Zomato: Are They Losing Money?
If there is something that is breaking the news today and for the next few days to come, it has to be Zomato. Right from its IPO launch to all the social media buzz around its marketing strategy has always caught media attention. From their quirky posts to witty advertising campaigns, Zomato has never failed to amaze us with their creativity and out-of-the-box offers.
Be it an IPL match or a festival of joy, Zomato’s offers have always made its customers jump for food. But, is it what it seems like? Is Zomato actually losing money? Let’s find out!
The Business Model – Let’s Start From The Basics
Zomato as we know is a food delivery app and it connects customers, people like us who want to order food with restaurants, who want to sell food. Zomato plays a double role as it connects people like us who are looking to order food.
A simple tie-up with a FOOD-TECH platform put many restaurants in a position to be easily discovered. With this, Zomato was consistently climbing the ladder in the world of start-ups and its valuation kept growing exponentially.
Customer Acquisition: The Strategy To Die For!
As Zomato started to grow it attracted more and more investors. As investors poured in more money, they wanted to see growth, so zomato acquired millions of customers. All the marketing on social media platforms like Facebook, Instagram, etc. is done by Zomato mostly to promote its customer acquisition game.
To acquire more customers companies like zomato do a lot of marketing to make a customer’s habit of ordering food from their app. Companies like zomato analyze a lot of data, they use incentives to keep a customer hooked like for eg. Zomato gold. So that the customer sticks to the app. So in a gist.
Companies like Zomato identify a major pain point in the business ecosystem, they fill that gap with the promise of their business model. They bring in investors, who give them the funds to play the customer acquisition strategy. And finally, they get customers hooked to a habit who keep on using the app, which makes the company profitable. This turns into a vicious cycle wherein as Zomato gains more and more customers, it gains the resources to further increase its customer base and keep them hooked to their platform.
Unit Economics: The Commission Strategy
So, here’s what the unit economics of Zomato’s average order tells us. Up until last year, Zomato was losing a lot of money in terms of this unit economics and suddenly when it decided to file for IPO this unit economics became positive.
From last year we can see an increment in Zomato’s commission and other charges, delivery costs that will allow fewer and fewer customers to order from the app. Furthermore, we can see a decrease in Zomato’s discounts. In a country like India, discounts incentivize the customers to order more and if they do not get discounts they might not even consider a purchase they need. It is very apparent that in our country, discounts drive purchase decisions.
Pandemic Effects: Was The Virus A Boon Or A Curse?
In the first quarter of 2021, there was a significant impact on its business. Zomato hit its lowest GOV, meaning gross order value in a quarter in two Financial Years. However, after this hit, the food delivery business saw a considerable recovery. In Q1 of 2021, its GOV was Rs 11000 million, wherein in the 3rd quarter, it was Rs 30000million which was more than the 3rd and 4th quarters of 2020.
Let’s check out the industry overview. If we take a look at the food delivery business in FY21, India saw quite contradictory movements. While the first quarter proved to be a tough time for the food delivery business, in the 3rd quarter, it was at its all-time high.
In FY202, Zomato was looking at a revenue of Rs.58.9, which included Rs.43.6 commission and Rs.15.3 Customer Delivery charge. The total cost however was at Rs.89.4 which is made up of a Rs.52 delivery cost, discounts adding up to Rs.21.7 and Rs.15.7 variable costs. At this point, Zomato’s contribution margin, i.e. revenue minus cost, was negative at – Rs.30.5.
In contrast to this, FY 2021 saw a Rs.89.6 total revenue with Rs.62.8 commission and Rs.26.8 Customer delivery charge. The Total Cost was at Rs.66.7 with a Rs.44.6 delivery cost, Rs.7.3 discounts and Rs.14.8 variable costs. This made the company’s contribution margin turn positive at Rs.22.9
The avg value of orders went up from Rs 278 in FY20 to Rs 398 in the first 9 months of FY21. The monthly transacting users have grown from 9 lakh in FY18 to 1 CR in 2 years but reduced to 58 lakhs in the first 9 months of FY21.
Where does Zomato’s IPO Stand?
Even though the beginning of the pandemic might have hit Zomato hard, its IPO hit back harder. Since its opening, the Zomato IPO generated Rs. 2.13 Lakh crore, the third highest in the history of the Indian Capital Market. The response from investors towards Zomato’s IPO was overwhelming to say the least. The IPO, which was oversubscribed by 38.25 times, comprises Rs. 9,375 crore wort of fresh equity shares.
At a price band of Rs. 76, Zomato would be valued at $8 billion i.e. around sixty thousand crores so that would make zomato a large company. With this IPO, Zomato aims to raise $1.26 billion. While the market seems enthusiastic about the IPO, is the enthusiasm justified? Only time will tell.