Zomato Ltd

NSE:ZOMATO

Earnings Call Analysis

Earnings Call Transcript 2024-Q4

[Operator]

Ladies and gentlemen, a very good evening and welcome to Zomato Limited's Q4 FY '24 Earnings Conference Call. From Zomato's management team, we have with us today Deepinder Goyal, Founder and CEO; Akshant Goyal, Chief Financial Officer; Albinder Singh Dhindsa, Founder and CEO of Blinkit; and Kunal Swarup, Head of Investor Relations.

Before we begin, a few quick announcement for the attendees. Anything said on this call, which reflects outlook for the future or which could be construed as a forward-looking statement, may involve risks and uncertainties. Such statements or comments are not guarantees of future performance, and actual results may differ from those statements. Additionally, please note that this earnings call is scheduled for a duration of 45 minutes, and we'll be starting directly with the Q&A section of the call. [Operator Instructions]

[Operator]

The first question is from the line of Manish Adukia from Goldman Sachs.

[Manish Adukia, analyst]

Congratulations on the -- to the team on the quick commerce milestone. My first question is on the outlook for the segment. Now with your plans to double the store count in the next 12 months, what is your expectation of how much time could these new stores take to reach contribution breakeven? And is it likely to be meaningfully longer than the 2 months number that you had called out in the previous quarter? And a related question, you talk about the 4x increase in GOV due to expansion in some of the larger cities in terms of store count. Is there a timeframe you're targeting for this 4x increase? Or is it like more medium-, long-term aspirational number? I have 1 more follow-up after this, but I'll just stop there for a minute.

[Albinder Dhindsa, executive]

Manish, this is Albinder. So in terms of the store count increase, like you mentioned, like a lot of our increase is now indexed to the cities which are growing, so Bangalore, Hyderabad, Mumbai and a few other cities. So the time to breakeven usually varies depending on whether we are opening a store in an existing location, new location. So we expect that it will not increase meaningfully the time to breakeven, but it will be higher than the 2 months that we have put in, and we are already accounting for that in our projections as well. But outside of that, I think what you will see us do more and more is just going into under-penetrated markets in the top 4 cities and opening more stores over there.

[Manish Adukia, analyst]

Sure. My other question was on the 4x increase in GOV.

[Akshant Goyal, executive]

Yes, Manish. So I mean, there is no -- the timeline is broadly what we are saying, that the store count will double from here over the next 12 months. And most of those stores will come in the top 7, 8 cities, right, including the top 4 you're asking. So broadly, that's where we are. And to get to -- I mean, we do believe that even in Delhi NCR, there is meaningful room to add more stores. So I think Delhi will continue to remain our largest market, while the others will also start catching up is how we look at the next 12 months.

[Manish Adukia, analyst]

Right. So Akshant just to confirm on this particular comment. You're saying at an overall Blinkit level, you could potentially see your GOV go up by 4x in the next 1- to 2-year period. Is that what you're suggesting?

[Akshant Goyal, executive]

It's a function. No, I think we're not trying to put any timeline to this. I think the comment was to essentially highlight the fact that for us today, outside of Delhi, the other metro markets are significantly underpenetrated. And over time, as these markets get to the scale that we are at in Delhi today, would mean that the business would have grown by 4x, right? So I think that has to be read in conjunction with the other statement that we have made, which is that we're planning to double our store count in the next 12 months. So I think there's like going to be some overlap here, but it doesn't mean that all of this will happen in the next 12 months.

[Manish Adukia, analyst]

Right. Okay. And maybe the last question on -- now the quick commerce segment has seen an acceleration in your MTUs in the quarter again, while your food delivery trends have been somewhat volatile. What in your view explains this divergence? And could this continue? I mean, basis your comments on quick commerce just definitely looks like quick commerce could continue to be strong. But on food delivery, is there any expectation of reversal or acceleration in MTU heads? Or could that be in the same ballpark for some time?

[Akshant Goyal, executive]

Yes. So I think even if you look at last 12 months, Manish, the MTUs have grown in line with the overall growth in volumes. So they've grown around 20-odd percent. So we expect that as the business GOV continues to grow 20% plus is what we have shared. That is likely to be a combination of some AOV increase and order volume increase and majority of the order volume increase would come from transacting users growing. So we expect that to continue.

