the base of 42 million, the number for the monthly transacting users (MTU) is just 11 million. What this means is that the online food delivery major has to provide more reasons and occasions for consumers to pay. Food alone won’t suffice.
There is another potential glitch. The pandemic delivery tailwinds, especially from the latter part of the last year, are likely to abate once the raging pandemic subsides and the vast majority of the population gets vaccinated. This, in turn, will not only result in a dip in online food volume and value order, but will also force online food delivery companies to look for new sources of revenue.
Internationally, too, food players are diversifying. In its recent report on online food delivery in India, brokerage company CLSA points out how global players are getting into adjacent categories such as cloud kitchens, grocery, and other essential deliveries by using high customer engagement, delivery expertise, and data analytics on consumer insights. Online food delivery companies around the world are attempting to transform their single-purpose apps into multi-use ‘super apps’ with a host of convenience services for consumers. “Relatively high take rates in India demand that online food delivery platforms also expand their revenue bases,” the CLSA report released in April says.
Grocery has been the mainstay of millions of general trade stores dotting streets across the country, where the supply chain is managed in a pretty cost-efficient manner due to lower overheads. Let’s take Grofers, for example. For the FY20 fiscal, total revenue reportedly stood at Rs.176.79 crore and losses were at Rs. 637.49 crore. These numbers do not come anywhere close to BigBasket, India’s biggest e-grocery platform: Rs. 3,822-crore revenue and Rs 611 crore losses for the same fiscal.
Though the headroom for growth is massive in grocery, one also has to look at the flip side. It is hard to make money and sustain the business. Even BigBasket, a decade-old player and the biggest in India’s e-grocery business had to sell out recently. In May, Tata Digital bought a 64.3 percent stake in BigBasket, reportedly at a post-money valuation of $1.8 billion.
The only thing common between Zomato and e-grocery platforms are on-demand delivery. However, with millions of locally-relevant stock-keeping units (SKUs) that are required in the case of grocery, it becomes challenging for an aggregator to stock and deliver.
With Tata, Reliance, Amazon, and Walmart-owned Flipkart taking deep positions and getting hyper-aggressive in the segment, there is not enough room for smaller or niche players. The Zomato-Grofers deal is a good example of two desperate players. For Grofers, with an aborted IPO listing plan and its failure to get more funds from its existing or new backers, an investment by Zomato gives it a new lease of life. For Zomato, looking at Grofers gives it an opportunity to take a long-term view.