In the third quarter of the current fiscal year (Q3 FY25), Swiggy Instamart’s margins were negatively impacted by the growing rivalry in the rapid commerce market, as the company increased its investments to keep the competition at bay. The contribution margin for Swiggy Instamart decreased from -1.9% in the previous quarter (Q2FY25) to -4.6% during the reviewed quarter. Higher growth investments, especially in user engagement and the expansion of darkstores across different areas, were cited by the company as the reasons for this reduction.
It further stated that rising competition resulted in higher consumer incentives and higher client acquisition costs, which caused the contribution margin to decline. Notably, the fast commerce segment’s adjusted EBITDA margin also decreased from -10.6% in the previous quarter to -14.8% in Q3 FY25. This decline was mostly caused by higher brand and performance marketing expenditures as well as a decline in the contribution margin.
As structural changes take place, Swiggy anticipates that Instamart’s short-term margins will be range-bound. These gains will be fuelled by increased average order value, rising ad income, decreasing delivery costs as scale increases, and improved store cost efficiency.
Nevertheless, Swiggy Instamart’s gross order value (GOV) increased by 15.5% on a quarter-over-quarter (QoQ) and 88.1% on an annual basis (YoY) to INR 3,907 Cr. In Q3 FY25, its monthly transacting users (MTUs) increased by 13.9% QoQ and 62.7% YoY to 7 Mn. Compared to INR 293 Cr during the same period last year, its adjusted revenue for the period was INR 603 Cr, a 105.8% increase. It increased 17.5% sequentially from INR 513 Cr in Q2 of FY25.
Instamart Spreading its Wings
On a sequential basis, Instamart recorded a mere 7.3% increase in the quantity of orders. This was explained by Swiggy as the “back-ended nature of store expansion.” The influence on order frequency is delayed when new stores open later in the quarter since new customer acquisition occurs at the end of the quarter.
According to the company’s post-earnings teleconference, “A higher share of new customers results in a lower overall order frequency because order frequency doesn’t increase immediately for new users.” Notably, Swiggy Instamart increased the number of operational dark stores to 705 by adding 96 new ones in Q3 FY25. By contrast, rival and industry leader Blinkit expanded its shop count to 1,007 during the December quarter, adding 216 dark locations.
Additionally, Swiggy has replaced some of its smaller locations, which were between 2,500 and 2,800 square feet, with larger locations that are between 3,500 and 4,500 square feet and have the capacity to hold up to 20,000 SKUs. The average store size increased from 3,200 square feet in Q2FY25 to 3,475 square feet in Q3FY25 as a result of this expansion, the business stated in a statement.
This puts the business on schedule to meet its goal of having an active dark store footprint of 4 million square feet by March 2025. Co-founder and CEO of Swiggy, Sriharsha Majety, claims that while controlling overall growth, the company’s near-term expansion was fuelled by both geographic expansion and densification into outlying areas within already-existing towns. He continued in the call, “Most floor additions going forward will be aimed at managing overall category growth rather than entering entirely new areas.”
Financial Performance of India’s Quick Commerce Sector
It is important to note that, according to Zomato and Swiggy’s remarks following the release of their Q3 results, the December quarter was among the most competitive in the rapid commerce segments. The three major participants in the market, Zepto, Blinkit from Zomato, and Instamart, are well-funded and rapidly growing their networks.
The rivalry has gotten more fierce since e-commerce behemoths Flipkart and Amazon entered the market, while JioMart and BigBasket have increased their emphasis on speedy transactions. Swiggy is optimistic that the additional stores will become successful, nevertheless.
Overall profitability will increase as more stores stabilise and achieve steady-state unit economics; mature stores should see a 4-6% positive margin trend, according to the business. Store expenses, including fixed costs incurred prior to a store opening, usually last between 30 and 45 days, according to Majety.
However, because of increased competition, the cost of acquiring new customers can vary depending on the category’s investment level. Even though there have been some challenges in this area, we are always refining our strategy to increase productivity. He thinks that if the category as a whole expands, the company’s costs associated with acquiring new customers will eventually decrease.
Nitin Konde
