In part one of this Q&A with Deepinder Goyal, Founder of Zomato, he spoke about the impact of the Urbanspoon acquisition on Zomato’s strategy, their key markets, how they’re using their whitelabeled product strategy to garner traffic in markets where they don’t have enough traffic, and the areas of focus for the company. Second part of this Q&A with Info Edge investors (and the media); some part of this conversation is paraphrased:
Q: What are the profit levels between your different models of enterprise, ad based revenue and order delivery? How do they stack up in order? If you have any rough numbers to share, that’d be great.
Goyal:So, the ad revenue business is the most profitable when it comes to gross profit margins. We actually do not calculate gross profit margins the way other people do, we see how much are we paying our sales force. So, for every dollar that we used to pay our sales team which goes out and sells ad space to restaurants, how many dollars do they bring back. In general, if we’re spending $1 on our sales team, they’re bringing $4-5 (that month alone, including commissions paid on a monthly basis, fully loaded cost like travel, reimbursement, phone calls) in terms of revenue.
On a monthly basis, our sales cost, if we’re paying X to our sales people, they bring in 4-5X in revenues. And that’s a 75-80% gross margin. In the longer term, our margins should easily fall between 40-50% odd.
I think ad sales is going to be the most profitable, and the mainstay of the business and Order serves 2 purposes: first it keeps traffic share within Zomato. And in the long term as well, there’s a lot of monetisation which will happen on the delivery side of the business. And there’s going to be a commission based revenue as well. That will get to about 25% net margins, but going beyond that would actually be very very hard. Looking at our global public competitors, I think, that’s pretty much the range they fall in, we should be able to get that in India as well. Again, comes back to the same thing: we don’t have customer acquisition costs and that just makes the business slightly easier for us even as the ticket prices India offers to us.
Q: What is the monetisation model in booking a table? And also in the Order delivery, are you doing any delivery in-house, is it done through your own network or is it all outsourced?
Goyal: Our monetisation model on table reservations is a flat fee we charge on a per month basis to use our system. Listing on Zomato and the widgets they use are free. Different markets have different paying capacity, so we’re customising it for different markets. On delivery, we don’t actually deliver orders. We don’t have a logistics force. However, we have invested in Grab, and it is doing very well with us. We are acquiring restaurant partners, and Grab is fulfilling that.
Q: Do you have any exclusive restaurant deals?
Goyal: We have a competitive advantage, that 40% of restaurants on Zomato are exclusive to Zomato. You won’t find that on any other player. That’s why our ticket prices are much much higher. We have an exclusivity agreement with them for 3 years.
Q: What is the range of that flat fee per month?
Goyal: It’s Rs 10,000 per month per location.
Q: Could you elaborate on whether you have plans to enter the food marketplace model like Tinyowl Homemade or Holachef etc.
Goyal: Not yet. We’re closely watching the place. We don’t want to put in the effort of building this market. Since we have the user base, we could do with the second mover advantage. Building one side of the marketplace is never hard. It’s building both sides that is the hardest thing. It’s a chicken and egg problem. In this case, we have the chicken, they have the egg. It won’t be very very hard for us.
Q: Competition in terms of take rates?
Goyal: Since we were very sure of our low customer acquisition costs, our take rates are very low, compared with our competitors. I don’t think the market has reached a stage where take rates determine which restaurants work with. So that’s still a couple of years away from now.
Q: On B2B2C: the competition you face in the more mature markets would be a bit more serious. How do you go around advertising and marketing there?
Goyal: More competitive markets, are maybe 4 cities in the US and London. Everything else is greenfield for us. We are trying to grab market share in London, and we’re not focusing on highly competitive markets in the US. In most of our markets, we don’t face competition, and we’re already the largest player.
Q: What about Opentable?
Goyal: OpenTable is a mature company, but they’re not in a lot of cities in the world. We have zero overlap with them. If you look at distribution of restaurants on OpenTable, 2/3rd of their restaurants are in around 5 cities in the world, nothing else.
Q: Sales hiring?
Goyal: We have two sales teams now: one on ad sales and other is enterprise products. We’re making sure that only two people from Zomato are points of contact.