[Operator]

Next question is from the line of Ankur Rudra from JPMorgan.

[Ankur Rudra, analyst]

Congratulations on the profit milestone. On Blinkit, if I can start, we've seen a huge amount of experimentation that you've done on the ground, which seems to be yielding very good results. When you take this to completion, let's say, over the next 2 or 3 years, do you see you get to a point where you start moving beyond just quick commerce to other forms of delivery timelines also?

[Albinder Dhindsa, executive]

Ankur, so right now, we don't have -- we are focused more on operating our quick commerce supply chain more efficiently. We don't have any plans of experimenting with any other supply chain modes straight now.

[Ankur Rudra, analyst]

And maybe just a quick follow-up on that one. In terms of the next 2 or 3 years, your rollout plan is quite aggressive like you suggested. Will this change the -- the business has been negative cash flow so far, will this remain the case as you go into a more accelerated rollout while maintaining 0% margins?

[Albinder Dhindsa, executive]

So I think our attempt is to keep reinvesting back into the business to grow as fast as possible while we want to sort of maintain at least neutrality on the EBITDA side. So that's our strategy based on like how our expansion goes in a particular quarter, the numbers might be up and down, but it will not significantly deviate from our stated objective of remaining at least EBITDA neutral, if not positive.

[Operator]

Next question is from the line of Swapnil Potdukhe from JM Financial.

[Swapnil Potdukhe, analyst]

So a couple of questions from my end. First, on the ATU number that you used to share for food delivery. I presume that used to be around 60 million odd number of users. Has that changed meaningfully since then? And that's point one. And point 2 is like any sense on what will be the number for Blinkit, a similar like-to-like number?

[Akshant Goyal, executive]

So Swapnil, on the food delivery side, the ATUs have grown by about 10% last year. I think we'll share that data with you in the data pack that we put up on the website. It's not there in the letter. And on the Blinkit business, I'll have to check. We haven't really -- I mean the business is only a couple of years old. So we haven't had a chance to look at the business on an annual lens yet, but I can check and come back to you.

[Swapnil Potdukhe, analyst]

Okay. Got it. Good. And the second question was with respect to the improvement in profitability of Hyperpure. So are we -- is there any guidance that we have for us? I mean when can we expect the profitability trends to improve? That's point #1. And point #2 is like how long can we expect the growth to be so strong in the Hyperpure business on a Q-on-Q basis? The trends have been very strong for last so many years. But will there be a base effect at some point of time? And if yes, can you give some sense around that?

[Akshant Goyal, executive]

Sure, Swapnil. So I think like base effect is already showing up. I mean, if you see the growth rates have come down from 146% year-on-year to 99% in Q4. And I think as we scale, we do expect that it will trend downward slightly, but still remain healthy and reasonably higher. And similarly, on the margin front, I think if you look at over the last 5, 7 quarters, directionally, the EBITDA margins have improved from negative 9% in Q4 last year to negative 2% now. So we expect that change to continue. Honestly, our focus here right now is not getting to breakeven, but I think continuing to solve for growth in the business. We believe the business is still subscale as far as the opportunity is concerned. And hence, while the margin improvement will continue, we are really focused on driving more growth at this point.

[Operator]

Next question is from the line of Aditya Soman from CLSA.

[Aditya Soman, analyst]

Quick question. So firstly on Blinkit. I mean, the guidance of doubling the stores is fairly straightforward but would you also see the per store throughput to continue along similar lines? That would be question 1.

[Akshant Goyal, executive]

So Aditya, I think per store throughput is a function of, I mean, the weighted average, right? So we do think that directionally, it will not go down, but again, expansion can be lumpy. It's very hard to predict our base expansion, given there are so many external dependencies that are there when you open a store. So I think like not counting for 1 or 2 quarters here and there, directionally, we expect the average throughput per store to continue to increase over time. But if the growth is lumpy, then there could, of course, be like one-off quarters along the way.

