Zomato awaits CCI’s approval on a 9.3% stake in Grofers

Zomato, the food delivery behemoth, filed for approval from the Competition Commission of India to acquire a 9.3% stake in Grofers, the grocery delivery company. The $120 million investment will come from Zomato and its investor Tiger Global, of which Zomato will contribute the lion’s share.

Some key highlights

• Along with a 9.3% stake, Zomato will obtain certain rights in Grofers India, Grofers International, and Hands on Trades.
• The proposed transaction will have no impact on the competitive landscape. It will not affect the relevant market in any manner.
• This deal falls under Section 5(a) of the Competition Act, 2002.
• The investment is worth $120 million, making Grofers a unicorn company.

Zomato answers why

According to reports submitted to CCI, Zomato talks about a fragmented, potentially relevant market, courtesy of several players in the arena.

Further, Zomato explains that the two companies – Zomato and Grofers – operate with broadly overlapping segments. These include groceries, general merchandise, household items, fruits, vegetables, and personal hygiene.

The acquisition will help them induce stability in a fragmented market.

The bigger picture for Zomato

Zomato operates in the B2B sector under its Hyperpure banner, delivering fresh vegetables to over 2,280 restaurants in India.

Hands on Trades Pvt Ltd. is a B2B wholesale trader dealing with third-party merchants and contract manufacturing of food products. The company sells these products on a wholesale basis. Thus, this deal will significantly help Zomato boost its bottom line in the B2B segment, leveraging the vast HoT network.

Moreover, with a third wave of the coronavirus pandemic on the cards, the grocery sector is expected to grow even stronger amid mobility restrictions in various states.

Per RedSeer reports, the market share of online grocery stores may rise from 0.3% to 2.3% of the total grocery and food market by 2024. In general, the segment will likely experience a 57% CAGR.

Not the first and surely not going to be the last

Zomato’s efforts to get into the grocery sector were evident when introducing Zomato Market during the pandemic-induced lockdowns. However, they retracted this banner as various state governments slowly lifted the restrictions.

Zomato CEO explained it was not their core business as the company stopped their grocery services.

Grofers and Zomato tried to strike a deal in 2020, which could have been an all-stock merger. But it fell through due to compliance regulations and other issues.

Zomato performance at a glance

• 1367 crores clocked in revenue for the first three quarters of FY21.
• Operational revenue totalled Rs. 1301 crores, and nearly Rs. 1724 crores were spent during the same period, i.e., April to December 2020.
• Lockdown boosted Zomato average order value by 32% to Rs. 400 since Q1 FY21.
• Zomato will launch its IPOin 2021 and has received approval from SEBI for a whopping Rs. 7500 crores.
• Although Zomato’s standalone losses increased to 160% to around Rs 2450 crores, its revenue grew by a mind-boggling 98% in the same period.

Parting thoughts

Grofers’ well-established bottom line in the grocery sector can improve Zomato’s business growth considerably. Further, continuing mobility restrictions are prompting an increase in online sales in the food and grocery sector. Therefore, if CCI approves this, and there is no reason not to, it can be a landmark turning-point for both Grofers and Zomato in the long run.

Frequently asked questions

How much is Zomato aiming to collect from its IPO?

Zomato is looking to raise up to $1.1 billion from its IPO later this year

When was Zomato founded?

Zomato is in operations since 2008. It has over 3.5 lakh active restaurant listings and is present in 524 cities across India and 24 countries outside India.

What is a unicorn company?

A unicorn company is a privately funded tech start-up whose valuation is over $1 billion.