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While announcing its financial performance for Q1FY23, online food delivery major, Zomato also shed some light on the controversies revolving on social media over their ₹4,447 crore acquisition deal of Blinkit, a quick commerce business in India. Zomato co-founder and CEO Deepinder Goyal said there are zero skeletons in the closet when it comes to Blinkit transactions. He addressed the issues of valuation and corporate governance over the transaction. Zomato expects the journey to profitability to only accelerate post-Blinkit deal. Zomato estimates losses for Blinkit to come down to ₹92.9 crore by July 2022-end compared to ₹204 crore in January this year.
Zomato's chief financial officer Akshant Goyal said, " Losses for Blinkit are coming down every month - from ₹2,040 million in January 2022 to ₹929 million in July 2022E. The losses have come down owing to a) operating leverage and b) improved execution. As the GOV per day per store goes up, losses come down given the high operating leverage in the business."
Zomato expects orders of Blinkit to rise to 8.3 million by July 2022-end from 7.9 million in May 2022 and 5.1 million in January 2022. Further, it estimates the monthly transacting customers base to rise to 2.5 million by July end from 2.3 million in May and 1.5 million in January this year.
Further, Zomato estimates GOV to increase to ₹482.7 crore for Blinkit by July-end compared to ₹402.8 crore in May and ₹295.5 crore in January. Revenue is projected to jump to ₹74.9 crore by July 2022-end against ₹58 crore in May 2022 and ₹22.1 crore in January. Losses are expected to decline to ₹92.9 crore by July end from losses of ₹107.7 crore in May 2022 and ₹204 crore in January this year.
Akshant said, ". In addition, revenue per order has gone up due to an increase in commissions and customer delivery charges. Blinkit has also shut down a number of unviable dark stores, which were not scaling. This has also brought the losses down. The team will continue to evaluate non-performing stores and learn what does not work. The playbook for new store openings is now much sharper and we think that each new store has a higher chance of succeeding."
"We have good visibility on the various levers for achieving profitability in this business. Many dark stores are already trending towards contribution break-even. With continued solid execution and synergy realisation with Zomato, post the transaction, the journey to profitability should only accelerate," Akshant added.
The CFO expects quick commerce to become a large enough business vis-à-vis food delivery going forward.
He said, "Blinkit GOV is already ~20% of Zomato’s food delivery GOV at an aggregate level. On a like-to-like basis, if we compare Zomato food delivery GOV in cities where Blinkit has a presence, the relative size of Blinkit would be even higher. For example, in the city of Gurugram, Blinkit GOV is ~70% of Zomato food delivery GOV (for the month of June 2022)."
According to Akshant, Zomato took about 45 months since the launch of food delivery to get to the current monthly GOV scale of Blinkit. He said, a large part of Blinkit's current GOV is a) from their legacy customers and b) because of their erstwhile infrastructure, supply side network, and knowledge which allowed rapid expansion.
Adding he said, "Quick commerce cuts across a wide range of essential spends including grocery, fruits and vegetables, beauty and personal care, OTC medicines, stationery items, among others. Therefore, we expect the overall customer base, average order value as well as monthly order frequency to be higher than food delivery (restaurant food in India is still regarded more as a discretionary spend)."
Post transaction closure, the food delivery e-commerce major plans to experiment with cross-leveraging Zomato’s customer base for Blinkit and vice versa.
Founder and CEO Deepinder Goyal said, "We will also start working on integrating the delivery fleet back-ends which should drive higher delivery efficiency over time. Tech integrations between the two companies will accelerate the pace of progress at both ends," adding, " in terms of geographic presence, the plan, for now, is to stay focused on the top 15 cities and deepen Blinkit’s presence in these markets."
Deepinder shed some light on the criticism Zomato received around corporate governance issues with regards to the Blinkit transaction. He said, "I would like to address this as there has been a lot of commentary on social media about this transaction. We have zero skeletons in the closet."
Talking about the valuation paid for Blinkit, Deepinder said, "we objectively evaluated all available acquisition opportunities in the quick commerce space and after zeroing in on Blinkit, we ensured that rigorous and detailed due diligence, deliberations, and negotiations were done before agreeing to the terms of the transaction (like any other company would do for a large and important transaction)."
Deepinder added, "We had multiple external advisors who helped us with various aspects of the transaction, including valuation which was done by EY, and we took an independent fairness opinion from Morgan Stanley. We negotiated hard on valuation but at the same time, had no intention to be opportunistic since it is important to be fair to the team on the other side who is going to build this business going forward."
Further, on the corporate governance critique, Deepinder said, "the relationship between Albinder and Akriti/ I is public and already known - there was nothing to hide there. The board was aware of it and all parties, including Akriti herself, made sure that she was never involved in any discussions or decisions with respect to the transaction. This transaction also had no overlap with her role as Chief People Officer at Zomato. We also took an independent opinion from Saraf & Partners on there being no related party transaction under applicable law."
"Me knowing the founder of the company we are acquiring is actually a good thing to my mind, as it significantly increases the chances of deal success and reduces the blind spots which could lead to value destruction post consummation of the transaction," Deepinder added.