[Aditya Soman, analyst]

Understood. No, that's very clear. And secondly on Zomato Everyday, can you throw a little more light? I think recently, there was some press that even Swiggy is restarting their daily service. So any more light on Zomato Everyday?

[Akshant Goyal, executive]

Yes. So I think that's a business or a use case we've been trying to develop for now last over 1.5 years. And finally, we believe that we have good confidence on being able to scale that use case, keeping in mind customer experience and also economics given that it's a low AOV use case. So right -- we want to continue expanding Everyday. Right now, it's largely in Gurgaon. But over the next few months, we'll see maybe Bangalore and Hyderabad -- sorry, Mumbai and Bangalore being added as cities where we'll launch Everyday, and then we'll take it from there in terms of other cities that we want to expand in. So it will be a slow gradual expansion over time.

[Aditya Soman, analyst]

Very clear. So Bangalore, you've already launched in a few neighborhoods, right? So you'll just expand it further?

[Akshant Goyal, executive]

Yes, we'll scale that now.

[Operator]

Next question is from the line of Abhishek Banerjee from ICICI Securities.

[Abhisek Banerjee, analyst]

Yes. So again, super set of numbers. Just to understand the growth trajectory that you are now kind of guiding for in Blinkit, seems like you're trying to do a land grab with regards to at least intensifying the density in the urban locations or probably plugging the coverage gaps. So is that with relation to the competitive intensity in the space given most of your competitors at this point of time cannot really match the scale of growth? Because, I mean, there was a business case for probably driving the EBITDA margin slightly higher before you go on this kind of an expansion, plus retail expansion is often very challenging, I mean trying to find the right real estate. So if you could give us some clarity as to what kind of drove this decision making, that would be really helpful.

[Akshant Goyal, executive]

Yes. Abhishek, so I think our plan to expand slowly in the last 12 months and now expand aggressively I don't think has anything to do with competition or even margins, right? I think it's more dictated by the confidence we have in the business, right, because the expansion can be really expensive if it doesn't work. And it's also dictated by the bandwidth that we have to be able to open these new stores, right, which requires time to build, capabilities, both in terms of team and infrastructure, right? So adjusted EBITDA breakeven is more an outcome of where we are today.

We've not really thought of the business in that way where we said, okay, let's get to breakeven and now we should expand. It just happens to be the case now that we are at that milestone. And from here on, as we feel confident about the business fundamentals and we believe that we have the capability to expand at a higher pace than what we have done in the past, we're doing that. And while doing that, we believe that we should be adjusted EBITDA breakeven, but that's not the goal here. The goal is to now expand as much as we can now that we clearly see signs of the business doing well.

[Abhisek Banerjee, analyst]

Understood. Understood. Just to add on to this question. Now you are talking about opening more stores in the top 8 cities, right? Now if you could give us some color on the kind of AOVs that you see in the top 8 cities, vis-a-vis, the Tier 2, Tier 3, that would give us some idea of how the AOVs should be expected to move because I would think that the AOVs in these bigger cities would be higher. So given you are expanding your reach within these cities, the AOV blended could actually move up. Any color on that?

[Akshant Goyal, executive]

See that is -- broadly, what you're saying is true that AOVs are higher in the top 8 cities. But if you see the mix of top 8 versus the rest, I don't think that is likely to change meaningfully. Because while we are expanding in top 8 cities and within top 8 focusing more on non-Delhi cities, beyond top 8 expansion also continues, right? So even in the letter we have mentioned that only about 75% of the stores we opened were in the top 8 cities. So 25% stores were still in the non-top 8 cities. So that mix of top 8 and non-top 8 cities is likely to remain the same. And hence, I don't think what you are saying that weighted average change in AOV is going to play out at this point.

[Abhisek Banerjee, analyst]

Understood. And on the food delivery business. Last 1.5 months, you have really started priming the innovation engine. We've seen a lot of new initiatives being undertaken there. If you could give us some color on those, such as the group ordering one and all, that would be very helpful.

[Akshant Goyal, executive]

Yes. So I think, look, I think our idea is to constantly think of what can drive value for customers in our business. And I think the only way to win long term is to continue innovating. And not just last 2 months, I think we've been at it always. And sometimes, some of these things end up culminating in terms of execution at the same time, I think best applied on innovation, as we've always done.

