Eternal and Swiffy will quadruple the size of the business over next 3 years, while keeping losses in check: Kunal Vora

Time of India

11 hours ago

Kunal Vora
, Head of India Equity Research,
BNP Paribas
, says India's largely unorganized trillion-dollar retail sector, dominated by mom-and-pop stores, is witnessing a
quick commerce
boom. Driven by dark stores, companies like Eternal are achieving EBITDA breakeven. A land grab is underway, with major players investing heavily to gain first-mover advantage. Focus remains on strong growth while controlling EBITDA losses. In FY27, BNP Paribas expects Eternal quick commerce to get to breakeven at EBITDA level. In the case of Swiggy, it will take longer, about FY29 or FY30.
Your report calls quick commerce a decadal opportunity. Help us understand what are the key factors that could determine who will win in this space over the next 5 to 10 years? Any important metrics other than the regular ones that you are tracking at the moment?
Kunal Vora:
The
Indian retail industry
is a trillion dollar industry in terms of size, but it is still largely unorganised. If I look at a category like grocery, more than 80% is still largely driven by 10 million mom-and-pop outlets. We have seen a modern trade making some inroads, but it has still been restricted to top cities and then we saw overall growth starting to stabilise in modern trade while e-commerce did not really make any meaningful dent when it came to the grocery segment.
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What we saw with quick commerce is a very strong growth over the last couple of years driven by the dark stores which provide convenience; pricing also has been reasonable and consumers use them more frequently. Also, they were able to crack unit economics with Eternal getting to EBITDA breakeven in 1H of FY25. What we have seen subsequently is a land grab phase in which everyone started investing more aggressively. We have seen that happening in three quick commerce companies. But other retail and e-commerce companies are also looking at this opportunity very closely. They are also starting to invest. It is really about chasing and getting the first mover advantage and we believe that the near-term metric to judge them by will be ensuring that they maintain a very strong growth, while at the same time keeping the EBITDA losses in check.
I would not judge them by immediate profitability even if over the next couple of years, they get scale. What we are expecting is just between the two companies which we cover – Eternal and Swiggy – where the net order value will increase from about $4 billion in FY25 to $16 billion by FY28. That is quadrupling the size of the business over the next three years, while keeping the losses in check. We expect that the model in the case of food delivery is initially getting the scale and then focus on profitability will be replicated. Having said that, this is going to be a more competitive industry. The size of the industry is much larger compared to what the food delivery industry is and it is going to remain competitive. Right now, it is more a question of just getting the size and we expect margins to follow.
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How do you see unit economics evolving across food delivery and quick commerce as the market matures?
Kunal Vora:
In the case of food delivery, we have already seen that happening. In food delivery, if I look at over the last three years, this industry was making about $20 billion in EBITDA losses. In FY25, we have seen about $20 billion EBITDA positive numbers. In case of quick commerce, we believe that going forward, FY26 will remain a year in which there will be peak losses, but beyond that in FY27, we expect Eternal to get to breakeven level at EBITDA level.
In the case of Swiggy, we expect it to take longer about FY29 or FY30. In terms of margins, we expect the food delivery margins getting closer to 5% now and on average order value, while in case of quick commerce we expect to take longer, but about 5% is possible in the medium term.
The report states that the food delivery is more resilient than the QSRs. Now, is this primarily due to the capex like models or are there consumer behaviour shifts that are driving this advantage?
Kunal Vora:
In our report, we have done an extensive comparison and benchmarking between food delivery and quick service restaurants – both spaces which we look at very closely now. What we see is that the Indian quick service restaurant industry has seen an increase in EBITDA but they have not been able to generate free cash flow because whatever increase in EBITDA they have seen, largely that is getting reinvested in capex.
The big difference between the two is that in the case of food delivery, there is almost no capex, there is no working capital. So, whatever EBITDA they are able to generate is getting reinvested in another very large high growth opportunity which is quick commerce. So, that is a space which we prefer between the two. Even in terms of growth trends, over the last six years – FY19 to FY25 –,
QSR industry
has seen about 13% revenue CAGR, but that has been driven by 14% store CAGR and that is fairly capex intensive.
