On quick commerce margins/losses - this quarter gross margin didn't expand, store throughput was down ~6% QoQ, but contribution margin expanded 90 bps and EBITDA expanded ~130 bps, all while you say competition is irrational. If competition stays irrational, why shouldn't margins continue improving at the same pace as this quarter?
It's very hard to predict the trajectory of margin in the near term. Competitive intensity, even if it's high, is not steady always. On our last conference call, we mentioned that the competitive intensity is now easing off and then it changed. So, the margins are a function of various things. Competitive intensity is one of it and even within a quarter or even in a longer period, there are various variables which are geography specific and so on. So yes, directionally we say that margin should expand, but we're not able to confidently say that the pace of margin expansion will be the same as what happened in the last quarter because the competitive intensity was high and therefore going forward should also be the same. It's a multi-variable problem with no linear correlation with just one variable.
Clarify QoQ store throughput down ~6-7% - what explains that? And to tie up earlier guidance: you said 100% YoY growth for next one-two years; now you're saying 100% YoY is contingent on competition not staying irrational. Is it correct that you'll open 3,500-4,000 stores and hit 100% YoY only if competition is rational?
The way competitive intensity affects us is in which form it comes. Last quarter, we saw competitive intensity getting amped up because a lot of competitors went to low MOVs for zero delivery fees, but we're also seeing a lot of discounting happen in the market. Therefore, it becomes a lot more complex for us to be able to say which way things will move and how will we respond. But what you've said is broadly correct. On store throughput, it's a function of the fact that our assortment is now expanding and it's possible therefore that there are quarters when some of the store expansion, the driver of which is assortment expansion is not as fast moving as some of the main SKUs. Over the long term, we don't see that as a concern, and the fact that assortment is expanding is also reflecting in our margins which were better last quarter despite the throughput being lower as you mentioned.
Your growth is good (130% YoY LFL) and you're expanding margins. Where is competition showing up? It's not really impacting you today. What needs to change for competition to start impacting your numbers?
We're not saying that. There's always a way to look at things and one can argue that in absence of irrational competition, that we're pointing out, things would have been much better than what they are today. That's also one perspective. The competition is impacting us in terms of our outcomes and numbers, but it may or may not impact the decisions that we take in that particular quarter. For example, in the last quarter we didn't see these freebies impacting our market share too much, and hence we sort of sustained our pricing, but as you might have seen last week, we did drop our delivery charges in some markets because we saw some impact. Overall, there's definitely an impact of competition and it impacts our margins, it impacts our top-line growth, it impacts our store expansion plans and various other things.
Given you cut delivery fees in certain markets, that'll pressure take rates. How much contribution margin expansion can realistically be sustained in the next quarter or so?
For the next quarter or even two, we don't want to comment on anything. It is very hard to talk about whether the margins will expand at all or if they do, by how much in the next quarter. In the long term, our confidence on margins going to 5% to 6% of NOV remains high, and we've shared data on a couple of cities in our business where we are already at 5% Adjusted EBITDA margin. The way we think about margins is therefore long term. We have extremely high confidence in the business model to deliver the margins that we need to get to the ROCE that I mentioned. But in the short term, we want to take the right decisions for the business which would mean taking a margin hit if we have to do that and we're open about that.
How to look at break-even on cash flow basis in quick commerce at the steady-state margin you're talking about? What does that translate to in terms of free cash flow margin?
We haven't looked at that yet, honestly.
Any broad sense on store additions happening in Tier 2, Tier 3 cities? Is economics similar to top-tier cities in AOVs and OPDs, and should long-term margins (5-6% of NOV) be similar there?
We're not providing any sort of breakup in to where we are opening stores, but at the contribution level, the economics for us are fairly similar even though the headline numbers might be different depending on Tier 1 or Tier 2. On long-term steady state margins of 5-6% of NOV in Tier 2/Tier 3 - correct.
On a four to five year view, how big could this quick commerce/store industry be? Will the industry number be as high as 10,000 stores? Big picture thoughts please. Also, is the current mix 70:30 between top-tier and Tier 2/3 cities and could that ratio change?