[Abhisek Banerjee, analyst]

Got it. But specifically for the bunched -- I mean, the group ordering thing, how big can it really become over the next coming...?

[Akshant Goyal, executive]

We don't know. We'll know in the next 6 months. We'll keep sharing data. I think as and when things become meaningful in our business, we will make sure that we share that with our investors, right? So at this point, a great opportunity. But we'll have to first execute well. I think announcement doesn't mean that we have solved the problem. So there's a learning curve in everything that we do. So we'll have to continue executing and solve for it, and then hopefully share the results as and when they become meaningful.

[Abhisek Banerjee, analyst]

Got it. And with regards to the priority delivery or better monetization of the gold program as in differential pricing, are we any nearer to implementation of that? Because that could really boost your profitability in the food delivery segment.

[Akshant Goyal, executive]

So these are all tactics. I think we take real time calls on these things on pricing, et cetera, depending on competitive environment and what we are seeing on the demand side. So yes, nothing to comment specifically here.

[Operator]

Next question is from the line of Ashwin Mehta from AMBIT.

[Ashwin Mehta, analyst]

Can you hear me?

[Akshant Goyal, executive]

Yes, Ashwin. Please go ahead.

[Ashwin Mehta, analyst]

So 1 question in terms of expansion beyond NCR to Bengaluru and Mumbai. How do you see the dynamics differ? Because in NCR, you were the incumbents. In Bengaluru and Mumbai, there is more entrenched competition. So from a dynamics perspective, how would that expansion differ in your view?

[Akshant Goyal, executive]

Ashwin, so I think even in Bangalore and Bombay, for instance, these markets we are, we believe, the largest player in terms of GOV already. The point that we were trying to make in the letter was that there is still a lot of opportunity for us to go to these markets and meaningfully expand because we also think that the NCR market has been able to grow in quick commerce because of the product market fit and the quality of service that we've been able to provide. And we feel that as we touch more customers in these cities with our quality of service, with our selection, that the quick commerce market over here will also meaningfully expand to the size of the NCR market.

[Ashwin Mehta, analyst]

Okay. Fair enough. The second question was in terms of -- like you've mentioned in the letter that you are charging INR 20 per delivery in Blinkit. But some of your competition is kind of discounting delivery. So how do you see that, you will continue to be more prudent here or there will be a need to possibly react to that?

[Akshant Goyal, executive]

Ashwin, like we mentioned in the letter as well our focus is to build a valuable service that customers actually are willing to pay more for rather than trying to provide an inferior service and leaning on discounting to grow. And I think that will be our strategy going forward as well.

[Ashwin Mehta, analyst]

And the last one was in terms of NCR indication the growth was 7% sequential in this quarter. That appears to be a little soft, given that we've also indicated we've added stores as well as users. So is there something to read into the slower growth here? Because our overall growth seems to have been pretty healthy, but NCR seems to have slowed down.

[Akshant Goyal, executive]

So Ashwin, there is seasonality also involved here. So the overall business grew at 14%, and most of our stores in this quarter were actually non-Delhi NCR. So to that extent, I think 7% growth is not bad according to us. There's no saturation here in terms of demand or anything. I think it's just that like, as I said earlier, the growth will be lumpy not just one way, but many ways. I mean there could be quarters where we end up opening more stores in a particular city. So I think these things will keep going up and down.

[Ashwin Mehta, analyst]

Okay. Okay. And if I can just squeeze last one. So Blinkit, we saw AOV drops in this quarter, given that we've expanded into adjacencies. Is it that some of this is not going into GOV and possibly going into take rate? Or it's more a seasonal factor?

[Akshant Goyal, executive]

Seasonal factor. Even last year, we saw that dip in Q4, if you recall. So -- and this year, the dip has been significantly lower than what we had last year. So I think that assortment expansion leading to AOV increase is still playing out, if you look at year-on-year comparison.

[Operator]

Next question is from the line of Gaurav Rateria from Morgan Stanley.

