Knives Out in India: Zomato Needs to Expand the Menu, Quickly

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Indian tech heavyweight Zomato has built a foundation in food delivery. But its competition is moving aggressively.

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In a newly unforgiving market environment for tech, that isn’t necessarily an advantage. Keeping shareholders happy while still making the bold moves necessary to grow will be increasingly tough, particularly given the many deep-pocketed giants backing the firm’s privately held competition.

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Zomato went public in India with a $12 billion valuation on the back of its strong food delivery business driven by India’s increasing Internet penetration. And the economics of its core food delivery business have continued to improve.

Its earnings as a percentage of gross order value—after deducting delivery costs and discounts offered—has risen steadily from minus 15% in 2019 to 1% today, the company said last month. A roughly 5% rate should allow the company to break even overall before interest, taxes, depreciation and amortization at its current scale.

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However, shares have still suffered recently: they are down 54% from their November peak, and are now trading barely above their initial public offering price last year.

Partly that reflects the tough market environment overall for tech these days. But investors may also be spooked by reports of expensive acquisition plans. Zomato may soon buy instant delivery service Blinkit for $700 to $800 million in stock, several news sources, including Bloomberg and the Economic Times, reported earlier this month.

By acquiring Blinkit, the company would finally be able to play big in the red-hot quick-commerce space, after dabbling and failing a couple of times before. The quick-commerce market in India is set to reach $5.5 billion by 2025 according to management consulting firm RedSeer: 10-15 times its current size. The firm already holds close to a 10% stake in Blinkit.

Investors may be nervous about moving decisively into expensive new businesses when the overall global economic picture is murky. But building adjacent businesses like quick commerce is important for Zomato to keep customers, delivery personnel, stores and restaurants within its ecosystem—especially given how aggressively the competition is moving in. Softbank-backed Swiggy, Reliance Retail-backed Dunzo, and Y Combinator-backed Zepto are burning millions of dollars in quick grocery delivery.

Zomato gets 75% of its 19.9 billion rupees ($262.24 million) of revenue from food delivery, 15% from running a restaurant booking service, and 10% from Hyperpure—a food procurement service for restaurants—according to its disclosures last year.
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That provides a solid, but relatively narrow base. To survive and keep growing, the firm needs to diversify its offerings—even if that means spending significant sums now and upsetting newly risk-averse public investors.

Global food delivery companies like DoorDash, Germany’s Delivery Hero,

and China’s Meituan have successfully diversified to add grocery delivery, medicine delivery, on-demand delivery and instant shopping to their menus.

If Zomato wants to deliver for its shareholders in the long-run, it probably needs to follow suit.

Write to Megha Mandavia at [email protected]

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Credit: www.Businesshala.com /

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