Sriharsha Majety stated that competitive intensity and dark store rollouts in the sector will remain elevated in the near term, impacting margins temporarily
Highlighting that the quick commerce business is witnessing a heightened degree of competitive action as investments are being made by incumbents as well as new players, Sriharsha Majety, the Co-founder and Managing Director (MD) of Swiggy has stated that competitive intensity and dark store rollouts in the sector will remain elevated in the near term, impacting margins temporarily before they head back up.
In a letter to shareholders, the Group Chief Executive Officer (CEO) of the company, Majety stated that the company has been modulating its investments for sustainable gross order value (GOV) growth in the quick commerce segment. This has driven down its Contribution margin to -4.6 per cent from -1.9 per cent last quarter.
“Our investments are focused on geographical expansion, customer acquisition/retention, and competitive dynamics, in that pecking order. This thrust implies that we have added 86 stores in just the month of January, and have grown monthly transacting users (MTUs) to nine million (+ two million vs third quarter) already,” Majety highlighted.
The company’s management, in its regulatory filings, stated that contribution margins for quick commerce dipped to -4.6 per cent in Q3FY25 from -1.9 per cent in Q2FY25, while AOV and take rates improved. The company attributed this to various factors. Store expansion and replacements (smaller to larger), which are yet to mature in terms of scale along with heightened competitive action leading to higher customer incentives have been the key factors.
Increased investments on customer acquisition and activation as well as seasonal investments on store and delivery networks to cater to peak event volumes have also added to the cause, as per the statement. Led by the contraction in contribution margin, increased brand and performance marketing spends, and increase in manpower cost, the adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) for quick commerce business of the company dipped to -14.8 per cent in Q3FY25 from -10.6 per cent in the last quarter.
Despite headwinds from a higher store count addition planned in Q4FY25 and heightened competitive action, the company expects its contribution margins to be rangebound in the near term due to structural improvements in its margin levers. The statement added that this improvement is driven by an increase in average order value, a rise in advertising revenues, a reduction in cost of delivery with scale and densification and an operating leverage on store costs.