[Gaurav Rateria, analyst]

The first question is with respect to the store expansion acceleration that we saw during the quarter, and it happened with very sharp improvement in contribution margin. So just trying to understand when the new store additions happen, does that have an impact more on the overhead cost below contribution margin level? Or does it have an influence on contribution margin as well?

[Akshant Goyal, executive]

It has an impact on contribution margin also because the way we define our contribution, a lot of fixed costs are sitting above that. So the entire store operating cost is above that, for example. So impact is on both sides, and the increase in contribution you see is a function of the negative impact of new stores and the positive impact of the older stores increasing the -- in terms of profitability.

[Gaurav Rateria, analyst]

Got it. Second question is on the data that you guys shared on store count and GOV city-wise is quite useful for comparison. Curious that these store count expansion is possible without necessarily changing the dynamics on competition because you think these markets are underserved? Or you think this is also likely to up the ante on the competition for Blinkit?

[Albinder Dhindsa, executive]

Ashwin, so -- sorry, Gaurav, nothing that we are doing is actually a function of any looking at competition, I think our viewpoint has been that we are able to go into markets and actually gain meaningful share because of the quality of our service. And the quality of our service is everything, it's assortment, it's timely delivery, it's the quality of products as well. So we believe that we still see an opportunity to be able to go and do that and expand the overall pie of quick commerce in all of these markets, and that's what we're going to focus on.

[Gaurav Rateria, analyst]

Got it. Last question on steady-state margins that you guys shared. I think from the time you broke even in the food to getting to a steady state of 4% to 5%, it's been 8 quarters, and now maybe another 4, 5 quarters, you get to that level. The journey for quick commerce should be similar or should be a little bit more longer than that of food to get to steady state because it's a much faster growing market, food matured much earlier. And hence, this investment required is much higher than that of food for quick commerce.

[Akshant Goyal, executive]

So Gaurav, very speculative at this point. Very hard for us to say. It depends on the potential size of the market here, how many stores we end up opening and so on. So at this point, I would not -- we're not in a position to like very specifically answer that question.

[Operator]

Next question is from the line of Sachin Salgaonkar from Bank of America.

[Sachin Salgaonkar, analyst]

Congrats on the quick commerce breakeven milestone. I have 3 questions. First question on take rate of Blinkit. Any color you could provide how much is ad? How much is core take rate? And how big could ad as a percentage of GOV be in, let's say, medium term?

[Kunal Swarup, executive]

Sachin, we don't provide that breakup. I think the take rate has increased by 1 percentage point right now in this quarter. And it's a composite number, including the product margin, the ad income and the delivery charges. And at this point, we expect each of these to contribute towards the growth in take rate.

[Sachin Salgaonkar, analyst]

Got it, Kunal. Just a quick follow-up out here. We did see volatility in AOV from quarter-to-quarter. Should we expect a similar volatility in take rate or just because ad as a percentage of AOV continues to improve, we won't see that volatility?

[Albinder Dhindsa, executive]

I think some of it will be there as we also expand into different categories, but there is definitely an element of seasonality in our AOV. And there is also an element of seasonality in our product mix that we are able to sell on the platform. Therefore, you will see some amount of volatility across the average take rates. But overall, the trend for us has been that the -- as a result of improvement on commissions on products and advertising and delivery fees, we've been seeing an upward tick in the take rate consistently, and we expect that to continue.

[Sachin Salgaonkar, analyst]

Any color on new use cases you guys are looking to add to the Blinkit platform? Anything on the services part out here?

[Kunal Swarup, executive]

Please follow Albinder's Twitter handle for that.

[Albinder Dhindsa, executive]

We launched sluggish today, guys, if anybody wants to buy.

[Sachin Salgaonkar, analyst]

And sorry, just a quick follow-up out here. Clearly, you talked about an aggressive store expansion going into more places and broadening and widening the reach. Should we, at some point, expect the Blinkit MTUs to cross the Zomato MTUs?

[Akshant Goyal, executive]

Absolutely. I think that seems like it will happen.

[Sachin Salgaonkar, analyst]

Got it. 12 to 18 months or difficult to give a timeline, Akshant?

[Akshant Goyal, executive]

Difficult to give a timeline.

