Zomato's Holy Grail quest: Will its search for the path towards profitability fructify?

Chole bhature is not just a food item, but an emotion for the people of Delhi. But chole bhature is not the only delicacy that can claim a place in people’s hearts. There’s Lucknow’s tunday kabab, Hyderabad’s biryani, Kolkata’s rosogolla and many more such food items from across the country that can make food aficionados salivate just by their mention.

Till now, the only way to savour the original taste of these delicacies was to visit very specific outlets in the cities which lend them their fame, and sample them. But now, Zomato is going the distance to bring these famous dishes from around the country to your doorstep with ‘Intercity Legends’, its latest venture. For instance, if you’re craving some good old chole bhature from the popular Sita Ram Diwan Chand—in Old Delhi’s Paharganj area—in your living room in Mumbai’s Lower Parel, Zomato can deliver the dish to your doorstep by the next evening for as little as Rs 720, after taxes.

This is the newest business Zomato is trying to build. Launched in August 2022, Zomato Intercity Legends, an inter-city food-delivery service, allows customers to order anything from Kolkata’s rosogollas in Bengaluru to Delhi’s nalli nihari in Mumbai. The platform has partnered with logistics companies like Shadowfax for storage, transportation and delivery of food; plus, it has tied up with some commercial airlines. A pilot of the service was first launched in Gurugram and Bengaluru; in November, it was expanded to Mumbai, Kolkata, Chennai and Lucknow, among other cities. At its launch, Siddharth Jhawar, who headed the vertical then, had said, “Even at a slight scale, we’ll start making a profit. As we grow and with awareness, when people start making our offering a part of their celebrations with larger orders, we’ll be there.”

However, two months after the launch, the inter-city service saw the exit of Jhawar, who quit Zomato. He has been replaced by Kamayini Sadhwani, who was Director of Category at Blinkit that Zomato acquired a few months ago. But Jhawar’s exit is not the only reason that has kept Zomato in the news. Following its blockbuster debut on the bourses, the company has been under pressure to improve its bottom line, leading it to lay off employees and cut costs. Not only that, many top-level executives such as Co-founder Mohit Gupta and Rahul Ganjoo, Head of New Initiatives and Vice President for Global Growth, have walked out, while 120 employees have been shown the door, per a spokesperson of the company.

But even as the 3,800-employee-strong company has gone through its share of ups and downs, it has ventured into different businesses, and not restricted itself to being just a food-delivery and restaurant-discovery platform. Founder Deepinder Goyal, in his first financial earnings call after taking the company public, told analysts, “We want to get to profitability without diluting any more. That’s how we’re thinking about it. With the current $1.6 billion that we have in the bank, we should get to a profitable business on a group basis.”

Zomato’s intra-city food delivery service—that was started in 2015—broke even in June this year. The foodtech firm expects its inter-city service to take lesser time to break even than the time taken by its intra-city service. Ganjoo, who was the CEO of Zomato’s food delivery vertical at the time of launching the inter-city service, had said, “We are conscious of responsibly scaling up Intercity Legends so that it is cost-efficient. It will not be years till this service breaks even.” For example, in Mumbai, one of the iconic joints Zomato has partnered with is a quaint Parsi restaurant in the South of the island city called Jimmy Boy. “A delivery person comes to pick up the orders for the day at around 5:30 pm. We pack the food after bringing it down to room temperature in containers provided by Zomato. It is important to seal pack the food after it’s brought down from its cooking temperature as that reduces the chance of it getting spoilt,” says Sherzhad Irani, Jimmy Boy’s third-generation owner. One of the most popular dishes currently on the menu is its signature mutton dhansak, for which the restaurant receives about seven to nine orders daily, through Intercity Legends.

The food-delivery platform is also taking care to keep the charges for food items under control for inter-city customers. For instance, Mumbai’s popular food joint Sardar Pav Bhaji from Tardeo in South Mumbai—that’s listed on Intercity Legends—has the same price for its intercity and dine-in orders. “We have priced our food at the same rate. A plate of pav bhaji at the restaurant will cost you Rs 185 and that’s the price we offer on inter-city orders as well. However, Zomato adds some charges and then presents it to customers. Despite the higher price, we receive about 10-12 orders every day and more on weekends,” says Nissar Sardar, current owner of the eatery that was started by his father Sardar Ahmed in 1966.

Zomato offers Sardar’s pav bhaji for Rs 355 to users who order it on Intercity Legends. The average value of each order through Intercity Legends is between Rs 500-800, about 2.5 times more than the average of intra-city prices, which is in the range of Rs 200-275.

Seasoning to taste

In 2019, Zomato launched Hyperpure, a B2B wholesale vertical that allows restaurants to buy everything from vegetables, fruits and spices to poultry, groceries, meats and beverages, etc. The foodtech company says it works directly with farmers, mills, producers and processors to provide these ingredients to restaurants. Hyperpure saw huge uptake during the first wave of Covid-19 when the nation went under a lockdown. The number of restaurants on Hyperpure grew to 7,500 in May 2020 from 2,256 in March 2020.

