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's financials

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.