[Sachin Salgaonkar, analyst]

Got it. Last question. Any specific reason for increase in ESOP costs this quarter? Couldn't get that from your shareholder letter.

[Kunal Swarup, executive]

Like we have explained, part of it is towards the Blinkit leadership team and senior employees. And that is the reason for the current quarter, as well as the increase that we've alluded going forward.

[Operator]

Next question is from the line of Vijit Jain from Citi.

[Vijit Jain, analyst]

Just 2 questions. One, just on the Blinkit dark store acceleration, you will add 475-odd stores this year. Would these mostly come with existing dark store partners in these cities, Bangalore, Mumbai, Hyderabad and Delhi? Or do you need to add new partners there? That's my first question. And the related question to that is, if I got the math of it right, you have 32 stores each in 6 cities, 62 stores in Bangalore, 180-odd -- 178 in Delhi NCR. So essentially, in that 500-odd stores you're going to add, it's about 100 each in each of these other non-Delhi NCR cities, that is Bangalore, Mumbai, Hyderabad. Is that interpretation right? What I'm trying to get at is, is 180, 200 the right store count for larger cities for you to kind of do 10 minute to almost everyone you can target?

[Deepinder Goyal, executive]

Vijit, I think, that ways that number is much higher. I think where we get to in the next 12 months, I don't think we'll even get to 178 in each of the 3, 4 other large cities within the next 12 months. That might take longer. And more long term, I think each of these -- we think it's -- each of these 4, 5 top metros can easily have, like, for example, 500 stores each, right? So that runway, I think, on store expansion will continue fairly meaningfully beyond the next 12 months.

[Vijit Jain, analyst]

Got it. And how about the dark store partners? Do you need them to ramp up also in a meaningfully different way? Or do you think that is not a constraint to your growth plans?

[Akshant Goyal, executive]

Vijit, I think we are always looking for good partners for our dark stores. So we are also expanding the footprint of our best operating partners in the existing cities. But we're also looking and talking to a lot more entrepreneurial folks that are looking to open these dark stores. And I think we'll increase that number as well. But our methodology more or less will remain the same.

[Vijit Jain, analyst]

Got it. And my last question, just sticking to Blinkit would be if you could discuss a little bit on the nonfood share in the Blinkit GMV mix. And just a clarification, you have said before that food delivery should see 4% to 5% of GOV in few quarters. That's still very much the timeline, right, few quarters?

[Deepinder Goyal, executive]

Yes, I think so.

[Vijit Jain, analyst]

Okay. And how about the first question, sorry?

[Akshant Goyal, executive]

We don't give the breakup of the different category mix, Vijit.

[Operator]

Next question is from the line of Abhishek Bhandari from Nomura.

[Abhishek Bhandari, analyst]

So Akshant, can you talk about the vesting schedule of the new ESOP policy? And longer term, what is the thinking of the management on the ESOP pool? The last pool, what we issued was large enough, 5% at -- when the market cap was much smaller. But even today, the 2% looks a large amount. So thinking around the new ESOP pools also will be helpful.

[Akshant Goyal, executive]

Yes. So Abhishek, I think on employee cost, we look at the summation of ESOP cost and the cash employee expense together. And as we've mentioned in our letter, that expense as a percentage of revenue has come down meaningfully from 29% in FY '22 to 12% in FY '24, right? And we expect that to continue, which is the operating leverage in the business. And within that, then there is a balance between ESOPs and cash compensation. And we believe we have to maintain that balance. And the last addition that we did on the ESOP front was prior to our IPO. And we still have a large part of, or at least some meaningful portion of that ESOP pool with us today to be granted to employees. But we just wanted to expand that a little bit by 2% right now. And we believe then with that, we should be good for the next 5 years at least or more in terms of adequately incentivizing our leadership and generally employees at Zomato and Blinkit.

[Abhishek Bhandari, analyst]

Okay. Let me ask you in another way. This quarter, we roughly had INR 160 crores of ESOP cost. So let's say, on a run rate basis, INR 650-odd crore annually. How should we think about next 2 to 3 years?