We're also finding out the depth of the market as we go along, and as we launch more use cases. Customers also indicate how they want to use the platforms. Right now, we have a lot of vectors for growth- geographic, assortment, penetration, customer use cases, which are also coming up. We're also finding out as we go along. Whenever we know better, we will keep guiding to what we think. Right now, we think that in a rational market, there should be headroom for us to add a significantly higher number of stores in the near future. On the 70:30 mix - we are not providing this.
In Deepinder's letter it's mentioned his unvested shares would come back to the employee pool. What kind of expansion would this lead to in your ESOP pool, and for how long would you not need to do more grants?
The way it works is that we have an ESOP pool which has a large number of shares today. I think roughly about, I need to check the number, but it's north of 20 crore shares. So, his ESOPs will perhaps expand that pool by another 3.3 crore shares. The grant from this pool is a function of the Board allocating ESOPs to different employees basis their performance, etc. Therefore, the grants are not going to go up just because the pool size went up, but because the pool size went up, we may not need to dilute our ESOPs again for slightly longer than what we would have otherwise done. We don't think we need any dilution in the near future at this point.
In terms of competition, is it largely between the three quick commerce players, or are e-com players (Amazon, Flipkart) and physical retailers (JioMart with 800 dark stores and 1.6 million daily orders) also impacting you, particularly in Tier 2/3 cities? Also, how much do cities beyond top 8 contribute?
For us, competition is everybody who's trying to gain a market share of the online buying pie. So, everybody's included. Generally the competition across the board has gone up. On contribution from cities beyond top 8 - we are not disclosing that, I've mentioned that before also on the call.
Is competitive behavior consistent across players, or is it limited to incumbents? Are Amazon, Flipkart, JioMart also resorting to this kind of competition?
We wouldn't want to comment on this question. You should find out and talk to others.
On food delivery - we saw some acceleration and positive commentary from consumer companies in India. Is it fair to say you're more comfortable reaching 20% growth in FY27 or in two-three quarters? Also on leadership transition - is the medium-long-term goal to transition more responsibility to Albinder?
Very hard to say. These things keep changing for reasons which are beyond our control. We don't want to venture and take a guess here on how this moves. Our business responds to growth and demand, and it's an asset light model. If the demand expands, unlike Blinkit, we don't need to build infrastructure to service it. Whatever is the pace of growth of consumer demand in the country, in this business, our job is to make sure that we're able to cater to it. So, we just stick to our job and we don't want to take a guess on how this will grow from here in terms of growth rates. On leadership transition - that's not the plan. Deepinder, as his letter mentions, is going to continue to be involved in the same way he was in the past, and there's a lot to be built at Eternal right now.
You've maintained $3 billion NOV guidance for going-out in FY30, which implies north of 30% CAGR over the next four years. Last quarter was ~20% growth. Why is growth as low as it is right now, and what explains the meaningful expansion built into your guidance?
A large part of our growth in this business, going forward, is going to be from market share growth. There are sub-segments within District business like events and movies where we are a significantly smaller market player even now compared to our competitors. For us to deliver 30% CAGR over the next three to four years, it doesn't necessarily mean that the industry has to grow that much. Lot of it can also come from market share gains, and that is what we are building into our plans right now.
Slower growth in orders this quarter seems to have slowed down more than headline revenues in quick commerce, and not been impacted by GST. Is that a reflection of more aggressive competitive stance? Did you lose share to peers? Going forward will this normalize?
Yes, some of it is an impact of that. On normalization - we have no idea. It depends on how the overall market behaves.
Store additions have slowed - should imply better store vintage and older stores should ideally have better NOV per store. Why is NOV or throughput per store per day not expanding if vintage is better? Also, capex went up despite fewer stores added, and working capital days are expanding - comment on those two factors.
That's again a function. As I mentioned, a lot of our store additions, not just last quarter but last two, three quarters, has been towards assortment expansion and as we now further expand assortment, the turnover of this long tail is not as high as what we started the business with. So, there is always that negative impact of assortment expansion on throughput that we will continue seeing in the business, and in this quarter, that's resulted in a slight dip. NOV per day per store we believe will continue to grow. On capex and NWC - our framework is ROCE. It's a young business; we don't have a playbook. On capex it will go up on a per store basis going forward because there's a lot of automation opportunity here which will increase productivity. We don't expect net working capital to be beyond those 18 days that we had shared earlier, so the ROCE outcome should still be north of 40%.
