With 15 million Kirana and 80 million trader-based stores in India, livelihoods are likely to suffer as qCommerce expands
Mumbai: Regulatory hurdles, such as gig worker security and alleged predatory pricing by aggregator companies if implemented could curtail growth rates in the near term, although medium-term prospects remain healthy. Zomato (ZOMATO IN, Rating, CMP: INR 263, TP: INR 320), with 469,000 delivery partners and incremental outgo from existing 2-3% of earnings toward their welfare, could hit profitability and may lead to a mild negative impact on EBIDTA margins. Also, retail associations, such as the All-India Consumer Products Distributors Federation (AICPDF) have approached the Competition Commission of India (CCI) and antitrust authorities to investigate quick commerce (qCommerce) companies for alleged predatory pricing. Based on channel checks, with 15mn kirana and 80mn trader-based stores in India, livelihoods are likely to take a hit as qCommerce expands, potentially leading to protest that can hinder growth and sentiments in this segment.
Govt demands additional benefits for workers: Various news reports on Economic Times, INC 42 and The Hindu in Oct-24, hinting at regulatory overhang on aggregator and eCommerce companies, as, 1) the Labour Ministry is looking measures to provide social security and considering a plan to increase benefits for gig workers of up to 5% and employers may be asked to contribute 1-2% of their annual revenue to a security fund, 2) the Ministry also ordered aggregator platforms to onboard eligible gig workers on eShram portal within three months, 3) Karnataka government is in stage of discussion to impose 1-2% transaction fees on online aggregators to provide social security to gig workers, and 4) India’s largest retail group, AICPDF, has approached the antitrust authority to investigate qCommerce firms for engaging in predatory pricing.
India origin eCommerce firms already provide benefits: Our primary checks with legal experts, food tech and other India origin eCommerce companies reveal they are already providing benefits of up to 2-3% of earnings to each of their delivery partners via Mediclaim, term plan, and maternity benefits. For e.g., ZOMATO has 469,000 delivery partners as on Q1FY25. Further, based on Q1FY25, its annualized delivery cost was INR 52bn. An increased outgo of an additional 2-3% for welfare of delivery partners will have a mild negative impact on profitability, in our view.
Slight impact on earnings: ZOMATO consolidated EBITDA margin was 4.2% in Q1FY25 based on the food segment EBITDA margin, which was 3.4% of Gross Order value (GOV) and 14% of adjusted revenue; we expect this to increase to 4.8% of GOV in FY26E. The potential 2% higher outgo due to increased benefits for delivery partners may pose a mild impact on EBITDA. However, ZOMATO can potentially recover a part of this from customers by raising handling or delivery charges; we also need to assess if these charges are implemented on a pan-India basis.
AICPDF moves CCI: Further, another potential overhang is the AICPDF approaching CCI against qCommerce companies, as kirana stores may see a further negative impact on their businesses if qCommerce scales up beyond metro cities. As per our update, Kiranas feel the pinch of quick commerce, on 11 September 2024, the implementation on MSP in a worst-case scenario may have a mild negative impact on qCommerce segment growth rates in the medium term, as the latter is a more convenience-led approach and not completely dependent on discounts. As per Swiggy’s DRHP, qCommerce industry growth is estimated to be 60-80% in the medium term, which may see a slightly negative impact and move lower toward 40-50% in a worst-case scenario.
Kiranas continue to feel the pinch of qCommerce: As per our checks, distributors on the ground are unable to recover dues from kirana stores due to the negative impact on kiranas by digital platforms; kirana stores are sitting with high levels of inventory and distributors are unable to receive money on time. Emergence of modern trade did not see a big negative impact for kirana stores, as the former is led by bulk buying whereas kirana stores were always for impulse consumer buying. However, emergence of qCommerce companies could make a bigger dent, as buying for impulse verticals and products may see strong growth via qCommerce platforms, moving away from kirana stores. With 15mn kirana stores on a pan-India basis and 80mn trader-based stores (the non-food vertical), there is a large portion of the country where livelihoods may see a negative impact once qCommerce scales up successfully in metros and beyond metros; thus, we believe any potential protests by kirana stores may have a negative impact on growth within the qCommerce segment.
