How does one value a business that is not making any money or how does one value the prospects of investments in a company that is yet to factor the imminent competition from conglomerates like Amazon when it comes to burning cash and profits? Or how does one value a delivery platform that is at loggerheads with the businesses that ushered in its existence or how does one value an idea that can be replicated with ease on different super-apps in the future?
Hitting Dalal Street on 14 July, the Zomato initial public offering (IPO) is set to raise more than Rs 9,300 crore for the food delivery aggregator, at the price band of Rs 72-76 per share.
However, 75 per cent of the portion is reserved for qualified institutional buyers (QIB), 15 per cent for non-institutional investors (NII), and merely 10 per cent for retail investors. As of today, the valuation of Zomato is in the neighbourhood of $5.4 billion.
The much-awaited Zomato IPO will be received by many subscribers on its launch on 14 July, but the questions about its long-term viability will be without answers. The first reference point, however, for most investors and observers, would be the numbers.
As per an elaborate report in the Economic Times, the average number of monthly users for Zomato went from 13.8 million in 2018 to 29.3 million in 2019 and further increased to 41.5 million in 2020.
However, the pandemic dented the numbers for the first nine months of financial year 2021 (FY21) as offices, colleges and universities, and other social hangouts were completely shut, with the average number of monthly users falling below 30 million, a 28 per cent decrease over 2019.
The transacting user base, on an average month, was also dented by the pandemic. In 2018, it was 0.9 million but increased by 522 per cent to 5.6 million in 2019. The growth normalised for 2020 at 91 per cent with 10.7 million. The pandemic hit this growth as it diminished by 45.8 per cent to 5.8 million monthly users, on average, for the first nine months of FY21. The total orders also halved between 2020 and the first nine months of FY21.
The only silver lining was an increase in the order value, going from an average of Rs 278 in 2020 to almost Rs 400 in the nine months of FY21.
However, this increase can be easily attributed to the change in the consumer size, given people at home were placing side-orders or orders for the entire family locked inside their homes, against the usual norm of individual orders. In the same period, Zomato increased the size of its commission, delivery charges, and lowered the discounts.
Consequently, the revenues took a beating as well in the pandemic year, falling from more than Rs 2,600 crore in FY2020 to around Rs 1,990 crore in FY21. The losses for the same period came down to Rs 816 crore from more than Rs 2,300 crore in 2020, but this can be attributed to the budgeted marketing, where the expenditure went from Rs 4,000 crore to Rs 2,500 crore.
The other obvious metric for investors for reference is the food delivery aggregators in the West. For instance, DoorDash, which operates in the United States, was trading at more than $207 per share in January 2021 but is now down to $177. The share price has registered an all-time growth of merely 1.25 per cent since its listing.
Another company, Just Eat Takeaway, operating out of Netherlands and Germany, has fared better when it comes to price per share, registering a lifetime growth of more than 200 per cent in the five years since its listing. However, the pandemic year has halted that party and the price has fallen by 20 per cent in the last 12 months.
Looking at the isolated share prices for different food aggregators around the world does not help one understand the Zomato equation, for what matters is the commission charged by these platforms, the average order value, the revenue per order, market size, and the current user base amongst various other factors.
Compared to its global competitors, Zomato’s enterprise value to sales and revenue ratio (EV/S) is also concerning. Against the valuation ascribed to the platform the sales numbers for FY20 (around Rs 2,700 crore), the EV/S is around 15. For DoorDash and Grubhub in the US, it’s 7.76 and 2.44 respectively.
For Meituan in China, it’s 5.57. Delivery Hero in Japan has an EV/S of about 4.26, and Just Eat Takeaway EV/S is around 2.66. A greater EV/R ratio indicates a bad investment or inflated valuation, thus ringing more alarm bells for Zomato.
The plausibility of inflated valuation could have been justified if the restaurants were on good terms with Zomato, but a silent conflict is brewing there as well.
In August 2019, restaurants, led by the NRAI (National Restaurant Association of India), embarked on a ‘logout campaign’, distancing themselves from the Zomato Gold and the Infinity Dining programme, citing it to be an ‘unacceptable proposition’.
In a conversation with the author over a year ago and reported here, a restaurant owner spoke about their struggles with Zomato.
"There are too many schemes in operation by Zomato, and by the time the eatery has settled into one scheme and is drawing tangible revenue, they (Zomato) discontinue the scheme,” he said.
Further elaborating on the issue of data-sharing, he said, “the platforms misuse customer data, and there is a conflict on who owns that data. With the data they collect, they can decode an ordering pattern for a region, and then disclose it to a competing restaurant through non-personalised data sets."
