Swiggy acquiring Metro AG's India ops makes sense. Here's why
A few years back, my mom wanted to throw a party to celebrate her 50th birthday. We had to shop for Frootis, and some plastic cutlery for about 50 people. And since a Metro store had just popped up nearby, we thought we’d try out this new place. But you could only walk in if you had a retail store ownership certificate on you. So, my mom borrowed one from a relative, and as we walked in, I was disappointed...
There was neither a fragrant welcome, nor any swanky interiors. Just plain boring cemented walls in a large air-conditioned warehouse (store) with almost every item being heavily discounted. By the end of our trip, Metro made a lot of money out of us, even though our necessities cost us less than Rs 750. How? The minimum bill at Metro has to be at least Rs 1,000.
SO WHAT IS METRO UP TO?
Metro AG is one of those wholesale cash and carry services that started its business in India in 2003 and currently runs about 31 stores here. Being a wholesale business, it operates in the B2B sector and competes with companies like Reliance Retail, Amazon, Flipkart, Dmart, etc.
The German company focuses on food and grocery wholesale and operates on the philosophy of profitable growth. It has a benchmark of only operating stores that make double-digit profits. Which means that if any of its stores are making loses or make profits below the double-digit benchmark, it closes them down.
(In Aug 2021, it shut down its operations in Japan and Myanmar as both were loss-making entities)
However, in India, its situation was different. Though earnings before tax jumped by 57% for FY 21 versus FY20, its profitability in India is at 4-5%.
WHY SINGLE-DIGIT PROFITS?
Metro identified that intense competition in the Indian grocery and e-commerce business led to its low market share. So, in January 2022, Metro hired the management consultancy firm Bain & Co to identify its expansion strategies. Metro estimated that a funding of Rs 5,000-6,000 crore from the German parent would help it fight competition in India. But since plowing in cash would cost Metro its profits, it decided to move out of India.
METRO ON SALE
As per the Economic Times, Metro had approached more than 10 companies to acquire its India operations for an estimated $1.5 billion to $1.7 billion (ie. Rs 13,181 crore). This has prompted Swiggy to take a keen interest in buying Metro's India ops. Here's why:
WHY IS SWIGGY INTERESTED?
Most of us know that Swiggy is one of the market leaders in the food delivery business, right?
Well, Swiggy has expanded its business over the years to leverage its expertise in logistics and delivery and has moved beyond food delivery. It has used the same food-delivery technology and expanded the infrastructure to serve a bigger purpose. You might remember how in 2020, Swiggy launched Swiggy Go (now Swiggy Genie) to help customers to get anything delivered from one place to another. It launched another instant grocery delivery service called Instamart on the main Swiggy app, which allows users to order groceries from the company's partner dark stores. As these products are delivered quickly within an hour, as it competes with startups such as Dunzo.
Buying Metro would help Swiggy instantly expand its e-commerce play as Metro’s retail outlets and deep links with FMCG players will give Swiggy the much-needed muscle power over rivals. A consolidation like this would help Swiggy instantly strengthen its position in the online retail space which is so much better than building a retail company over years.
A takeover like this could create a business model where Metro could supply to Instamart stores at a wholesale rate, and Instamart stores could be delivery-only or even be available for consumers to walk in.
It would also be in sync with other quick-commerce grocery players who are using a similar merger model to grow big. For eg, Dunzo is backed by Reliance Retail, Big Basket is backed by Tata Group, and Blinkit, (remember Grofers?) has raised funds from Zomato. So, Swiggy will naturally try to get support from Metro.
At the end of the day, such a masterstroke could take Swiggy’s e-commerce ambitions further by expanding beyond restaurant delivery, accelerating Instamart’s growth, and keeping Metro alive.