Contribution margin expansion at Blinkit was 90 bps despite 20 bps take rate coming off. Where exactly did you see meaningful improvement in the play-out between take rate and contribution margin expenses?
It's mostly to do with the mix change. Impact of seasonality is also over there and then some of the other factors also impact what product mix we end up selling in the quarter. On cost efficiencies, most of the benefit are on the cost side below gross profit. There's no one particular factor. It's largely operating leverage, which is resulting in lower costs and higher productivity in warehouses that's resulting in increase in margins.
On the labor code changes - how much of those costs are already baked into your margins, particularly the gig worker social security and gratuity for fixed-term contract labor?
The new labor codes do not impact our long-term margin guidance. That doesn't change. As far as any potential impact on account of code on social security is concerned, we will get to know that once the rules are operationalized and notified. From what we know today, the business will either be able to absorb that cost or we'll pass it on to customers. On your second part on gratuity and leave encashment, our assessment right now is that there's no impact on our business on account of that. But again, there are a few outstanding questions there that we will get more clarity on over the next few days. And if there is any impact, then the next quarter will reflect that, but I don't expect that to be meaningful at all.
On going-out - previous thought was losses around INR 60-70 crore per quarter. There's been a sudden jump this quarter without commensurate growth (20% YoY). Is there a scale-up in investments that will sustain, or was it a bunch of one-off investments?
It's more the latter. We decided to launch District Pass membership program which we initially did not plan for in this quarter, and a large part of the increase in losses is on account of rolling that out and that will not impact the top-line numbers in this quarter given the effect will be compounding over the next few months. But it's the right step, and it's going to drive multi-category usage on the app. We'll keep evaluating whether we need to continue this investment or not. Irrespective of that, we now expect the losses to come down sequentially from here towards breakeven in the next four to six quarters.
In Q2 letter you said GST cuts bring down basket pricing by 3% for Blinkit, helping demand. Did this play out as envisaged in Q3? Also, congrats to Albinder on Group CEO - do you continue leading Blinkit?
Some of it did, but there were also supply challenges because of the transition. It will become clearer over the next few quarters. It was not a resounding yes this quarter. On leadership - as we mentioned in the letter, we continue to operate like we're operating. As a team, Akshant, Deepi, and I will continue to do whatever we were doing, including me leading the Blinkit business. So, operationally, nothing changes for us.
On 100%+ growth being possible with 3,500+ stores (vs ~3,000 earlier) - does it mean incremental stores will carry lower throughput than previously expected? Is competition rolling out their own stores increasing penetration and bringing down your throughput?
No, we never mentioned that the 100% growth from here on will happen with just 3,000 stores. We don't think that is likely, although possible. For that to happen, we will need to open more stores, which is what we have mentioned here.
On competitive intensity - you alluded to some tactical interventions this quarter. If competition stays where it is, are your interventions sufficient to hold market share and deliver profitability, or will more interventions be needed?
Competitive intensity also tends to go up over time because the kind of competitive interventions that we're seeing, they usually lead to lower ROI as you keep doing more and more of them. So, we will have to respond to a fairly volatile environment. I don't think we can just stay at the intervention and then hope that the competition also stays at the same thing. I think people will change. There will be more competitive interventions, and we'll have to also respond to that.
In the letter you mentioned 90% of business shifted to inventory; the remaining 10% you said you will not shift - what is the assortment there? Is it electronics, slower-moving goods, higher ASP items?
Some of that is SKUs that we do want to keep on a marketplace model for different reasons. Some of these might also be related to the fact that these are slower moving and in some cases, there is a more vibrant seller ecosystem for these SKUs and they do a better job of managing inventory and managing the back-end, than we would be able to. That's the kind of SKUs that contribute to that number.
On food delivery, you took down delivery charges and growth is picking up. From here, do you expect growth to accelerate further or remain in this ballpark?
On growth, as we mentioned in response to question 7, that long term growth opportunity is pretty high given that some of our large cities are still growing 50% to 100% year on year. As of now, as we have mentioned, we expect year-on-year growth to continue slowly trending up towards 20% YoY, is what our current sense on the market is.
