Can Food Delivery Solve Zomato’s Blinkit Problem?

By now, Zomato’s Adjusted EBITDA has grown on us even though it was a little strange off at first. The delivery giant’s FY23 saw 48% lower YoY losses at INR 187.6 Cr along with 70% higher YoY revenue at INR 2,056 Cr and this meant that the ‘Adjusted EBITDA’ leaps were less of a stretch this time around.

The Deepinder Goyal-led company took great strides on the food delivery front, but there’s still the matter of quick commerce and Blinkit, which continues to weigh down the company overall.

With new leadership in place for food delivery, Zomato is hoping to use this vertical as a counterweight to solve the Blinkit problem. Of course, a lot can happen between now and next year, which is why it’s important to see just how Zomato is setting the stage.

But before we begin our analysis of Zomato’s FY23 and what FY24 holds, here’s a look at the top stories from our newsroom last week:

• Angel Tax Relief: After much back-and-forth over the new angel tax rules, the government is looking to clarify more rules around investments from overseas entities that are likely to come as a relief for Indian startups
• Filling The Shein Gap: Taking on heavyweights Ajio and Myntra, GenZ-focussed newme is taking a leaf from Chinese giant Shein to create a new fast fashion playbook 
• TCS Curveball For Startups: With the 20% TCS regime on all overseas credit card spending kicking in from July, startups brace for the short-term impact on their cross-border ambitions

Zomato’s Baby Steps Towards The Black

Given archrival Swiggy’s out-of-the-blue announcement earlier this week about profitability in the food delivery business, there were a lot of expectations that Zomato too would hit this milestone in FY23.

While Swiggy declined to comment on whether its profitability was for the whole fiscal year, we now know that Zomato has reached that point, even though this was on an Adjusted EBITDA basis.

To be fair, even Swiggy’s announcement wasn’t without the disclaimer that the profitability was before deducting ESOP costs, so both food delivery giants are taking some leaps when it comes to the bottom line metric.

Zomato said its overall business excluding quick commerce turned adjusted EBITDA positive in Q4 FY23 thanks largely to food delivery. On an Adjusted EBITDA basis, food delivery raked in INR 78 Cr for Zomato in the quarter.

The company also claimed it is on track to hit adjusted EBITDA profitability for the entire business within the next four quarters, along with a potential profit after tax kicker.

But to get there, Zomato has to not only double down on the food delivery vertical but also pick up the Blinkit slack. That’s where the new leadership for food delivery and the Hyperpure B2B vertical will play a huge role.

The new leaders come after the departures of key business heads and CXOs since last year. First Nitin Savara resigned as the CFO, followed by long-time leaders such as Rahul Ganjoo, Siddharth Jhawar and cofounder Mohit Gupta. In January 2023, another cofounder and CTO Gunjan Patidar also resigned.

The new appointments are likely to invigorate the businesses internally, and could be exactly what Zomato needs to enter the black.

Will Adjusted EBITDA Continue In FY24?

Indeed, the lower losses in FY23 can be attributed to the reduction in Zomato’s ESOP costs, which narrowed by 42% to INR 510 Cr. In FY24, ESOP costs are estimated to come down to INR 450 Cr.

ESOP costs are vital for Zomato as this is a key component in its Adjusted EBITDA maths. The company discounts rentals and share-based compensation expenses from the overall EBITDA to arrive at the adjusted metric.

The big question, of course, is whether this treatment will continue in FY24, if ESOP costs come down. The metric elicited questions from several retail investors after its debut in Q3. But as per analysts, it makes accounting sense given the high costs for ESOP grants to Goyal himself.

In April, brokerage Jefferies said 85% of Zomato’s ESOP costs were attributable to a one-time pre-IPO grant given to the CEO. This will be taken off the board in FY24 and new grants are decreasing rapidly. So, it’s very likely that the company will shed its Adjusted EBITDA reliance in FY24, particularly if its overall business continues the YoY growth momentum.

A key component in the improved FY23 showing has been the relaunch of Zomato Gold subscription, which now has 1.8 Mn members. Goyal admitted that Gold has dented the contribution margin slightly, but at the same time other revenue and cost levers mitigated this impact.

