Knives Out in India: Zomato needs to expand its menu quickly

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Zomato Indian Food Ordering Platform 543320 -1.82%

had an interesting two weeks. He launched his own pilot to deliver food in 10 minutes. It would consider gobbling up a separate instant grocery delivery service. And its share price hit its lowest level since the company debuted on the market in July.

Like many American tech companies before it, the company needs to spend money to keep customers and drivers in its ecosystem, expand its offerings, and hopefully eventually make money. But unlike its local competitors, it is already a publicly traded company.

In an unforgiving new market environment for technology, that’s not necessarily an advantage. It will be increasingly difficult to keep shareholders happy while taking the bold steps needed for growth, especially given the many deep-pocketed giants backing the company’s private competition.

Zomato went public in India with a valuation of $12 billion thanks to its strong food delivery business, boosted by India’s growing internet penetration. And the economics of its core food delivery business continued to improve.

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

However, the shares have suffered again recently: they are down 54% from their peak in November and are now trading barely above their IPO price last year.

This partly reflects the tough market environment overall for technology these days. But investors can also be scared off by reports of expensive acquisition plans. Zomato may soon buy instant delivery service Blinkit for $700 million to $800 million in stock, multiple 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 fast commerce space, having tried and failed many times before. The fast trade market in India is expected to reach $5.5 billion by 2025 according to management consultancy RedSeer: 10 to 15 times its current size. The company already owns nearly 10% of Blinkit’s capital.

Investors can be nervous about making a decisive move into expensive new ventures when the global economic picture is murky. But building adjacent businesses like quick commerce is important for Zomato to keep customers, delivery staff, stores and restaurants in its ecosystem, especially given the aggressive competition. Softbank-backed Swiggy, Reliance Retail-backed Dunzo, and Zepto-backed Y Combinator are burning millions in fast grocery delivery.

Zomato derives 75% of its 19.9 billion rupees ($262.24 million) revenue from food delivery, 15% from running a restaurant reservation service and 10% from Hyperpure – a service food supply for restaurants – according to his revelations last year. This provides a solid, but relatively narrow base. To survive and continue to grow, the company must diversify its offerings, even if that means spending large sums now and antagonizing newly risk-averse public investors.

Global food delivery companies like German delivery hero DoorDash,

and Chinese Meituan have successfully branched out to add grocery delivery, medicine delivery, on-demand delivery and instant shopping to their menus.

If Zomato wants to offer its long-term shareholders, it probably needs to follow suit.

Demand for food delivery has skyrocketed amid the pandemic, but restaurants are struggling to survive. In a fiercely competitive industry, delivery services are struggling to gain market share while facing increased pressure to lower commission fees and provide more protection for their workers. Video/Photo: Jaden Urbi/WSJ

Write to Megha Mandavia at [email protected]

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