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Zomato’s Blinkit Purchase Is A Toxic Pill That Will Burn Cash And Slow Profits

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  • Zomato enters the grocery delivery segment for the third time with the BlinkIt takeover, which can dig a hole in the balance sheet.
  • Shares of the company are down more than 6% today as analysts believe the company has paid more money than it can afford.
  • While the acquisitions will certainly add value to the Zomato portfolio, it will now take more time to become profitable.

Zomato’s official entry into the grocery delivery segment through the acquisition of Blinkit (Grofers) has spooked investors as the loss-making company is still on track for profitability.

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

After the company’s announcement on Friday, shares fell more than 6% today as analysts believe the company has paid more money than it can afford.

“Given the current market conditions, paying such hefty valuations to Blinkit is not a welcome move for Zomato. While the prospect of Blinkit will add value and synergy to Zomato in the long term, but in the medium to short term, it will put pressure on balance sheets and finances,” Kranthi Bathini, director of equity strategy at WealthMills Securities, told https://londonbusinessblog.com/ India.

Third time lucky? No, say experts
With this acquisition, Zomato enters the grocery delivery segment for the third time. It can also dig a big hole in its balance sheet by competing in a market with players with deep pockets like Tata, Reliance, Amazon and Flipkart.

“Making profits in this segment is high and the main concern for that company is that it is not making a profit. And after the acquisition of Blinkit, it will slow down its profitability period even further,” adds Bathini.

Some analysts argue that Zomato’s grocery business will act like a “poison pill.”

“We claim for Zomato that setting up a grocery store will work like a ‘poison pill’. It would require fairly high investment and thus cash burn and will likely be a significant logistical challenge to execute, yet Zomato cannot afford not to do it,” said a report from HSBC.

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

Quick commerce is a strategy, says Zomato
However, Zomato is betting on fast trading – which it says has been a strategic priority for the last year.

“We have seen this industry grow rapidly, both in India and globally, as customers place a high value on prompt delivery of groceries and other necessities. This business is also synergistic with our core food business, giving Zomato the right to “Quick commerce will help us increase the proportion of the customer portfolio spent on our platform and also drive higher frequency and engagement from our customer,” said Zomato.

Blinkit is a fast commerce marketplace that delivers groceries and other essentials to customers in minutes. The average delivery time of less than 15 minutes in the month of May 2022. Zomato will now have to compete with quick commerce players such as Dunzozeptoswiggy, jiomartBigbasket, Flipkart Quick, Amazon Fresh and several others.

Blinkit app and brand are separated from Zomato
In addition, the food delivery platform plans to keep the Blinkit app and brand separate from Zomato.

“The Zomato brand represents all things ‘food’ in the minds of customers, while Blinkit is on its way to becoming a brand that customers associate with groceries and essentials,” the company said.

However, after the deal was closed, they would experiment with different ideas, such as a Blinkit tab in the Zomato app. “As they say, experiment a lot and keep what works. This remains our guiding motto,” says Zomato.

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