One potential growth hurdle for Zomato (and indeed Swiggy) could come in the form of lower commissions from restaurants in the future thanks to ONDC becoming a major factor in food delivery.

Goyal welcomed the new competition, but said the company was not planning to make any changes in terms of commissions or take rates which will impact the growth or profitability of the food delivery business.

Despite the threat from ONDC, the cost savings on the food delivery side were positive takeaways for Zomato in FY23. Of course, there’s still the matter of quick commerce platform Blinkit, which continues to complicate the consolidated P&L.

Blinkit Spoils The Mix

It was another mixed quarter for Blinkit as average order value (AOV) declined 6% to INR 522 in Q4 from INR 553 in Q3 and INR 568 in Q2 FY23. This steady decline was attributed to seasonal swings in the business.

And the quick commerce business weighed heavily on Zomato’s consolidated numbers. Whereas the company’s Adjusted EBITDA improved by 16% (percentage points) without Blinkit, with the quick commerce business included this improvement was just 7% (percentage points). Blinkit remained in the red when it comes to the Adjusted EBITDA with a loss of INR 203 Cr in the quarter

On a positive note, though, quick commerce revenue grew a robust 21% in Q4 and touched INR 363 Cr. Gross order value grew nearly 17% to INR 2,048 Cr and the total number of orders surged 25% QoQ to 3.92 Cr.

Blinkit claims to have 3.9 Mn monthly transacting customers, up from 3.1 Mn in December, despite headwinds such as strikes and protests by delivery partners over pay reduction. Blinkit CEO Albinder Dhindsa said that the impact of the strikes was ‘fairly minimal’ though driver logins are yet to reach pre-strike levels.

The quick commerce app also seems to have taken a step back when it comes to store expansion which was on its radar in December. Now, it is focused on going deeper in existing cities, citing room for growth even in Delhi NCR, its largest region where it has under 70% penetration currently.

The company is also set to experiment with at-home services to take on Urban Company though no timeline was given for this foray. “Home services is an experiment where we are exploring whether we can make our neighbourhood services like electricians, plumbers, etc. more accessible to customers,” the Blinkit CEO added. It must be noted that even Urban Company, the largest player in this space, has not cracked the profitability problem.

Zomato’s penchant for experiments is well known, but given that Blinkit’s profitability is far from solved, perhaps it may look to take it easy when it comes to this latest one.

There’s little doubt that for Zomato (as also Swiggy) food delivery is the first problem to solve, and given the FY23 numbers, the company seems to be on track in this regard. But Blinkit is no longer a second-rung component in Zomato’s business.

Quick commerce as a category has flourished in the past two years and it will continue to demand significant investments from Zomato over the next few quarters. The question is how quickly and efficiently can Zomato bring its food delivery business into the black in FY24 to fund the Blinkit push?

Startup Spotlight: 30 Startups To Watch

Inc42’s 37th edition of ‘30 Startups to Watch’ is back after a brief hiatus featuring early-stage innovators from enterprisetech, ecommerce, fintech, Web3, EV, deeptech and other sunrise sectors such as drone tech and climate tech.

Interestingly, this time around, more than half of our picks (16 out of 30) operate in the B2B space. New-age businesses such as ShortLoop, Blue Circle, 50Fin, Clueso, CodeParrot and others led the B2B startup charge in our list for April 2023.

Check out the full list of 30 startups 

Sunday Roundup: Startup Funding, Tech Stocks & More

• Funding Picks Up: After seeing a lull in most of May, this past week saw Indian startup funding pick up pace with over $171 Mn raised across 18 disclosed funding deals. Will this momentum continue?
• Delhivery’s FY23 Results: The logistics giant saw an 32% increase in net losses compared to last year and finished FY23 with a loss of INR 158.6 Cr, its performance has improved on sequential basis. See our full analysis here

• Tesla Serious About India: Tesla execs met the Indian government this past week and indications from officials are bullish about the Elon Musk-led company’s plans to manufacture in India and procure components locally
• magicpin’s ONDC Bet: As ONDC gains prominence within the food delivery space, Zomato-backed magicpin has emerged as one of the early trailblazers thanks to its first-mover advantage. Can it capitalise on this momentum?

We’ll be back next Sunday with more. TIll then, follow us on Instagram, Twitter and LinkedIn for the latest news as it happens.

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