Swiggy IPO serves next dish in Indian food wars

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Salutations, Olio aficionados! 👋

Happy Hump Day and welcome to the 78th edition of Weekly Olio - your trusted source for giggles, wisdom, and a dash of intrigue, courtesy of our tantalizing thought piece (yes, buckle up for Publisher's Parmesan). 🧀

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The Quote󠀢 💭

The Tweet 🐦

Petra in Jordan is one of the most visited places in the world. Clicking a picture of the treasury is a bucket list item for anyone who enjoys travelling. In this thread, go behind the scenes and learn about Petra’s history - what is it and who built it.

The Infographic 💹

Jim Simons, founder of Renaissance Technologies, passed away last week at the age of 86. He was the brain behind Medallion fund - one of the most successful funds of all times. It averaged returns of almost 40% over a 40 year period - better than even Warren Buffett. To honor his legacy, here is a visualization of the Medallion Fund’s returns over the last 39 years.

The Short Read 📝

The AI Workforce is Here: The Rise of a New Labour Market - by NfX

Traditional B2B SaaS has augmented human work with software but the rapid advances in generative AI is forcing a reversal. From Software as a Service, companies now want Service as a Software. The rise of AI workers is leading to a massive fusion of the labour and software market leading to interesting opportunities for founders.

Traditionally companies would purchase a SaaS tool and then be forced to hire human workers to actually do the work. With advances in AI, software can both organise and execute tasks. As a consequence, labor and software are fusing into one massive market. As a result of this fusion, the margin between service businesses (usually less than 30%) and software services (upwards of 80%) is likely to converge. This fusion is likely to create opportunities for founders in industries which has resisted software adoption till now. We are already seeing a bunch of startups trying to sell AI engineers, customer support staff and SDRs. As AI becomes more capable, the list of roles that could be handled by such AI Employees will only become longer.

The Long Read 📜

The Indian Giant Has Arrived - by Mohamed A. El-Erian and Michael Spence

India’s star has shone the brightest in the last couple of years - China’s increasing global isolation and slowing growth has shifted the attention to India as the world’s growth driver. While India has a lot going for it - a young population, growing middle class, rising consumption - there are still three major risks that it needs to guard against.

First, as one of the world’s largest exporter of IT services and recipient of remittances, India' needs to take steps to ensure that it does not end up with an overvalued currency. Secondly, environmental issues are already becoming an acute challenge for people living in Indian cities. With the pace of growth India is expected to see, the impact of these issues is only likely to worsen. Lastly, to avoid China’s fate of becoming a global outcast, India will need to keep engaging with global powers - both in the East and in the West - to adapt as its global influence continues to grow. While these are happy problems to have, policy makers and administrators would need to out serious thought behind these to ensure a global future for India.

Publisher’s Parmesan 🧀

Swiggy IPO serves next dish in Indian food wars

Swiggy, the Bangalore-based food and grocery delivery company, is all set to give competition to its rival Zomato by joining it on the stock exchange. Exciting, right? Swiggy's IPO has already been approved by its shareholders for a whopping $1.2 billion! But the question that is on everyone's mind is - how will Swiggy fare in the face of stiff competition from Zomato?

Beginning in 2014, Swiggy rapidly evolved into a standout startup in the food delivery and instant commerce sectors in India, becoming rival to the recently listed – Zomato. Receiving approval by its shareholders, Swiggy aims to raise $1.25 billion through its IPO, with plans to offer $450 million (INR 3,750 Cr) in new shares and an additional $800 million (INR 6,664 Cr) in shares from existing backers. This move signifies Swiggy's strategic readiness to enter the public markets and indicates a pivotal moment in India's startup ecosystem.

Swiggy's journey from a food delivery startup to a quick commerce giant has been nothing short of remarkable. Despite facing intense competition from rivals like Zomato and Blinkit, Swiggy has managed to carve out a significant market share, thanks to its innovative business model and relentless focus on customer service.

Everything looks good on the face of it, but deep within there are many questions which Swiggy needs to answer.

For instance, Swiggy's market share has declined significantly over the years compared to its competitor Zomato. Despite being the first platform to establish itself in the food delivery industry in 2014, Swiggy has lost a considerable amount of market share to Zomato, which originally began as a restaurant discovery platform and started food delivery a year later.

According to a recent report by Bernstein, Zomato now holds a 54% market share in the food delivery business, while Swiggy's share has fallen to 46%. Additionally, Swiggy has fallen behind Zomato in terms of the number of active users and their engagement with both apps. The ratio of monthly active users on Zomato to those on Swiggy is now 60:40, as per Bernstein's report. This trend is also evident from data provided by market intelligence firm Sensor Tower. For instance, in 2023, Zomato saw 41 million new downloads, whereas Swiggy saw a little under 30 million downloads.

When it comes to profitability, Swiggy and Zomato are neck to neck in the race. This is called wishful thinking! 😁 According to recent reports, Zomato has been consistently profitable for multiple quarters now, while Swiggy is still trying to prove its worth.

