How does the Blinkit acquisition fit in for Zomato?

27 Jun 2022 , 09:21 AM

Last year in August 2021, when Grofers was cash strapped, it had raised $100 million from Zomato in exchange for an 8.6% stake, which gave Grofers Unicorn valuation. Subsequently, Zomato also extended a debt lifeline of $150 million to Grofers at an interest rate of 12%.

In between, Grofers changed its name to Blinkit and also repositioned the business model as a quick commerce outfit. The old Grofers promised 24-hourse delivery (next day), which was good enough but did not excite the audience. The repositioned Blinkit positioned itself as a quick commerce company, promising delivery of groceries in a span of just 20-30 minutes.

On 24th June, the deal was finalized with Zomato agreeing to pay Rs4,447 crore for Blinkit. This would give Zomato 100% ownership of Blinkit and in addition, Zomato will also acquire the warehousing and ancillary business of its HOTP unit for Rs60.70 crore. However, Zomato will not take over the B2B trading business as it did not fit into their core focus. The estimated valuation of the deal has also been lowered from $700 million to $568 million.

How is the Zomato-Blinkit deal structured?

The table below captures the stock-swap cum cash deal to acquire full control of Blinkit. Zomato will issue 62.90 crore shares in the stock swap, marking equity dilution of 6.88%.

Terms of the Zomato deal	Value in Rupees	Value in US Dollars
Current holding in Blinkit	8.4%	8.4%
Stock swap for 91.6% stake Buy	Rs4,447.50 crore	$570 million
Cash pay out for Warehousing unit	Rs60.70 crore	$8 million
Total Pay-out for the deal	Rs4,508.20 crore	$578 million
Eventual holding in Blinkit	100%	100%

Data source: Zomato

While the stock swap will take care of the balance 91.6% stake in Blinkit, the cash payment of Rs60.70 crore is for the warehousing and ancillary business of Blinkit. However, Zomato will not acquire the B2B trading business franchise of Blinkit as it does not fit into the core business focus of Zomato. While Zomato is into the food delivery business, it sees a natural corollary in the grocery delivery business as part of its brand extension. Quick commerce, ensuring 20-30 minute delivery, perfectly fits the bill for Zomato.

Out of the 62.9 crore shares issued by Zomato in consideration for this deal, the following key shareholders of Blinkit will receive substantial shares of Zomato.

Softbank	Tiger Global	BCCL (TOI Group)	DAOL, South Korea	Sequoia
28.71 crore	12.34 crore	1.50 crore	3.66 crore	4.51 crore

Nearly 80% of the fresh shares issued by Zomato as part of the stock swap will be cornered by the above five PE investors.

How does Blinkit fit in for Zomato

This is not the first attempt by Zomato to get into the grocery space. It had made attempts in 2020 and 2021 and in both the cases it had shelved the plan. With Zomato’s closest competitor, Swiggy, making rapid strides in valuation and also making a mark in grocery delivery through Swiggy Instamart, time was running out for Zomato. Now it plans to invest a sum of $400 million in the groceries business and that would be largely through the quick commerce franchise of Blinkit.

Here is how the deal fits into the business metrics of the two companies. For now, Zomato and Blinkit are likely to operate as independent entities under the same ownership. Here is what you need to know.

a)      Zomato is looking at the Blinkit deal as a natural extension of its food delivery business. The similarity is that both food delivery and grocery delivery are hyper local businesses. Like food, even in the case of groceries, rapid delivery is a major advantage. For Zomato, the quick commerce franchise of Blinkit will not only allow them to improve their wallet share but also enable a deeper and persistent engagement with the customer.

b)      Secondly, the global model also gravitates towards food delivery and quick commerce under the same umbrella. It increases the addressable market for food delivery and for grocery delivery. The demand patterns are also cyclical; in the sense that the peak demand for groceries is normally during non-meal times. This ensures better fleet utilization for hyperlocal delivery. This is likely to reduce the cost and eventually give a boost to the ROI in a big way.

If one were to play devil’s advocate, the only question is whether people really need groceries delivered in under 30 minutes or next day delivery is good enough. One big shift in retail purchases globally is that people are moving towards unplanned and spontaneous purchases.

How are the numbers stacking up?
Since Zomato numbers are well documented, let us look at how Blinkit numbers panned out in the month of May 2022 as comrade to January 2022.

·         In the last 4 months, the average number of orders on Blinkit have gone up by 54% to 5.1 million while average order value is slightly lower due to retail spread.

·         The monthly transacting customers in May 2022 were up 51% at 2.3 million compared to January 2022. Monthly order frequency per customer was up just 2%.

·         For dark stores (micro fulfilment centres), the GOV per day is up 51% over January 2022 while the dark store orders per day are up by a whopping 71%.

·         In INR terms, the GOV for May 2022 stood 36% higher than January 2022 at Rs402.80 crore while revenues were up 162% at Rs58 crore.

Despite all this growth, the EBITDA loss has halved and raises questions on the game plan to become profitable for the combined entity? Zomato has already committed to treat Blinkit as a long haul business and its entire capital infusion will be used to fund the losses of the  Blinkit business. To begin with, the dark stores are expected to become contribution positive in the next one year. However, an EBITDA breakeven for the combined business may conservatively take around 3 years.

Super brand versus Super app

As is the case with most mergers, the question is if the Blinkit brand and app would subsume into the Zomato umbrella. For now, the plan is to keep them separate. However, to begin with, the Blinkit tab may be added to the Zomato App. However, the apps and the brands with their different connotations, will continue to remain distinct. We would probably get more details on the granular aspects once the deal is closed in August 2022.