“…..To develop, own, run, administer, operate, facilitate, create, acquire an internet portal providing all sorts of information, including but not limited to details of menus, contacts discount offers, quality of service and food about restaurants, caterers, and other food and beverage service providers to be availed by users of the website in making informed decisions, hotels and other caterers to advertise themselves to the target audience in India and abroad…..” Excerpts taken from DRHP of Zomato Limited under heading ‘Main Objects of our Company’.
The paragraph above elaborates what real life problem Zomato actually tries to solve. As Zomato’s IPO opened up today, in this article, we have tried to analyze various types revenue and cost streams associated with the business model of Zomato and what is on the table for us as retail investors in this IPO.
Let’s dive straight into it.
A. Business Model
- The statistics: According to RedSeer, Zomato is one of the leading Food Services Platform in India in terms of value of food sold, as of December 31st, 2020. During FY2020, 41.5 million average Monthly Active Users (MAU) visited its platform in India. As of December 31st, 2020, Zomato was present in 526 cities in India, with 3,50,174 Active Restaurant Listings.
- The offerings: To capture value out of the shift in customer behaviour which India is witnessing in the current times, Zomato has to core Business-to-Customer (B2C) offering – (i) Food delivery and (ii) Dining Out, in addition to its Business-to-Business (B2B) offering (iii) Hyperpure (Hyperpure is farm-to-fork supplies offering for restaurants). Another important part of Zomato’s business is (iv) Zomato Pro (earlier known as Zomato Gold), which is a customer loyalty program inter-alia providing free and prioritized deliveries, offers like buy one get one on food or buy two get two on drinks.
- The Revenue Streams: Zomato generates revenue from online food delivery transactions, advertisement, subscriptions, sale of traded goods and other platform services.
- Revenue from platform services and transactions – Zomato earns commission income on such transactions from the restaurant partners upon completion of a transaction.
- Advertisement revenue – Advertisement revenue is derived principally from the sale of online advertisements which is usually run over a contracted period of time.
- Subscription revenue – It is the revenue from subscription contracts of Zomato Pro.
- Other revenues – Zomato also earns income as sign-up amount from restaurant partners and delivery partners and by sale of traded goods.
- The Cost Structure: The following are the major costs faced by the Profit and Loss Statement of Zomato:
| Cost Head | Amount in million ₹ (FY 2019-20) | % of Revenue |
|---|---|---|
| Outsourced support cost (Delivery Partners) | 20,937.72 | 80% |
| Advertisement and Sales Promotion (Ads, cashbacks and discounts) | 13,384.82 | 51% |
| Salaries of fixed employees | 7,988.8 | 31% |
B. Unit Economics
Contribution per order =
Commission and other charges (Commission from restaurant partners, advertisement, etc.)
Add: Customer delivery charges (Delivery fees paid by customers)
Less: Delivery cost (Payout to delivery partners)
Less: Discounts (Zomato funded discounts)
Less: Other variable costs (payment gateway charges, support costs, SMS charges, etc.)
(Costs associated with marketing, branding and other costs of fixed nature are excluded.)
Points which are noteworthy from the above comparison:
- All the costs incurred on an order fulfillment are curtailed whereas all the incomes earned on the same order are increased.
- The above increase in contribution per order is driven largely by increase in the number of food delivery orders owing to the fact that people has refrained so far from dining out due to spread of coronavirus pandemic and instead resorted to food delivery enjoying the safety and comfort of their homes. However, with decrease in number of cases of coronavirus and as governments allow opening up of shops, offices and restaurants, a shift towards dining out can be seen again. Hence, the above increase in contribution per order might prove temporary and unsustainable.
- Large restaurants chains like Burger King, Dominos, McDonalds, Sankalp, Spice Club, etc. may switch to their own ordering and delivering infrastructure as Zomato resorts to constantly increasing commission charges.
C. Way Ahead: Zomato has to continue using more and more marketing tools and strategies to acquire customers and keep growing. Further, it needs to ensure profitability and expand it by deploying a bunch of measures like pushing customers to order more frequently, hooking customers permanently to Zomato, optimizing delivery costs, commanding higher commission from restaurants, etc.
D. My View: As far as IPO is concerned, one should apply for limited listing gains, but huge upside potential in long term, if Zomato is able to overcome the challenges discussed above.
Stay tuned for post IPO analysis with a focus on valuation and market capitalization.
Views are personal and for education purpose.