Goldman's research suggest that Zomato's food delivery EBITDA margin is the highest among all global food delivery platforms. On the other hand, Swiggy announced its food delivery business to be profitable as of March 2023, but recent investor notes indicate EBITDA losses of 88 crore rupees in the first nine months of FY24.

However, there is some good news for Swiggy as well. The food delivery segment showed a significant improvement from the over INR 1000 Cr EBITDA losses it faced in FY23. Swiggy is optimistic that this trend will continue, and the food delivery vertical will turn profitable going forward.

In fact, Swiggy is expecting the food delivery vertical to grow at an annual rate of 20-25% from FY2024-2026.

Let's say, Swiggy gets listed. Who benefits? Zomato!? 😁

Well first, with the IPO, investors now have a new option to play with, specifically, mutual fund investors looking for an internet play. There are only a handful of internet companies that operate at a reasonable market cap, such as Nykaa, Policy Bazaar, and Paytm (fingers crossed 😜).

Another significant impact of the IPO is that we will finally have a mirror to reflect Swiggy's performance on a quarterly basis. Previously, Swiggy was unlisted, and it was challenging to track its metrics publicly. Now, investors can view Swiggy's performance metrics, such as users, transacting users, frequency, etc., which gives a bird's eye view of how the company is doing.

Furthermore, the IPO will inevitably change the valuation multiples for both companies. If Swiggy's performance deteriorates or doesn't improve, we could see the discounts increasing. On the other hand, if Zomato continues to perform better than Swiggy, it could get even more premium valuations.

But Zomato is now a bigger player in the food delivery and the quick commerce space compared to Swiggy. Correct? That means, there has to be a valuation discount on Swiggy!

It turns out that the pandemic played a huge role in the growth of food delivery services in FY21-22. While the numbers were largely the same for both the players, Zomato saw a massive turnaround, and there are two reasons for that.

Firstly, it managed to outshine its competitors, Swiggy, and capture a larger market share. Secondly, it has been able to increase its revenue growth rate by improving the take rates, commission rates, and advertising revenue.

In the last 6-7 quarters, Zomato has executed their food business strategy far superiorly than Swiggy, which is why they potentially have a 25-30% premium over Swiggy in terms of their food business.

So then, should Swiggy go ahead and list? Shouldn’t they first put their house in order and then think of ringing the bell at the bourses?

It's a bit of a tricky situation. On one hand, waiting for a few quarters before listing could be a good move. But on the other hand, if they come for listing now and show some impressive metrics over the next few quarters, the market could reward them with some great valuation multiples.

The thing is, the market can be pretty impulsive when it comes to rewarding multiples for good performance. So, it's a bit of a gamble. If they come today, they might come at a 30% discount compared to Zomato's valuation for the food business (not the size). But, if they execute well in the next two quarters, who knows, they could come to a 10% discount. And, if they continue to perform well over the next 4-5 quarters, they could be on par with Zomato.

Okay, so food delivery is clear. However, when it comes to quick commerce, Zomato's Blinkit is leading the way with a market share of around 35-40%, which is higher than Swiggy Instamart.

Furthermore, Goldman Sachs has valued Blinkit at $13 billion, which is a noteworthy increase. This valuation makes it even bigger than Zomato's food delivery business in terms of market value.

Investors may have concerns about Swiggy Instamart's business. This is because, unlike Zomato's Blinkit which is gaining market share and moving towards profitability, Instamart doesn't seem to be close to profitability as of now. In the first nine months of FY24, Instamart generated revenues of a little under Rs 1,000 crore, but its EBITDA losses stood at over Rs 1,000 crore in the same period. Furthermore, it may continue to see small losses until at least FY26. This raises questions about the sustainability of Instamart's business model.

Now, on the quick commerce part, what has happened again is that Zomato's execution again has been far superior. You could take it both ways, even in terms of revenue growth, market share, or in terms of profitability.

Zomato has been performing better than Instamart in the quick commerce space, with Blinkit being the clear winner. In terms of market share, Blinkit has around 40% while Instamart hovers between 30-35%.

Instamart is also incurring losses while Blinkit is on the path to breakeven. In the quick commerce space, there are only a few differentiating factors such as product assortment, arrangements with brands, customer experience of the app, and high-margin products. Blinkit has executed well in these areas, leading to its success.

Instamart can certainly make a comeback, but several changes need to be made. These changes may involve improving the product assortment, enhancing the customer experience, and improving the way they deal with brands. Instamart has a significant advantage over other quick-commerce companies, but this advantage has been lost in the last 12 to 18 months due to the success of Zepto and Blinkit. Therefore, Instamart needs to focus on getting back on track to regain its competitive edge.

Zomato currently holds a market capitalization of $20 billion, which is a significant amount. Earlier, an investor's note on Swiggy had suggested that the company's valuation could be at a 20-25% discount to Zomato's. Whether or not the public markets will share the same view is uncertain. It's possible that we might witness another turnaround in the near future.

Olio Jobs 💼

• OneSchema | San Francisco, CA - Software Engineer

• Railway App | Remote - Product Designer, Senior Full-Stack Engineer - Product

• Power | Remote - Product Designer

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Peeyush and Mohit

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