Quick commerce profitability to be impacted once companies take inventory control: Capitalmind’s Deepak Shenoy

Once quick commerce companies like Zomato’s Blinkit, Zepto, Swiggy have direct control over the inventory by owning the products sold to customers, profits are likely to take a hit, believes Deepak Shenoy, Founder and CEO of portfolio management service firm Capitalmind.

“The profits you see in a Blinkit is there is a profit there is primarily because inventory costs are not being accounted for meaningfully in the parent organisations because they are not allowed own the inventory,” he said. “Once you start seeing the inventory costs hitting you will start seeing a lot of the profits will be absorbed by the inventory.”

Shenoy shared these insights with YourStory’s founder and CEO Shradha Sharma during a virtual session on Saturday. His comments come closely following Zomato’s qualified institutional placement, through which it raised Rs 8,500 crore from domestic investors like Motilal Oswal, HDFC and ICICI Prudential. This would bring down foreign ownership of Zomato below 50%, enabling the company to own inventory that is being sold on its platform.

India’s foreign direct investment rules restrict majority foreign-owned companies to have ownership or any control over the inventory, for which companies like Walmart-owned Flipkart and Amazon have come under immense scrutiny in India.

“Right now they partner with some other organisations which are Indian who own the inventory and therefore own the store. But in retail operations a large part of the optimisation processes have a lot of losses in the inventory part of the mechanism,” said Shenoy. “You over-order something and you under-order something else, you will have inventory holding costs. This is not visible on Zomato’s balance sheet because they don’t officially own any of these entities.”

While it is still early days in quick commerce, the Indian government has already reportedly enquired with senior executives of quick commerce companies about the ownership structure of dark stores. Zepto has also been aggressively raising funds from domestic investors, raising a $350 million round led by Motilal Oswal. Both Blinkit and Swiggy Instamart have separate entities operating its dark stores and owning the inventory, whereas Zepto operates under a licensed or franchise model.

Shenoy said that inventory costs are also likely to shoot up as quick commerce companies diversify beyond groceries to categories like electronics and fashion.

“I think long term quick commerce will have a lot of functionalities, but the problem that comes with it is that once you go beyond the eggs, meats and rice- you move from fast-moving consumer goods to slow-moving consumer goods,” he said.