Photo: Indranil Aditya/NurPhoto via Getty Images
April 28, 2021
Everyone wants a piece of the Zomato IPO. So much so, in fact, that the Indian food-delivery startup was nearly 36x oversubscribed by anchor investors, according to Bloomberg. Those investors likely foresee strong public demand for shares of Zomato after its July 14 trading debut.
Zomato kicked off IPO proceedings on April 28, when it submitted paperwork to the Securities and Exchange Board of India. The company hopes to raise $1.3 billion through the IPO process, which could help it fend off competition from its top rival, Swiggy, as well as a small but menacing delivery challenger in Amazon. Most recently, Zomato garnered a $5.4 billion valuation following a $250 million funding round disclosed in February.
On paper, Zomato has a lot going for it: Demand for food delivery has soared during the pandemic, the company operates in a nation home to over 1.3 billion people and its backers include Ant Group and Sequoia. But turning a sustainable profit in the food delivery space is notoriously difficult, and Zomato is no exception. It posted a net loss of $320 million for the year ended March 31, 2020; this was more than double the net loss reported for the year prior, and more than 22x the loss from two years prior. With several deep-pocketed competitors vying for a larger share of India's food delivery market, Zomato faces a long and treacherous road toward profitability.
What does Zomato do?
Zomato employs the standard food delivery business model. The company pays gig workers to deliver meal orders fulfilled by various restaurants. Zomato then generates revenue by charging fees associated with every order. In December 2020, Zomato had nearly 162,000 active delivery drivers and 350,000 active restaurant listings on its platform. The company also generates revenue through its premium subscription business: For the Indian market at the end of 2020, Zomato had 1.4 million premium customer subscribers and 25,350 Pro Restaurant Partners.
Zomato operates food delivery services across 23 markets, but most of its revenue comes from India. In the IPO filing, Zomato writes: "We have taken a conscious strategic call to focus only on the Indian market going forward … we believe a focused Zomato will enhance the value for all our stakeholders."
Affirming its commitment to growth in India, Zomato agreed to give Uber a 10% equity stake in exchange for its entire food delivery business in India. The two companies reached a deal in January 2020. Over the course of that year, Zomato managed to more than double its monthly transacting users to reach 10.7 million people.
Zomato looks like a typical food delivery behemoth: impressive revenue growth accompanied by net losses of a similar magnitude.
The company posted $368 million in revenue for the year ended March 31, 2020. Most (95%) of this revenue came directly from operations. For that period, revenue doubled compared to the year prior and grew over fivefold from the revenue recorded two years prior.
Between 2018 and 2020, Zomato's expenses grew at an even faster rate than revenue, contributing to the bleak profitability outlook. For the year ending March 31, 2018, Zomato posted revenue of $65 million with $80 million total expenses. For the same period in 2020, revenue grew to $368 million, but total expenses exploded to reach $672 million.
What could go wrong?
The outlook for the food delivery business is so bleak that it feels more appropriate to ask: How could this ever go right (i.e., become profitable)?
Three themes stand out from Zomato's risk section: profitability, competition and public perception.
Zomato elaborates on the significant barriers standing in the way of profitability:
- "We expect our costs to increase over time and our losses will continue given significant investments expected towards growing our business," the company writes.
- And while Zomato has posted significant revenue growth in recent years, it adds that this is far from guaranteed moving forward. It cites factors such as "increasing regulatory costs" and "increasing competition."
- Zomato also writes about the near-term revenue implications of the pandemic: "Our food delivery business was significantly impacted during the first quarter of Fiscal 2021 as most restaurant establishments had temporarily closed operations in response to a government mandated lockdowns and customers were unwilling to order food from restaurants."
What makes the food delivery industry so unprofitable? The revenue opportunity is attractive, but the low barriers to competition make it such that there is always significant pressure on margins.
- Zomato acknowledges low loyalty and low switching costs in the industry: "Customers have a propensity to shift to the lowest-cost provider and could use more than one platform, independent contractors who provide delivery services could use multiple platforms concurrently as they attempt to maximize earnings and restaurant partners could prefer to use the platform that offers the lowest commission rates and adopt more than one platform to maximize their volume of orders."
- The company adds that this continual competitive threat could result in lower revenue, fewer users and worse margins.
Finally, public perception is particularly volatile in India, where WhatsApp acts as a public outrage generator.
- "Many social media platforms immediately publish the content that their subscribers and participants post, often without filters or checks on accuracy of the content posted," Zomato writes, referring to India in particular.
- The company adds: "The dissemination of inaccurate information online could harm our business, reputation, prospects, financial condition and operating results, regardless of the information's accuracy."
Who gets rich?
Zomato disclosed the following ownership stakes, as they stood pre-IPO:
- Info Edge owned 18.7%
- Ant-affiliated companies (Alipay and Antfin) collectively owned 16.7%
- Uber owned 9.2%
- Tiger Global owned 6%
- Sequoia Capital owned 7.3%
- Zomato co-founder and CEO Deepinder Goyal owned 5.6%
What people are saying
- "[Swiggy is] focused on re-mapping the way India eats for now but slowly expanding to re-map how India orders groceries as well. Zomato's DNA and scale is more aligned with food being its core. It was more about you making the choice where and what to eat. This is why takeout feels more aligned to be a part of Zomato. But giving it away for free shows lack of interest behind it. Swiggy will never launch a takeout, its delivery first business." —Vivek on the Duologue Substack.
- "Zomato's domestic IPO plan will be closely watched by market participants and industry alike at a time when Indian startups have attracted a wave of fundraising interest. The plan comes as India grapples with a vicious second wave of the COVID-19 pandemic, plunging the country into crisis." —Rosemary Marandi in Nikkei Asia.
Update: This story was updated on July 13, 2021, to include the date for its trading debut; and on July 14, 2021, to include information on the subscription period.