Blinkit - Transforming General Trade to Modern Trade
Quick Commerce (QC) is growing at break-neck speed, on track to be bigger than Modern Trade
It was the year 2016 and I was preparing for my CA Finals.
Having consumed Red Bull quite incessantly during my undergrad days at St. Xavier’s in Calcutta, especially during fests and end semester exams, the idea of getting wings had almost become synonymous with ensuring the best outcomes always prevail.
So, the idea of getting these shiny cans delivered at my house from my local Reliance Fresh store, without having to step out and almost getting a ‘steal’ discount appealed directly to the Amygdala in my brain.
It was as if this 23 year old kid had somehow managed to negotiate a bilateral trade deal with the most favourable terms, only to find out that the red bull cans were either not available or took a little longer than what was promised they would be delivered in.
The delight of getting orange coloured bags with your favourite items filled in it slowly started getting converted to despair.
Cut to 2024.
To my surprise, one fine day my mom wanted to get some impromptu onion pakodas fried and they had to be done in mustard oil. Somehow, she magically knew about an app that could get the oil delivered in less than 9 minutes!
On further reading, turns out it’s the same Company - pivoted now into ‘Blinkit’!
“You can make some people happy all the time, all people happy some of the times, but you cannot make everyone happy all the time”
A quote my beloved economics sir from School days, Rajeev Sir likes using a lot.
So, what happened here?
Death wishes written all over the world, from investors to customers to ‘experts’ and social media pundits - A Company that is not needed for a demand that is not present.
Yet, Blinkit managed to survive and stay put to its vision of being the ‘last minute app’ of India.
So, let’s try and delve into what Blinkit is doing and how is it that a category so notorious to crack has been able to see success after such an elongated period of time.
Cracking retail in India is tough - as much as we have read obituaries of Airline companies going bust in India, there is also ample cases throughout India where people tried organising something on a national or a local level in order to ‘disrupt’ and failed.
As much as we like shopping on the click of a button, the reality is - General Trade or the local kirana store still controls more than 80-90% of Indian retail.
Multiple attempts have been made by multiple companies - with deep pockets, expertise in different fields and yet somehow the kirana store still is a place that has not been disrupted.
Whether it was earlier conglomerates trying to make these outlets double up as distribution centres or ‘SAAS’ companies coming in and trying to provide automated accounting and debtor records management service - no one has seen straight success.
So, what gives?
Well, to understand what has evolved, history does give us great insights on how Companies have used the experience of learning from their failures and really drive value ahead.
So, in the example quoted above, while Grofers did create a fantastic tech product by integrating the inventory management system of Reliance Fresh with their own app, on-ground when the executives ended up at stores, they realised the systems were probably not updated real time causing friction in delivering on-time service.
One pivot and another, from white labelled brands to making sure supply chains are more robust, the Blinkit efficiency that we see today is nowhere close to the Grofers we saw a decade ago.
But what is interesting to note here, that while the business on the front end was still trying to scramble for success, the back end, the logistics and the relationships with manufacturers kept getting stronger.
Alright, all this is wonderful, can we please get on with what exactly is Blinkit trying to solve for?
Convenience. Convenience. Convenience.
Now the point is - what is it that Blinkit is trying to do which my local kirana guy could not?
Let’s take this point by point.
But before that, let’s set the context with a great quote by Henry Ford.
So what was it that created some degree of loyalty to our beloved local kirana store?
It was just two things.
1 - Proximity of Location
2 - Availability of a helper who would deliver the groceries to us when either our mom or our dad would make the call and get the ‘list’ written
After Sales Service was mostly absent and the assortment of products we could get was always limited due to the constraint on space.
Enter, Blinkit.
I have always been a believer in free markets and irrespective of what people think and try to paint the world with their opinions, numbers barely lie.
For 7 straight quarters, Blinkit has posted an average growth rate of 80-90% on GMV (Gross Merchandise Value) i.e. “maal kitna bika hai?”
So let’s first understand the business drivers.
The North Star of this business is on 2 levers.
GMV growth and Average Order Value (AOV).
Let’s again go back to the kirana store once.
Let’s say the Kirana guys sells products worth Rs. 100.
He would approximately be making about Rs. 5 by selling stuff worth 100.
This translates to the concept of something known as a Take Rate (i.e. just commissions in this case).
So Take Rate for the kirana store was ~ at 5%
On some products like hair dyes he would make a higher take rate, on something like atta lower - net net bringing his blended take rate to about 5%.
So now, what exactly is Blinkit making?
Blinkit currently does ~ 18% in Take Rate.
Wait what?
18%
Yes, 18%
Now, it’s not that Blinkit has cut all middlemen, went directly to the Manufacturer and said, pass it on to me, that is one big chunk of the take rate but there are other levers too.
Blinkit has three levers on the take rate:
1 - Margin from manufacturer
2 - Advertising Revenue
3 - Ancillary Revenue - in the form of Delivery Fee, Packing Fee and Surge Handling Fee
This again ensures you are not overly dependent on one lever as against the kirana guy who can just make money off 1.
Now that 1 is clear, let’s look at 2 and 3.
Today if you open the Blinkit App and try browsing through different sections, you can have a Juices section powered by Dabur or a sexual wellness section powered by Durex.
