Swiggy's Post-IPO Journey Won't Be A Cakewalk

Foodtech startup Swiggy is gearing up for its mega Rs 11,300 crore initial public offering (IPO) during the festive season, marking a significant milestone for the 10-year-old business which was among the first food delivery apps in the country. Swiggy, along with its biggest rival Zomato, revolutionised how Indians ordered food from restaurants.

Swiggy is targeting a valuation of around $11.3-$11.4 billion (Rs 95,000 crore) in its upcoming IPO, which is considerably lower than its earlier target of $12-$15 billion (Rs 1.25 lakh crore) from when it previously filed. This is reportedly due to ongoing macroeconomic conditions and the subdued demand seen for the latest large IPO from Hyundai, according to analysts.

Overall, Swiggy's valuation of $11.3-11.4 billion (Rs 95,000 crore) implies a valuation to revenue multiple of 8.4-8.5x as per FY24 revenue of Rs 11,247.3 crore. This is significantly lower than Zomato's 18.5x revenue multiple as of its FY24 revenue of Rs 12,114 crore. Several reasons explain this stark difference between these multiples, which we will explore shortly.

Swiggy, engaged in both food delivery and quick commerce, has followed a growth journey similar to its biggest archrival, Zomato. As Swiggy goes for IPO it is looking to expand into quick commerce where Zomato has already established itself as a leader, as it has with the food delivery business too. While the IPO itself is a step in the right direction, Swiggy has a lot of work cut out for it — with challenges in quick commerce where it’s already bleeding money and navigating an extremely competitive landscape.

Swiggy Vs Zomato

Over the years, both Swiggy and Zomato expanded into various allied services, including grocery delivery, table reservations, and logistics services for small businesses. Both companies began as pure-play food delivery players and later built on-ground last-mile logistics teams. Swiggy's delivery fleet size now stands at 4,57,249 strong.

Both players realised that their fleets could achieve much more and began re-using and re-purposing them for anything from grocery delivery to parcel pick-up and drop-off, and now even medicine delivery.

However, there is a fundamental difference in how the two operate their business models. Swiggy believes in a 'super app' model that encompasses all services, including food delivery, quick-commerce, and dining reservations, within a single app. In contrast, Zomato operates each of these as a distributed business with different brand identities and apps for each product.

Swiggy bets heavily on re-selling its services by funnelling users between its several services within its apps, hoping for higher user retention. Conversely, Zomato focuses on acquiring customer cohorts differently across different apps — Blinkit, Zomato, and now the District app (entertainment and lifestyle app). This naturally means that Zomato spends more on customer acquisition compared to Swiggy, but ultimately, financial figures show Zomato winning clearly.

In Q1FY25, Swiggy's revenue from operations reached Rs 3,222 crore, while Zomato's revenue for the same period was Rs 4,206 crore. During this period, Swiggy's total expenses amounted to Rs 3,908 crore, compared to Zomato's total expenses of Rs 4,203 crore.

In the same quarter, the food delivery businesses of Swiggy and Zomato reported revenues of Rs 1,729.6 crore and Rs 2,256 crore respectively. However, in Q1FY25, Zomato had a significant net profit of Rs 253 crore (food delivery and other businesses), while Swiggy reported a loss of Rs 611 crore (food delivery and other businesses).

Zomato's profitability can be attributed to a specific strategy. Apart from delivery charges and subscription revenues, Zomato's platform fees have significantly contributed to its profit margins, according to Aditya Jadhav, founder of GaanBaru Advisors. Zomato introduced a platform fee of just Rs 2 per order in August 2023, increasing it to Rs 4 by January 2024. Now, the platform charges Rs 10 per order, applied to all customers, including Zomato Gold members, in addition to the delivery fee.

Jadhav also highlighted another factor: "Prices of food items on Zomato and even Swiggy are typically 30-60% higher than the actual menu prices. This is because both platforms have pressured restaurants by increasing commissions over the years, forcing them to list food items at a higher price. Commission is an important revenue stream for both players."

Quick Commerce: A Race To The Finish Line

The quick-commerce business presents a different set of challenges, yet it holds immense potential for future growth. This is evident in Swiggy's Instamart's average order value (AOV) of Rs 487 in Q1FY25, which surpasses the food delivery AOV of Rs 436 in the same quarter. Recognizing this potential, Swiggy's Red Herring Prospectus (RHP) filed on October 28 states that a significant portion of its IPO proceeds will be used for opening new dark stores and expanding its quick-commerce business.