[Akshant Goyal, executive]

Yes. So again, I will take you back to that point of like looking at the total employee expense, right? We don't want to guide on specifically the ESOP costs at this point because like these things like we don't want to get ourselves into a box here. So we want to have the flexibility on that front as long as the total employee cost is within a range.

[Abhishek Bhandari, analyst]

Yes, the reason for asking this, Akshant, sorry for persisting here is we get measured on adjusted EBITDA. So for us, it's an important metric to look at. So if you could give some kind of indication, that will be helpful. Should we consider this INR 160 crores as the new run rate?

[Akshant Goyal, executive]

Yes, I think it will increase from INR 161 crores for sure going forward.

[Operator]

Next question is from the line of Vivek Maheshwari from Jefferies.

[Vivek Maheshwari, analyst]

A couple of questions. First, on the store additions. How easy or difficult it is for you to get this kind of real estate? Because you have a -- so I understand these are not on high streets. But still you need a larger plate. So where are you on that curve in terms of getting those 1,000 stores out there?

[Deepinder Goyal, executive]

So right now, we have a fairly healthy pipeline. So we are always looking for and scouting and building our database around real estate in the cities that we operate in. So far, we have not faced any material issues in being able to get the kind of real estate that you're looking for. In addition, we have also been innovating on that front to be able to work with different configurations of real estate. So as we open more stores, we learn how to do more things in better ways, and I think that's what we'll continue to do.

[Akshant Goyal, executive]

Having said that, Vivek, in all our guidances, there is some element of hope. So it's not like we have everything tied up for these 500 stores. So -- but we are fairly hopeful that this is a realistic target to take for the next year.

[Vivek Maheshwari, analyst]

Got it. And the other bit on stores is you have been somewhat, let's say, calibrated in store additions so far and now you are accelerating it. In a typical retail business, we have seen that there is a fair -- depending on which company we talk about, but there is a fair amount of, let's say, wrong locations that retailers choose, et cetera, which also requires calibration as you go forward. In your case, now that business -- you know a lot of nuances already. When you think about moving or accelerating it, do you think there is a risk of getting the wrong sites, or you're very fairly confident? That's 1 part. And second, how do you view the cannibalization bit? A lot of these stores are going to be in existing cities? Is there a -- it's not a risk, risk. But yes, from a shorter-term perspective, throughputs in the existing store go down because the next neighborhood store is coming up. Is that something that we have to bear in mind?

[Albinder Dhindsa, executive]

On the second one, Vivek, even if the throughput in neighboring stores go down, I think the customer experience improves meaningfully for us. So we think it's the right thing to do, and it also gives us bandwidth for adding more products for the customers as well. So we are usually not -- we are not shy about opening stores in existing locations just on the off chance that the throughput of a neighboring store might get affected. To your first question in terms of real estate and how to get the locations right. Look, we've -- we will get certain locations wrong, and we do. And I think as a business, our objective is to decrease that miss rate as we learn more. But I think we feel fairly confident that the numbers that we are putting out we will be able to deliver on that with a good enough hit rate and while making sure that the business is -- the business and the P&L is healthy. So I think which is the guidance that you're seeing is an outcome of that confidence.

[Vivek Maheshwari, analyst]

Got it. The other question is the AOV number, which has been fairly strong. Do you think as you get into, let's say, more neighborhoods or the mix of NCR goes down, is there a risk that, that number settles down on an average to a lower level than where it is today?

[Albinder Dhindsa, executive]

Vivek, right now, there are way too many factors which affect AOV. Like we mentioned, there is seasonality. There's assortment addition, which is also another vector of growth in the business. And then there is different city habits but we don't expect any material movement because of expansion in the AOV overall.

[Vivek Maheshwari, analyst]

Got it. But can it get diluted, Albinder?

[Albinder Dhindsa, executive]

No, we don't expect that it will be diluted. But like we said, AOV has many more components rather than just being affected by the cities that we are opening the stores.

[Vivek Maheshwari, analyst]

So just 1 thing, Albinder, on this. Keeping the city mix -- sorry, keeping the seasonality bit and portfolio mix the same, the cities other than NCR, do they have somewhat similar AOVs or NCR is by far ahead of everything else?

