Zomato’s food delivery growth forecast slashed by 4%; quick commerce biz to add long-term value

Foodtech major Zomato is expected to see muted growth in its core food delivery business for the third consecutive quarter, per brokerage estimates. JM Financial expects the segment to grow at 21 per cent in the FY23-FY27 period vis-a-vis its earlier estimate of 25 per cent. As witnessed in the last few quarters, the return of travel and a boom in dining out, especially during the festive season, had dented Zomato’s food delivery business in the December quarter.

According to JM Financial, “​ Key factors affecting [Zomato’s] growth include continued inflationary pressures, growing share of dining-out and its focus on profitability improvement (to support growth investments in adjacencies such as Blinkit and Hyperpure).”

Additionally, Zomato’s decision to relaunch its ‘Gold’ loyalty programme in January, and the closure of operations in 225 loss-making cities suggest that the company is shifting its focus towards “high-quality customers” (those whose ordering frequency is very high), rather than investing in expanding the long-tail of customers (who order infrequently) and don’t add long-term value.

“While on the one hand this strategy could have an adverse impact on the near-term monthly transacting users (MTU) trend, on the other hand, it could accelerate profitability expansion,” JM Financial stated in its report.

An earlier report by HSBC Global Research had indicated that Zomato’s relaunched Gold programmed had, in fact, helped it gain market share over Swiggy. “Zomato has started to reclaim some of the market share it lost in H2CY22, thanks to the launch of Zomato Gold. We expect it to continue to gain market share from Swiggy, led by an aggressive go-to-market strategy,” HSBC stated.

Zomato is also expected to increase its ad income from restaurant partners, and improve take-rates as well as delivery partner utilization in the March quarter. However, given India’s maturing foodtech ecosystem, with a ~33 per cent penetration of online food delivery apps, incremental gains for players could be slower than in the past, say analysts.

As a result, both Swiggy and Zomato are increasingly making incremental investments in quick commerce instead of the food delivery segment. “This is likely because: quick commerce offers a much bigger TAM; current penetration levels in quick commerce are significantly lower compared to food delivery within their relevant TAM; and competitive intensity has slowed down in quick commerce, which gives incumbents room to build scale moats,” according to JM Financial.

Over the next few quarters, it is left to be seen how the battle between Zomato’s Blinkit and Swiggy’s Instamart plays out. Zomato stock was up 3.45 per cent to Rs 53.95 in Monday afternoon trade on the BSE.

The company is slated to declare its quarterly earnings later in April.

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