Even amongst the assortment, you will see multiple products being below or above existing ones making this a great real estate for brands to advertise in.
After checkout, you get an ad again - could be for you to subscribe to a loan, check out a brand or even sign up on OTT.
Finally, the lever on Ancillary Revenue is self - explanatory. Maybe in the future we see Blinkit follow the path of Swiggy or Zepto and introduce membership plans further making the case for the third lever getting stronger.
Now that we have understood GMV, Take Rate - let’s look at a few numbers.
We can see that Blinkit’s GMV has been growing at ~90-100% for 3 straight quarters.
Take Rate is at about 18% vs. 14% as on Q1FY23.
Number of orders have almost 2.5x’d from 22 mn to 56 mn in the same period.
The other two interesting things to note:
Average Order Value (AOV) has gone up from 528 to 635 and store count has gone up from 409 to 451.
Now, there are two ways to look at this data.
Store count growth has been calibrated and they have not gone all out to open stores left right and centre. We have seen them do in the past, even Zomato for that matter had ventured into UAE, made a few acquisitions only to roll them back later and focus all their energy and effort in India.
Even in their earnings call, management has kept re-iterating that the store expansion has only been happening in key markets where existing stores are not able to meet the underlying demand.
Where is the proof of this pudding?
Average Order Value has gone up along with increase in the number of orders.
While these are great ancillary data points to feel excited about, let’s bring our eyes back on the ball.
GMV & Take Rate.
How do you push GMV? - Bring more assortment of products, get higher value products etc.
How do you push Take Rate? - Negotiate hard with suppliers, get newer companies to demonstrate your platform is probably the best answer for discovery vs. erstwhile option of experimenting on General Trade
(and both the points above help you drive Lever 2 and Lever 3 on the Take Rate)
Let’s now look at the costs
Blinkit has two major costs:
1 - Commission to dark store owner
2 - Last Mile Delivery
Blinkit ends up shelling out about 4.5-5% of GMV as Commissions to the dark store owner.
Wait, dark store owner?
Yes, Blinkit does not own a single dark store - all are owned by Franchise partners again making this model competitive to scale without putting a lot of pressure on your own Working Capital.
How?
Let’s do the math.
At the current run-rate of GMV, Blinkit is already at ~ USD 2bn GMV. Even if we assume there is 2 months of inventory required as working capital we are looking at ~3,000 cr. of Inventory.
Last Mile Delivery is the other big hit on the cost side, delivery cost per order would range about 35-40.
So, the only way to make this business profitable is to ensure GMV keeps going up, AOV keeps going up and so does the take rate.
Now, let’s look at a few published numbers by Zomato on Blinkit.
Typically, reaching 1000 orders a day makes a dark store break-even. We are increasingly seeing that time frame getting crushed.
Now that we know everything about the business, let’s look at a Blue Sky Scenario.
Currently Blinkit is at 2bn Dollar GMV, growing at 90-100% for about 4 straight quarters now.
Let’s say this growth rate drops to 50-60%
By FY26 we see Blinkit reach a GMV of ~ USD 5bn
Even if we assume a 5% take rate on ads, we see about ~ USD 250 mn come from ads straight to PBT.
At USD 5bn GMV, you become the size of what DMart is today.
So, is there an insane addressable market?
Well, Blinkit is no longer an optional ‘for convenience’ service. It is basically replacing the local kirana guy in a much efficient manner using the best tech available that could be a little beyond our comprehension - in terms of demand planning, tracking catchments (thanks to Zomato already having some of that data with them).
It also turns out that a lot of grocery purchases end up happening in an unplanned manner, and the local fruit / vegetable seller alongside the kirana guy is never available 24/7.
In fact, from time to time we have seen Blinkit bring innovative concepts. Right from selling the relevant products during relevant events - gift packs in Diwali, India team Jersey during World Cup to now even selling Sony’s Play Station 5!
What about the tech stack?
Blinkit seems to be getting a lot of things right here - while the entire competition more or less operates on similar lines, they clearly have a higher market share.
(Both these slides are from Tata Communications’ Investor Day deck, does seem like this is for Blinkit, given the GMV number)
Great, we have spoken about all the positives. What are the risks?
Well, turns out Blinkit is not alone in the game of quick commerce.
There is Swiggy Instamart, Zepto and also BB Now (Big Basket’s Quick Commerce arm is BB Now). All are vying to continue expanding their reach and capturing the slice of the ever-expanding TAM.
Competitive intensity is surely present but we are seeing a renewed interest from e-commerce incumbents who had vacated this category a long time ago.
Recently, Flipkart announced their re-entry in this space by testing it in Bangalore. This is what Deepinder had to say about it.
The other element which is a little in the unkown is the % of returns on the orders delivered. While the current numbers are encouraging and we are seeing a path to profitability emerge on overall numbers, currently this does not seem to be that big a concern.
Thanks for reading this deep dive, if you have any questions or would like to add any thoughts, feel free to reply to this email.
Disclosure: No content on this blog should be construed to be investment advice. Consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this newsletter being used for actual investments. The author may have positions in the companies discussed and may sell them without prior notice. Please do your own due-diligence before investing. The author is not a SEBI registered investment advisor.