[Albinder Dhindsa, executive]

No, I think as our city -- our service in the city gets better and our assortment gets better, most cities tend to -- at least the top cities are converging to a similar number. Again, I would reiterate that there are a lot of factors which affect AOVs. For example, MRPs for most products in Bombay tend to be higher than in Delhi. So there are more than 1 factor which affects the AOV number. So I think my -- the takeaway I would want you to have is that we don't expect that the city expansion is going to have a material impact on AOVs.

[Vivek Maheshwari, analyst]

Okay. Got it. And last one, if I may, Albinder, Akshant, what is so -- because there is so much of excitement around QC, you are accelerating the store additions, et cetera. What are top 1 or 2 worries that you have about quick commerce at this stage? The proof of concept, everything is done now. What is it that worries you from a next 12 to 18 months perspective?

[Albinder Dhindsa, executive]

I think Vivek we are always -- we have to innovate on behalf of our customers. And I think we have to be paranoid about not falling behind on that innovation ladder. Because we believe that our business is all about constantly making things better, constantly innovating, getting better products to the market. So I think that is what at least keeps me up at night. And in order to innovate at that pace, what you need is your teams to be not just on their toes, but also to be smart and humble and realize that they need to also show up every day to make lives better for our customers. So I think on both these fronts, I think these would be my biggest worries, that we keep innovating and then we have the people who also have the right mindset to keep innovating.

[Operator]

Ladies and gentlemen, in the interest of time, we will now take the last 1 to 2 questions. The next question is from the line of Gaurav Malhotra from Axis Capital. Gaurav, checking with you again. Can you hear us? Seems like we're facing some technical difficulties. So we'll move on to our next participant. Next question is from the line of Samarth Patel from Equirus Capital.

[Samarth Patel, analyst]

Can you hear me?

[Operator]

Yes, please.

[Samarth Patel, analyst]

I have 3 questions. Just to -- or adding to previous participant's point, typically, FMCG companies in India make around -- like typically allocate 8% to 9% of revenue to A&P spends. Now considering that Blinkit could be getting around 3.5% to 4% of GOV according to my estimates, how should we think about advertisement income going forward, especially considering that there could be some categories with low or no advertisement income such as foods and vegetables or electronics. So just your thoughts on the same would be helpful.

[Akshant Goyal, executive]

So yes, Samarth, broadly we expect the advertising revenue in Blinkit to increase from where we are today. But at this point, like we don't want to give a guidance on where it can go. But it's been -- so far been a major driver of economics, and I think that is expected to continue.

[Samarth Patel, analyst]

Just next question on Blinkit as well. So you mentioned in shareholder letter that a steady-state margin for the business could be around 4% to 5%. What could be fixed cost as a percentage of GOV in the steady state? Would that number be materially different than food delivery business? The point I'm trying to get is, what would be the contribution margin required to achieve that kind of adjusted EBITDA in the business.

[Akshant Goyal, executive]

That will broadly be similar to food because below contribution, we just have like people cost and marketing cost, which we don't think is going to be meaningfully different between the 2 businesses.

[Samarth Patel, analyst]

Okay. Got it. That was really helpful. Now the third question on food delivery side. Do you foresee further rise in take rate through advertisement income in food delivery business? Or do you anticipate that it would be primarily be driven by, let's say, customer side initiatives such as increasing the platform fee or the new value-added services that we introduced, like quick deliveries for an incremental fee? So would it be on the restaurant side or the customer side, that I'm trying to get here.

[Akshant Goyal, executive]

So Samarth, I think we don't think of the business that way. I think we think of it more in terms of optimizing absolute profits in the business while providing the best experience to customers. And to be able to do that, I think these answers on economics keep changing, right? So there is also an element of competition here and what they are doing and so on. So we don't have a target on each of these line items that, look, take rate can go up to here and ad sales can go up to here. I think we're just like multiple juggling balls, but juggling multiple balls with an overall intent of taking the margins in the business to a certain point and driving growth in the business. So yes, I would not be able to therefore comment specifically on the potential on each of the line items in the unit economics.

[Operator]

Thank you. Ladies and gentlemen, we will now conclude this conference call. Thank you for joining us today, and you may now disconnect your lines.