More than a pandemic year later, the problems between the restaurants and aggregators have only grown. Speaking to Swarajya, Anurag Katriar, president of the National Restaurant Association of India (NRAI), stressed the need for improvement in terms of engagement between the eateries and the aggregators, especially when e-commerce becomes indispensable to the food service industry.
Katriar elaborated on the importance of growth for both the aggregators and the restaurants. "As of today, the only growth is in the enteprise value while the restaurants struggle, and aggregators too struggle to make any money."
His arguments are not without reality for the high rate of commission charged by the likes of Zomato, close to 22 per cent on every order and the year-round discounts offered by Zomato but paid for by the restaurants are a burden on the balance sheets of the latter.
For instance, the 60 per cent discount (up to Rs 120) offered by Zomato during their birthday month hammered the margins of the participating restaurants.
For FY21, the average cost of an order placed on Zomato was around Rs 400, up from Rs 270 in 2020. Now, for an order worth Rs 250, the cost of goods and packaging comes down to around 38 per cent, thus Rs 95, the Zomato commission is to the tune of Rs 33 to Rs 40 (assume lower value here), and the discount is Rs 120.
Thus, the margin for the restaurant is around rupee 1. For an order worth Rs 300, the margin calculated for the restaurant is not more than Rs 20, and for an order worth Rs 400, the margin is not more than Rs 60.
Assuming the restaurant has an average order value of Rs 300, they need to do six times the business on a daily basis to recover the cost of the discount forced upon them by Zomato. Barring this discount, there are always offers which further dent the restaurants’ earnings.
The duopoly of Zomato and Swiggy ensure that the restaurants have to continue their dependability on these platforms, especially in the pandemic year when food delivery supersedes outdoor dining.
However, there is also the problem of data masking. In his conversation with the author, Katriar elaborated on how restaurants had no data about the users placing the order with them. Citing it as unethical, Katriar, rightfully, pointed out that the users were customers of the restaurants and not the aggregator.
Yet, for now, the restaurants have no option but to stick to the likes of Zomato which makes the IPO look like a great prospect, but for how long?
The ‘Order Direct’ campaign initiated by the restaurants could be a potential threat to the aggregator industry. The NRAI also voiced its support for DotPe and Thrive, two platforms that take the control away from the aggregators by cutting out the middlemen between the restaurants and the users. The order can be simply placed by scanning a QR code or through WhatsApp interaction.
The benefits of the ‘Order Direct’ campaign include more control over the user data for the restaurants, thus making the entire process easier and personalised. For instance, most users do not order from more than 10 restaurants, and if all of them can be available on one’s WhatsApp, the process becomes far more seamless.
While the eatery can offer a personalised experience as the customer familiarity and loyalty kick in, the users will have the option to customise their orders more intricately, a feature Zomato has offered but without much success.
However, in this case, the eateries will have to rely on third-party delivery service for the last-mile completion of the order but going forward, restaurants in the vicinity can come together and build their own delivery cooperatives, an idea Katriar, in his conversation with Swarajya, said that must be explored.
The other benefits of a direct ordering model include higher profits and revenues for the eateries, distraction-free ordering process, reduced delivery times if eateries can own the delivery fleet, loyalty programmes, and several new marketing opportunities for the eateries, for instance, a complimentary dish or drink.
Food in India is all about sentiments and the elimination of Zomato from the ordering process can bring back that sentiment, the emotion, to the ordering equation, benefitting both parties.
For the restaurants, another alternative is already in the making. Reliance, Tata, and Amazon are working on their respective super-apps, and as with WeChat in China, these super-apps will also be host to several mini-services or mini-apps. Eateries can simply use the API within these super-apps and host their services, without having to worry about the app setup costs.
For restaurants, the two problems they need to solve are that of getting users to order directly, and that of having their delivery fleet, solo or cooperative, and if they can exercise this right over the next three to four years, the usability of Zomato will be dented heavily.
The industry is anyway desperate, given Covid-induced shutdowns have led to the closure of 30 to 40 per cent of the eateries. The survivors would be looking to insulate themselves against the risks in the future, and the first problem they would like to solve is that of the commissions and discounts forced upon them by the likes of Zomato.
Further, there is the imminent competition from Reliance, Tata, Amazon, and the restaurants themselves that would warrant cash burn in the form of marketing costs and customer acquisition, and faltering profitability, if Zomato ever gets there.
Zomato’s hope for long-term success is a sustained duopoly and the restaurants are doing everything to break free of it and odds are in the favour of the latter.
Nevertheless, Zomato’s IPO is all set for short-term gains, for the excitement of the investors and the exuberance of a youthful tech startup would drive subscribers, but in the long-term, Zomato will have to tailor itself to an evolving digital world, but first, it will have to make some money.
Tushar is a senior-sub-editor at Swarajya. He tweets at @Tushar15_
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