Let's examine some numbers to understand this further. Swiggy's Q1FY25 financials for its quick-commerce business show revenue of Rs 374.1 crore for the quarter while suffering an adjusted EBITDA loss of Rs 318 crore, an increase from Rs 312 crore in Q1FY24.

In contrast, Zomato's Blinkit reported revenues of Rs 1,156 crore for Q2FY25 (September quarter), with an improved EBITDA loss of Rs 8 crore in the three months ended September, compared to negative Rs 125 crore in the same period last year. Although these figures represent different quarters, it's clear that quick commerce is a crucial growth driver for both companies.

However, Swiggy's Instamart business is facing challenges. In Q1FY25, Swiggy's quick-commerce business had a negative contribution margin of -3.18%, while its food delivery business had a positive contribution margin of 6.40%. The contribution margin is calculated by subtracting variable costs, such as delivery costs, discounts, and other variable expenses, from gross revenue. A positive contribution margin is essential for covering fixed costs, such as rent, salaries, and administrative expenses.

Swiggy's RHP states that the company plans to improve the quick-commerce unit's contribution margin by expanding its scale of operations to reduce per-order delivery costs and increase efficiency. Additionally, Swiggy intends to add more premium product offerings to increase the average order value, which will also improve the contribution margin. However, this might be challenging given the dynamics of the quick-commerce sector's relationship with FMCG players.

Jadhav said, "While it may be easy to pressure restaurant players and achieve better margins by charging higher commissions every year, the same can't happen with large FMCG players like Britannia, HUL, and Nestle, who are major suppliers to both Instamart and Blinkit. Regulations prevent charging above the MRP, resulting in thin margins. The only way for these players to enhance their margins in the future is by launching private labels or partnering with a major player like HUL or P&G to sell their exclusive products."

To effectively scale its quick-commerce operations, Swiggy will need to expand its product offerings, particularly in the electronics and home appliances category. However, this strategy faces challenges due to competitive pressures and logistical complexities.

A former senior Swiggy employee, speaking anonymously, explained, "To facilitate revenue growth in quick commerce, Swiggy must forge deep strategic partnerships with offline electronic sellers and distributors such as Croma, Poorvika Phones, and Vijay Sales. This is crucial because storing large appliances and electronics in dark stores is impractical. The success of Instamart's quick-commerce venture hinges on establishing robust business and logistics partnerships with these players."

The Future of Food Tech

It's crucial to remember the history of the food delivery sector. Between 2014 and 2018, a fierce battle for market share led to the demise of several players, including UberEats, Ola-owned Foodpanda, TinyOwl, and JustEat. This crowded space eventually consolidated into a duopoly, with Swiggy and Zomato emerging as the dominant forces. However, a former Swiggy employee warns that a similar scenario could unfold in the quick-commerce sector, although it may take several years to play out.

In the quick-commerce sector, factors like economies of scale and speed play a crucial role. The proximity of dark stores to customers significantly influences success. While strategic partnerships with brands are essential, the quick-commerce landscape may see future consolidation due to new entrants like Jio and Tata Neu and intense competition from existing ones like Bengaluru-based Zepto.

"In quick commerce, speed is paramount…Whoever has a dark store closest to the customer wins. This trend is more pronounced in quick commerce than in food delivery. Consolidation may not happen soon due to the capital investments and the commitment of competitors to expand deeper into commerce. But it’s possible and it may take a few years before any consolidation occurs. Ultimately, the number of apps a person is willing to use will be a limiting factor," explained the former Swiggy executive quotes earlier.

Swiggy's IPO, which has been in the making since mid-2022, according to the Swiggy executive, marks a significant step for the company. While Swiggy and Zomato hold a duopoly in the core food delivery market, the landscape is more competitive in other sectors where they both operate. It's likely that Swiggy will follow in the shadowed footsteps of Zomato, which went public first, navigating the complexities and challenges of a publicly listed company. However, Swiggy's IPO is just one of many interesting IPOs expected in the near future, promising a thrilling shake-up of the market. The battle for dominance in the Indian food-tech and quick-commerce space is far from over, and the stakes have never been higher.