Zomato's cost control efforts are hurting the startup: Strike at Blinkit to hurt revenues by 1%
Zomato’s most recent cost control efforts by slashing the fixed fee for its delivery partners is hurting the company’s topline.
- According to analysts, Zomato is looking at a 1% revenue loss from
Blinkitdue to the strike by delivery partners in the Delhi-NCR region.
- Its core food delivery business is expected to remain subdued in the March quarter, and while the company is targeting breakeven in Q2 FY24, analysts now expect it to happen in FY25.
AdvertisementZomato is in the news for its efforts to control costs and achieve breakeven – it’s increasing the commission it charges its restaurant partners, while reducing the fee it pays to its delivery partners. The latter has got Zomato in trouble, with its delivery partners in the Delhi-NCR region going on strike since the last one week.
According to a report by ICICI Securities, this has led to a temporary shutdown of nearly 25% of Blinkit’s total dark stores, leading to a revenue loss of nearly 1% already.
Zomato has rolled out a new fixed-cum-variable structure of ₹15 per delivery with an additional incentive based on the distance travelled, replacing the old fixed-fee structure of ₹25 per delivery. This has not gone down well with its delivery partners, who have demanded a rollback of this structure.
The company clarified in an exchange filing today that it had to “shut down some stores for a few days to ensure the safety of our employees at stores and the delivery partners”. However, it added that most of the stores were now back up and running.
Strikes not new, but this time is different
Strikes by restaurant and delivery partners are not new for either Zomato or rival Swiggy, but this time is different given the fact that the strike in Delhi-NCR has attracted both national as well as political attention.
Analysts at ICICI Securities think this needs to be resolved at the earliest through “a combination of clearer communication on expected change in earnings for delivery executives or some concessions on the delivery fee, or both.”
Cutting down on delivery costs will help Zomato expand the delivery radius of the existing Blinkit stores and help it control capital expenditure.
Recovery of food delivery a key monitorable
Zomato’s core food delivery business has seen a slowdown post Diwali, and it continues to be a key monitorable going forward.
AdvertisementAnalysts expect the gross order value in the March quarter to remain subdued, with improvements expected to be driven by volumes and not value. Attempts to improve revenue by increasing the take rates from restaurants and hiking advertisement charges are likely to help provide a boost to the topline and offset the impact of free delivery to its Zomato Gold subscribers.
With food delivery being a two-player market between Zomato and Swiggy, and Zomato leading with a 55% market share, analysts suggest gains through scaling up in this segment could be slower. A slowdown in discretionary spends and return of dine-outs has also impacted Zomato’s food delivery business.
“We assume the hyper-growth expectations of the [Dalal] Street have now been suppressed,” said a report by HSBC Global.
Quick commerce a gateway to quicker gains
With the food delivery business expected to remain subdued in the March quarter, analysts are bullish on quick commerce as a business prospect despite the hiccups Zomato has gone through in this segment, especially post the Blinkit acquisition.
Advertisement“Quick commerce offers a much bigger total addressable market and the current penetration levels in quick commerce are significantly lower compared to food delivery,” said the analysts at JM Financial.
According to a Redseer report, the quick commerce market in India is currently valued at just $5.5 billion, which is a fraction of the estimated addressable market of $45 billion. This leaves a lot of room for growth in this segment for Zomato, as well as its rival Swiggy.
Expect breakeven by FY25
All said and done, analysts expect Zomato to achieve breakeven by FY25, even though the company’s management has set a timeline of Q2 FY24.
“Higher city-level competitive intensity in India is likely to slow down profitability as orders will be split between Zomato and Swiggy and can delay the gains emanating from scaling up of customer base over the next few years,” said a report by Motilal Oswal.
AdvertisementWhile the Blinkit acquisition offers Zomato an opportunity to grow its overall business faster at a time when its core food delivery business is expected to remain subdued, it also brings with it additional risks. The high attrition levels seen in the senior management are also a cause for concern, according to brokerages.
Looking beyond the “adjusted EBITDA” (earnings before interest, taxes, depreciation, and amortisation) narratives, food delivery as well as quick commerce are still in their nascent stages in India, and the total addressable market remains huge. Analysts remain bullish on Zomato’s long-term prospects, thanks to tailwinds like increasing technology and internet penetration, and rising incomes.
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