Zomato’s Blinkit buy is a poison pill that will burn cash and delay profits

• Zomato is re-entering the grocery delivery segment for the third time with the BlinkIt acquisition, which may dig a hole into its balance sheet.
• Shares of the company today slipped over 6% as analysts feel the company has paid more money than it can afford to.
• While the acquisitions will definitely add value to the Zomato’ portfolio, it will now take more time for it to become profitable.

Zomato’s official entry into the grocery delivery segment by acquiring Blinkit (Grofers) has rattled investors, as the loss-making company is still on its path to profitability.

Zomato today said that it will acquire Blinkit Commerce (formerly known as Grofers India) for a total purchase consideration of ₹4,447.48 crore ($568 million).

Following the company’s announcement on Friday, its shares today slipped over 6% as analysts feel the company has paid more money than it can afford to.

“Given the current market conditions, paying such hefty valuations for Blinkit is not a welcoming move for Zomato. Even though the long term prospect for Blinkit adds value and synergy for Zomato but in the medium to short term it adds pressure on the balance sheet and financials, “ Kranthi Bathini, director of equity strategy at WealthMills Securities told Business Insider India.

Third time lucky? No, say experts
Zomato is re-entering the grocery delivery segment for the third time by this acquisition. It may also end up digging a big hole in its balance sheet by competing in a market with deep-pocketed players like Tata, Reliance, Amazon and Flipkart.

“To make profit in this segment gestation periods are high and already the main concern for that firm is that it is not profit making. And after the Blinkit acquisition it further delays the profitability period for it,” added Bathini.

Some analysts claim Zomato's grocery venture will work as a 'poison pill’.

“We claim for Zomato that building a grocery business will work as a ‘poison pill’. It would need reasonably high investment and hence cash burn and is likely to be a significant logistical challenge to execute as well but still Zomato can’t afford not to do it,” said a report by HSBC.

A poison pill is an action that can intrinsically lower the value of an organization – a strategy adopted by companies to save themselves from a hostile takeover. In this case however it’s causing an unintended effect.

Quick commerce is a strategy says Zomato
Zomato however is betting on quick commerce - which it says has been a strategic priority for the last one year.

“We have seen this industry grow rapidly both in India and globally, as customers have found great value in quick delivery of groceries and other essentials. This business is also synergistic with our core food business, giving Zomato the right to win in the long-term. Quick commerce will help us increase the customer wallet share spent on our platform and also drive higher frequency and engagement from our customer,” said Zomato.

Blinkit is a quick commerce marketplace delivering grocery and other essentials to customers within minutes. The average delivery time of under 15 minutes in the month of May 2022. Zomato will now have to compete with quick commerce players like Dunzo, Zepto, Swiggy, Jiomart, Bigbasket, Flipkart Quick, Amazon Fresh and several others.

Blinkit app and brand to be separate from Zomato
Besides, the food delivery platform plans to keep the Blinkit app and brand separate from Zomato.

“Zomato brand stands for everything ‘food’ in customers’ minds, while Blinkit is on the path to becoming a brand that customers associate with grocery and essential supplies,” said the company.

However, post the deal closure, they would experiment with various ideas like a Blinkit tab on the Zomato app. “As they say, experiment a lot and keep what works. This remains our guiding motto,” said Zomato.

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