But Hyperpure’s hyper growth momentum did not last; growth plateaued during the second wave of Covid-19 in 2021. However, for the first quarter of FY23, Hyperpure’s revenue from operations increased 40 per cent to Rs 272.7 crore from Rs 194.2 crore in the previous quarter, indicating that the company’s B2B vertical has the potential to grow substantially.

In FY22, Hyperpure’s adjusted revenues stood at Rs 540 crore, whereas that from food delivery stood at Rs 4,760 crore. Karan Taurani, Senior Vice President of Elara Capital, believes the lower turnaround time of a business vertical like Hyperpure can help the company’s valuation multiples. He says that another vertical that can take Zomato on the path to profitability is its recent acquisition, Blinkit, earlier called Grofers.

The online grocery-delivery business saw a rapid uptick in orders as the country remained under lockdowns due to the pandemic in 2020-2021. While major players such as Reliance Industries’ JioMart and Swiggy’s Instamart threw their hats in the ring, that didn’t stop smaller start-ups like Zepto and Dunzo from entering. The two nationwide lockdowns resulted in a major boom for the online grocery business. However, with lives returning to normal, the market penetration of the online grocery business has started slipping.

In the blink of an eye

Zomato could have missed the grocery delivery bus that its peers Swiggy and some other players were riding on, but after a year of deliberations, it announced its intention to acquire Blinkit in June 2022. The deal was completed in August when Zomato acquired 33,018 equity shares of Blinkit’s parent Blink Commerce Pvt. Ltd (BCPL) for a total consideration of Rs 4,447 crore. While reporting its earnings for Q2FY23, Zomato said that Blinkit saw a 17 per cent increase in orders from the previous quarter, while its average order value rose nearly 8 per cent from Q2FY22 to Rs 568.

Goyal, in his call with analysts, mentioned that on the back of Blinkit’s narrowing loss, Zomato was cutting its overall investment guidance in the service to $320 million from $400 million stated earlier. However, instead of being seen as an accelerator, the Blinkit acquisition is being seen by many as a speed bump in Zomato’s journey to profitability, since the situation now is very different from when the deal was negotiated. Lockdowns have been lifted and competition among online grocery players is only becoming more intense. This has also led to its online-grocery peer Dunzo to re-strategise and focus on its B2B vertical to stay afloat.

Not only that, the day the Blinkit deal was announced, Zomato’s stock plunged 6 per cent, as analysts believed it to be an overpriced acquisition. Also, a report by ICICI Securities in October states that although losses have narrowed for Blinkit, it continues to be a concern for Zomato, at least in the medium term, as it faces stiff competition from big players such as JioMart and Instamart, and start-ups like Zepto.

And competition is tough on all fronts, from delivery speed to quality of food and discounts offered to customers. This has made the space a cash-burning and logistically tedious rabbit hole, which in turn is a worry for analysts and investors in such companies.

Hunt for the secret ingredient

Zomato’s path to profitability looks rocky and long from here. Although it has achieved adjusted Ebitda break-even in the intra-city food delivery business in Q1FY23, it is now focussed on getting the overall business to adjusted Ebitda break-even. The management believes that they are close to the milestone.

Zomato has diversified into many businesses since its inception as Foodiebay in 2008 as a restaurant listing and recommendation portal. It was rebranded as Zomato in 2010, and is now a multinational restaurant aggregator known not only for its food and grocery delivery businesses but also for its successful B2B wholesale vertical along with a membership model called Zomato Pay (called Gold and Pro in previous avatars) that offers exclusive discounts to users. The company is also popular online because of its quirky social media campaigns and high-profile events like ‘Zomaland’.

But as Zomato’s lock-in period expired in July this year, it gave its pre-IPO investors a window to offload their stakes. The investor exodus began with Uber ending its ride with Zomato in August by selling its 7.8 per cent stake in the company for $390 million. Hedge fund Tiger Global followed suit and sold 180 million shares the week after Uber’s exit, and then Sequoia Capital sold 170 million shares in the open market. Sequoia has subsequently reduced its stake to 4.4 per cent, from 6.4 per cent at the time of the IPO. Founder and CEO Goyal holds a 4.7 per cent stake in the company that is worth around $650 million.

Globally, there are food aggregators like the UK’s Deliveroo, China’s Meituan and US-listed food aggregator DoorDash. Zomato’s story is similar to Deliveroo’s, as both went public in 2021, listed at a premium but their stocks are currently struggling to peak.

Globally, the food aggregating business seems to have hit a lull as economies around the world have opened up after the Covid-19-led lockdowns. While most developed economies are staring at a recession, the road ahead for Zomato looks promising, as the Indian economy has remained resilient in the face of multiple headwinds. And Zomato is trying to build a sustainable and profitable business on the back of its quick commerce, B2B wholesale and inter-city food-delivery play on top of its food aggregator model.

To turn profitable and for its stock to climb the highs it saw following its debut on the bourses, Zomato has to find just the right ingredients and the perfect recipe to prepare an aromatic business model that appeals to the investors on Dalal Street. 

@r_dhanrajani