SoftBank-backed e-grocery startup Grofers is likely to scrap its plans to go public as it may have found a powerful backer in food delivery giant Zomato which is looking to write it a USD 100 million check.
The funding deal seems to be a part of a bigger investment round, which may value Grofers at USD 1 billion, a report by local media Economic Times (ET) said, citing two sources aware of the proceedings.
“Now that the company has decided to shelve its IPO, it is looking to mop up around USD 200 million,” one of the sources told ET.
This is the second time the two Gurugram-based startups have tried to shake hands. Early last year, Zomato was looking to acquire Grofers in an all-stock deal, in a bid to stay ahead of rival Swiggy which ventured into e-grocery in 2019, but the talks didn’t materialize as the pandemic swept the country off of its feet.
The renewed discussion for a capital infusion comes at a time when the country is fighting the second wave of novel coronavirus and millions of Indians are sticking to online channels for buying groceries and food.
“Zomato has ambitions in the grocery segment and wants to partner with a specialty grocery company rather than build something of its own,” the ET report said, quoting a person privy to the deal. “They want to stay focussed on the food business.”’
It is to be noted that last year, when COVID-19 struck India in March, Zomato rolled out grocery delivery service under Zomato Market by partnering with fast-moving consumer goods companies and e-grocers BigBasket and Grofers. It was around the time when Zomato was eyeing a merger with Grofers.
However, after a few months, Zomato discontinued the service, claiming it was not its core business.
“We did grocery because the food delivery business was gone during the lockdown. For 3–6 months, it worked really well and helped us get through the crisis. Eventually, it didn’t make sense…,” Deepinder Goyal, co-founder and CEO of Zomato, told ET in an earlier interview.
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A week ago, Zomato became the first high-profile startup to file for a USD 1.11 billion IPO by submitting a draft red herring prospectus (DRHP) with market regulator SEBI. The company said it plans to utilize USD 756 million from the proceeds in funding growth initiatives, which will include acquisitions.
Grofers, on the other hand, was reported to be mulling a special purpose acquisition company (SPAC) merger with US-based Cantor Fitzgerald to list on Nasdaq in February. SoftBank Vision Fund (SVF), which is the largest shareholder in Grofers with about 50% stake, was earlier steering conversations around its initial public offering via SPAC, the ET report noted.
“We are in regular touch with the investor ecosystem and are seeing a lot of inbound interest given grocery is an essential need and a high growth segment,” Grofers said in an emailed response to ET. “Given the dynamic business environment, there will always be room for speculation, but our team is focused on serving more families.”
Satish Meena, industry analyst and former senior forecaster at research firm Forrester, believes Grofers’ IPO was highly unlikely as it is not the market leader, and is not likely to remain number two after BigBasket, because of the entry of Reliance JioMart, Amazon, and Flipkart in the online grocery space.
“However, taking money from Zomato is quite surprising, since its biggest backer SoftBank is an investor in Swiggy. Or SoftBank might have just given up on Grofers and perhaps planning to fund Swiggy Stores, which is almost a replica of Grofers,” he said. “It is also surprising because SoftBank could have gotten Grofers to collaborate with Swiggy.”
“Grofers is raising from Zomato because Albinder [Dhindsa] was in Zomato before starting Grofers and Zomato’s Goyal had contributed in its first USD 500,000 round,” he added. “He was one of the early backers so there is a connection there.”
Backing Grofers, which claims to be witnessing a year-on-year growth of around 110%, makes sense for Zomato as it will give Zomato a pie of the exploding online grocery market in the world’s second-most populous country.
“If you see their IPO document, Zomato is purely a food delivery company, and they are not making decent money either from their B2C or B2B business,” he said. “They want to use this USD 100 million investment in Grofers to remain competitive with Swiggy.”
Swiggy, meanwhile, is reportedly in the process of raising USD 450 million to boost its grocery delivery business. Taking Grofers under its wings will also give Zomato a footing against the US e-tailer Amazon, which entered into its territory with Amazon Foods last year.
Meena said after Zomato goes for an IPO after three months, it will have to tell a continuous story to its investors because the food delivery numbers are not going to grow very fast this year.
“When they go for IPO, they will need something to keep the stock prices up, and online grocery is something that they can show as a new opportunity and a growth area,” Meena said.
Grofers, on its part, will be able to use the potential investment to level up its operations to grab a bigger chunk of the market in the ultra-competitive e-grocery segment.
Many industry experts feel that over the years, Zomato has been strategically establishing its food tech empire, while cutting down costs and letting go of businesses that don’t generate money. At the same time, it has been keeping an eye on new opportunities that it can be a part of.
“Zomato has been quietly building a full-stack food-tech business,” Aviral Bhatnagar, a VC at early-stage investment firm Venture Highway said on LinkedIn last week. The stack now consists of “sourcing (Hyperpure), dining (Gold), and fulfillment (deliveries). This vertical integration is orthogonal to Swiggy’s horizontal delivery business.”
It has been strengthening its relationship with restaurants by connecting and monetizing with all the stakeholders of the food and beverage industry. Through advertisements and commissions, it monetized restaurants, its subscription service Gold ensured it earns revenue from dine-in customers, while with B2B grocery platform Hyperpure, Zomato is trying to control how restaurants source groceries. With this investment, Zomato is now looking to expand its presence from B2B grocery supply to B2C space.
Bhatnagar said, the “real pattern is actually Zomato’s reinvention to leap into bigger markets.”