Swiggy Instamart’s Q3 Margins Hit By Rising Competition In Quick Commerce

Swiggy Instamart’s Q3 Margins Hit By Rising Competition In Quick Commerce

SUMMARY

Swiggy Instamart’s contribution margin dropped to -4.6% in Q3 FY25 from -1.9% in Q2 FY25

The company attributed this decline to higher growth investments, particularly in user activation, and the expansion of darkstores across multiple regions

Its adjusted EBITDA margin also slipped to -14.8% in Q3 FY25 from -10.6% in the last quarter

The rising competition in the quick commerce segment hit the margins of Swiggy Instamart in the third quarter of the ongoing fiscal year (Q3 FY25) as the company stepped up investments to fend off the rivals.

Swiggy Instamart’s contribution margin dropped to -4.6% during the quarter under review from -1.9% in the preceding quarter (Q2FY25). 

The company attributed this decline to higher growth investments, particularly in user activation, and the expansion of darkstores across multiple regions. It added that increasing competition led to higher customer incentives and increased cost of customer acquisition, leading to the dip in contribution margin. 

Notably, the quick commerce segment’s adjusted EBITDA margin also slipped to -14.8% in Q3 FY25 from -10.6% in the last quarter, largely due to the dip in contribution margin and increased brand and performance marketing spends.

Swiggy expects Instamart’s near-term margins to remain range bound as structural improvements take effect, driven by higher average order value, growing ad revenue, lower delivery costs with scale, and better store cost efficiency.

Despite this, Swiggy Instamart reported a 88.1% year-on-year (YoY) and 15.5% quarter-on-quarter (QoQ) growth in gross order value (GOV) to INR 3,907 Cr. Its monthly transacting users (MTUs) grew 62.7% YoY and 13.9% QoQ to 7 Mn in Q3 FY25.

Its adjusted revenue for the period stood at INR 603 Cr, up 105.8% from INR 293 Cr in the same period last year. Sequentially it rose 17.5% from INR 513 Cr in Q2 FY25. 

However, Instamart reported only 7.3% growth in the number of orders on a sequential basis. Swiggy attributed this to the “back-ended nature of store expansion”. 

“When new stores open later in the quarter, new customer acquisition happens towards the end, delaying the impact on order frequency. Since order frequency doesn’t increase immediately for new users, a higher share of new customers results in a lower overall order frequency,” the company said in a post-earnings call. 

Notably, Swiggy Instamart added 96 new dark stores in Q3 FY25, taking the total number of active dark stores to 705. In comparison, competitor and market leader Blinkit added 216 dark stores in the December quarter, taking its store count to 1,007.

Swiggy has also replaced a few of its smaller stores, which were about 2,500-2,800 sq ft in size, with larger stores of about 3,500-4,500 sq ft size that can house up to 20K SKUs. “This has led to average store size increasing from 3,200 sq ft in Q2FY25 to 3,475 sq ft in Q3FY25,” the company said in a statement. 

With this, the company is on track to achieve its target of a 4 Mn sq ft active darkstore footprint by March 2025. 

According to Swiggy cofounder and CEO Sriharsha Majety, near-term expansion was driven by both geographic growth and densification into satellite areas within existing towns, all while managing overall growth. 

“Moving forward, most floor additions will be aimed at managing overall category growth rather than entering entirely new areas,” he added in the call. 

It is pertinent to mention that the December quarter was one of the most competitive quarters in the quick commerce segments, as per Zomato and Swiggy’s comments after their Q3 numbers were released. The three key players in the segment, Zepto, along with Zomato’s Blinkit and Instamart, are flush with funds and expanding their network aggressively.

The entry of ecommerce giants Flipkart and Amazon in the segment, coupled with JioMart and BigBasket increasing their focus on quick commerce, has further intensified the competition.  

However, Swiggy is confident of the new stores turning profitable. “As more stores stabilise and reach steady-state unit economics, overall profitability will improve, with mature stores expected to achieve a 4-6% positive margin trajectory,” the company said. 

According to Majety, store costs, including fixed expenses incurred before a store becomes operational, typically last for 30 to 45 days.

“However, due to heightened competitive activity, customer acquisition costs can fluctuate based on the level of investment within the category. While we have faced some headwinds in this area, we are continuously optimising our approach to improve efficiency,” he added. 

He believes that the company’s customer acquisition costs will go down with time as the overall category grows.

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