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Many of the companies like Jubilant FoodWorks, the capex was about 1-1.5 billion per annum in FY19, but that number is now about 7 billion in FY25. So, while we have not seen a meaningful increase in EITDA, the capex intensity has been fairly elevated in QSR industry and that is the reason we believe food delivery is a better place to be in.
In terms of the audience that quick commerce caters to, help us understand how you expect quick commerce to evolve into a true mass market channel? Or will it remain an urban value proposition in the near future?
Kunal Vora:
In our projections, we see the quick commerce industry catering more to the affluent consumers by FY28. But once they achieve scale, they will be in a position to go mass market as well. For now, our expectation is about 40-45 million households will be spending about Rs 5,000 monthly on quick commerce that can be across various different categories. It can be home and personal care. It can be consumer electronics. There are various products which they can start adding. And beyond that, once they achieve scale, which is about $16 billion just between the two quick commerce companies, they will have many margin levers which can help them bring the cost down.
The margin levers we are talking about would include better pricing power when it comes to negotiating with the brands. We expect the advisement revenue to come in because the kind of details which these companies will have over the
household consumption patterns
will be very valuable for the companies and also, we expect the average order per dark store will keep on increasing over the next few years.
Some of these will help them achieve a better level of profitability and some of that can get passed on to the consumer. As the pricing becomes more competitive, they can start going beyond the affluent 40 million households and into the mass households.
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In what ways might large incumbents in the entire retail space like Reliance or Amazon retail could reshape the competitive intensity we are seeing amid the listed space?
Kunal Vora:
This is still going to be an evolving space and we do not expect a quick result in terms of market consolidation the way we have seen that in food delivery happening in case of quick commerce soon. The way we are looking at this industry is that everybody will look at their own sweet spots and their own target markets.
Larger e-commerce players will continue to focus on a much larger assortment. For quick commerce, what really works is fast moving items which the consumer needs, but it will not be able to cater to industries in which there is a wide assortment, like fashion is not something which they are like well positioned or footwear is not something which they are well positioned to do. So, they will be doing the fast moving items.
E-commerce will have a much broader offering and they will not be delivering within 30 minutes. They will have a larger assortment while delivery times could be longer. In the case of physical retailers, it is going to be about the consumer footfalls and they will look more at scheduled deliveries. While they will look to bring the delivery times lower, at the same time they would not go into the dark store model wherein they are close to the consumers in every location.
With the heavy focus on the dark store expansion, how should players balance the speed of scaling with profitability discipline?
Kunal Vora:
After Blinkit achieved EBITDA breakeven, there has been a big burst of dark store expansion. The number of dark stores have doubled in FY25 across most players. I expect FY26 to be a year in which there will be some consolidation while the heavy growth will still continue, and at the same time, we will not see doubling of store count and the focus will be on driving efficiencies to bring the EITDA losses to lower levels compared to what we see. FY26 could be the peak year. After that we expect the dark store additions to get normalised while the focus will be on driving consumers per dark store per day.
What kind of impact could Rapido's entry have into the food delivery space? How sustainable could Rapido's model be in terms of their pricing?
Kunal Vora
: I would not comment on Rapido and what they can do. But if I look at the economics of this business, it makes it very difficult to breakeven at Rs 25 or Rs 50 because average rider will want about Rs 20,000-25,000 per month which is about Rs 1,000 per day and if he is working for 10 hours, you need at least Rs100 per hour, Rs 50 per delivery. So, if someone is looking at like Rs 25, Rs 50 pricing, that makes it very difficult to work out and it will require a lot of cash burn.
Today Zomato and Swiggy between them carry about 1.5 billion orders annually and at that scale, we see variable cost per delivery for these players at about Rs 60 purely for delivery and about Rs 80 in total. So, to beat them in terms of unit economics is going to be a challenge. Till FY22-23, Swiggy itself with its large scale was still reporting about 15 billion of annual losses. So, it seems challenging for any new entrant to make any meaningful inroad. We continue to see this as a duopoly which will keep generating healthy cash flows.