By Surya Suresh
The Indian food-tech space was the subject of a major news story recently as Zomato, one of Indias first food-tech startups raked in $200 million in funding from the Alibaba Group. In recent years, Zomato has faced increasing competition in the sector, owing to the rise of food delivery startups such as Swiggy and Foodpanda. The investment and the vote of confidence from Alibaba could not have come at a better time for Zomato, as the company attempts to expand horizontally and retain its place as Indias most successful food-tech startup.
This report seeks to provide an insight into the evolution of the food-tech sector and Zomato, in particular. The report also seeks to describe the revamped business model of Zomato and the numerous opportunities available to the company.
Food-tech in India
The food-tech space in India has been a topic of much discussion over the past couple of years, owing to the influx of capital, the rise of Me Too start-ups and the high burn rate in the sector. The term food-tech is an umbrella term that includes all internet-based food businesses, ranging from cloud kitchens to food delivery. In India, the sector took off in the late 2000s with the introduction of restaurant discovery platforms like Burrp and Zomato. The success of Zomato inspired several other entrepreneurs to venture into the food-tech sector, leading to the growth and expansion of the industry.
However, the sector has seen several ups and downs in the past few years owing to deep discounts, poor scalability and low margins. 2015 and 2016, in particular, were bad years for the industry with many leading players restructuring their businesses and laying off employees. At this point, 10 years after the first food-tech startups came into the picture, only the well-funded remain and the competition is fierce.
Zomato: The leader in food-tech
Until 2015, Zomato focused on its core business of restaurant search and discovery. Since then, the company has diversified into the food delivery space on seeing the rapid strides made by Swiggy and Foodpanda. Further, they have revamped their advertising model and developed several loyalty programs to retain customers.
The companys founders have always believed in having strong unit economics, robust margins, and good fundamentals. FY17 and FY18 have been good years for the company, as it finally turned profitable in several geographical locations.
Alibabas investment
Alibaba has invested $200 million in Zomato through its affiliate Ant Financial. Ant Financial, formerly known as Alipay, is the worlds most valuable financial technology company. The deal values Zomato at an impressive $1.1 billion, thus enabling the startup to bag the coveted unicorn status. This is but the latest move in Alibabas aggressive expansion into the Indian market, with the Chinese e-commerce giant having already invested in Snapdeal and BigBasket. Moreover, Alibaba has prior experience in the food-tech sector, with a $2 billion investment in the Chinese food-delivery startup Ele.me. The synergies from this investment could help Zomatos cause too.
Alibaba is expected to own 26% of Zomato, with the stake of Info Edge, the primary shareholder, reducing to 31%. This investment comes after global investors such as Softbank and Nasper recently concluded deals to enter the food-tech space. The next few years in this sector should prove to be competitive as the three major playersZomato, Swiggy, and Foodpandaare all well-funded and poised for growth.
The revamped business model
In May 2016, HSBC securities slashed the valuation of Zomato to $500 million owing to an advertising-heavy business model, growing competition in the food-tech space, and losses in international operations. In January 2018, Morgan Stanley valued Zomato at $2.5 billion. So, what has changed in these 1.5 years?
FY16 was a difficult period for Zomato owing to a high cash burn, layoffs, and consolidation in international operations. As a result, the companys operating losses more than tripled, leading to poor investor sentiment. Since then, the company has turned around its fortunes by making changes to its business model and increasing its service offerings.
Latest developments
Some of Zomatos new service offerings since 2016 include table reservations through Zomato Book, Zomato Gold and Zomato treats. The company introduced Zomato Book in late 2016 and became the largest reservations player in India within a month. Users can reserve tables in more than 10000 restaurants across the globe. In September 2017, the company waived off table reservation fees for partner restaurants in order to build stronger relationships with partners and increase user penetration.
Zomato Treats was launched in April 2017 and proved to be successful as well, with the company on-boarding more than 20,000 customers onto the platform within four months of the launch. Pankaj Chaddah, co-founder of Zomato, commented on Zomato Treats: The great thing is, it is already driving repeat usage. In fact, we have already seen a 25% jump in order frequency for members subscribing to Zomato Treats and see this trend holding over time. Zomato Gold, the companys paid subscription product, was launched in November 2017 and saw 26,000 registrations in the eight hours following its launch. The membership has also been launched in Dubai and Lisbon. The company hopes to reward loyal customers through these programmes.
Besides these new offerings, one major change in Zomatos business model has been the expansion into the food delivery space. This sector is notorious for the deep discounts, the speedy cash burn and the large number of startups that have shut down operations. Zomato was a late entrant into the food delivery space, with operations commencing in February 2015. The company has narrowed the gap with Swiggy, the leader in the food delivery space, by reaching out to its larger user base. The zero commission model, introduced in September 2017, could also help Zomato wrest market share from Swiggy. Further, the company acquired food delivery startup Runnr in September 2017 and the synergies from this deal could prove crucial amidst the rising competition in the sector.
What does the future hold?
In the near future, Zomato must be prepared for competition from the likes of Foodpanda and Swiggy. The company has a natural advantage over the two owing to its sustainable business model and diverse service offerings. In FY17, Zomato reported an 80% jump in revenue and reduced cash burn by more than 75%. Further, the company turned profitable in all the 23 countries that it operates in.
An important factor to consider is that both Swiggy and Foodpanda are well-funded and hence, the speedy cash burn will likely continue in the near future. Hence, it is important to understand the market share captured by each company. In the food delivery sector, Swiggy may continue to have the edge in the near future, with Zomato close behind. The former, which began with free delivery, has slowly shifted to a more sustainable business model and as a result, may continue to lead in this space. Further, people continue to associate Swiggy, rather than Zomato, with food delivery services and this could prove to be a hurdle for the latter.
The standout for Zomato
A major advantage for Zomato is the continuous stream of revenue from advertising and subscription programs. This could enable them to sacrifice profits in favour of a market share in the food delivery segment. The availability of a larger user database will also provide them with greater insights about the requirements of the Indian customer.
Other competitors such as Uber Eats and Googles Aero are still in the nascent stages and have a limited market share in the industry. The Indian food-tech sector is finally on the growth path once again and the future appears to be promising. The organised food business sector in India is estimated to be worth more than $50 billion and only a small percentage of this is being catered to by the food-tech industry. Hence, there is a lot of potential for startups such as Zomato to increase their market share and profitability.
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