On the move to inventory model - the letter says half of the 1% accretion has already happened. Should we expect the remaining half-point in the next three to six months? Could the benefit be more than 1% point?
The full benefit should accrue in the next six to nine months, and the benefit will not be more than 1%.
In a place like Bangalore where every quick commerce platform is aggressive, what are the directional trends for your market share and contribution margin? Are you maintaining, gaining or losing share?
From what information we have, in most of the Tier 1 markets, which is the metros, we have largely maintained our share of NOV, and we know that now there is competition in almost all of the cities. That is the best information we have.
On MTU growth on a per-store basis - ad spends consol vs standalone don't show much increase despite competition, so we seem to be getting more organic users. What is attributable to this continued per-store user growth?
It's more related to assortment expansion.
But more users should translate to higher order frequency per customer, but frequency has gone down. Is there a replacement happening? Also on leadership - does the Blinkit/food and going-out leadership below the three of you remain as it is?
That's not as linear relationship as you think. If customers come to us through categories which are expansion categories, then the frequency doesn't necessarily go up because frequency driver categories are not the ones that they might be entering through. The trajectory might be different as we expand assortment more. On leadership - right, no change below the three of us.
In the letter you mentioned capex per store will increase henceforth. Why? Are we also moving to a megapod-like structure?
It tends to be chunky, and we make a lot of investment in the warehousing infrastructure as well, especially as we expand deeper and deeper into the country. That would explain the increase in capex per store. Also, we are investing a lot more in automation now. Also, there is some increase in per store's square foot size, but it may not be similar to what other competitors are doing, but in general, our store size is going up every quarter. It's a function of availability of real estate, it's a function of how we want the store design to be, and because of that, there's a trend which is taking the store size up. Capex per square feet of space addition is not going to go up as much as capex per store would.
In Bistro, you mentioned early signs of product market fit. Can you please elaborate and what kind of scale-up can we realistically think of? Is this convenience plus value (comparable to Swiggy's Toing)?
Product market fit for us means that on the customer side there is genuine value being created for which they come back to the platform and transact and then equally from an economic standpoint, we start getting more comfort on this business being able to make money, especially given the AOVs are much lower here than what we see in the food delivery business. On the demand side we were anyways fairly confident. We knew that a few months ago when we opened the first few stores that customers were not coming here just for cheap food, but we're solving an unmet customer demand here for quick snacky food, which is higher quality at the right price point. On that we had conviction early, but as we continue to build the business, we are building more conviction on economics as well and hence, at this point our plan is to continue investing in this business in a cautious way and at some point, like Blinkit, if it becomes extremely clear that this is a profit making business and margin visibility is high, then we may accelerate expansion as well. Not just convenience and value, it's also menu assortment. There's a cuisine gap in the market which Bistro fills, and that is also why we don't see this business cannibalizing the Zomato business, wherever we have these stores.
You had 211 net store additions this quarter - did you close any stores? How high is gross vs net? And after rapid expansion over the last few quarters, do you see a need to review some stores or exit some smaller cities?
Just regular closures that happen for different reasons, so it is net store addition. Closure rate is very low. It looks good.
On 100% growth - last quarter you said you can deliver 100% YoY for next two years. If the opportunity is so large and you've achieved break even, why can short-term competitive intensity derail it especially when you're investing in market share gain? What has changed in one quarter?
Our viewpoint on this is that the competitive intensity is also dependent on the kind of competition you see. Currently, we feel that we are the only ones who are meaningfully contributing to increasing the market size, whereas the competitive intensity is mostly showing up and taking away share, and that is why you will see that pressure on growth. Usually, you will see much faster market growth and all players gaining share, but we're not seeing that kind of competition.
You said store size in general continues to go up every quarter - are store sizes going up in mature cities as well? And when you say automation in stores, where does that automation come in?
On the first one, yes, the store size is going up across the board. And on automation, actually, most of our automation is more related to our overall supply chain, not just the stores.
On assortment changes as business grows, is gross profit per square foot per day still your north star metric? Do you care about maximizing order throughput per dark store per day at all?
We don't really have those kind of targets whether it is orders per day or sales per square foot. Our plan is to provide customers with better experience, whatever allows us to do it and is good for the overall economics of the business. That's the direction that we end up going in.