Q: What would make you prune down your markets?
Goyal: We don’t have plans to prune down any of our markets. In about 3 months, you’ll see a lot of our markets profitable, and some will not. Some will turn a lot of profit, and some with a lot of losses. it’s that curve that we need to balance over time. I don’t think if we execute well, that we’ll need to prune.
Q (MediaNama): Could you tell us how you’re place organisationally for growth because you had a lot of senior people leave in the last 3-6 months. So what is happening there?
Goyal: When it comes to hiring senior people, it’s just like a marriage, you always want it to work but rarely it doesn’t work. And most of what gets in the media are the people who actually leave for some reason or the other. So nobody talks about the people who are actually still here and are driving the business. In general, we don’t have a lack of bandwidth at the senior management level. We have adequate number of great people to actually cater to all of our markets and all our businesses.
Q (MediaNama): How do you see that growing in terms of adding more bandwidth capacity?
Goyal: We don’t need to add any bandwidth right now, we have leaders everywhere, we have leaders for every business function and we have local leadership in all the countries in place. We’re not actively looking for people right now. Having said that, we have a global core team and we always make sure that we have a couple of people in the team to actually fill in for the most urgent bandwidth requirements that come up.
Q (MediaNama): In terms of US business, have you see any users moving out of what was earlier Urbanspoon, how’s that market reacted to the switch and what will it take you to make that one of your full stack markets?
Goyal: We got a lot of negative reaction early on when we switched from Urbanspoon to Zomato, so a small chunk of users who are actually contributing to 90% of the things that you hear from the market and when I say that, we did see a percentage of the users leave us as a platform when we switched from Urbanspoon to Zomato. However there were enough users who liked Zomato so much that the word of mouth also kicked in and we compensated for the loss that we had from those users. It’s been almost 6 months since we switched from Urbanspoon to Zomato, and our traffic in Australia and Canada is actually more than what Urbanspoon had and US is now very close to what it was, and to make US a full stack market, I think we need to double our traffic from here, and doubling our traffic in the US which is already a favourable chunk, is not going to be easy but we think it’s doable.
Q (MediaNama): In terms of rolling out Order in India, what are the approach you’re taking in terms of identifying cities and in terms of where competition is already present or has built the market for you?
Goyal: So we are in 14 cities in India right now, with the online ordering business, and that’s most of the online ordering business out there. That’s most of restaurants, that’s most of the users. And we’re actually, we’re not picking our battles in terms of saying ‘hey these are the cities we’ll focus on and these are not’, every city is equally important to us and we have local leadership everywhere for the online ordering business to make sure that we succeed and come out on top in each city that we’re in.
Q (MediaNama): Can you also elaborate on the challenges that you faced with Cashless and whether that’s a product that you’re going to continue with or not?
Goyal: Cashless we’ve already discontinued and cashless was piloted in Dubai, what we figured out and we also published a very detailed blog post on that, is that using cashless was not a part of natural flow of users who used Zomato, like it is for the online ordering business. People are already calling from the Zomato app to place their orders so now they just, I mean, for the online ordering business they just need to press the button next to the call button and not press the call button. That’s part of the natural user flow. Cashless business, we needed users to actually open Zomato while entering the restaurant after they’ve already made the choice of where they want to go. So people were not used to opening Zomato at that point in time.
So it literally came down to the point where we had to pay customer acquisition cost for our own users (on Cashless) who were already using Zomato and longer term, we knew that this business is not going to sustain. On payments business you need very large scale.
Q (MediaNama): From what you’re saying it seems as if you are competing with your own calling feature there, so what are you doing to transition users to ordering there?
Goyal: It’s a lot about education and we have pop ups, so for example, you press the call button, we show a small message saying hey, if you’re going to order, try our online ordering feature, and most of the messaging is actually, doesn’t have discounts, suited to them. Now if the user dismisses this pop up three times, and sometimes we switch this feature on from the backend, the 4th time the person calls, any restaurant, throwing a 10% off, and make that user try it too so we, do these things. Overall, we’re growing 50% month on month, and just to make sure that the quality of our operations stays intact, we don’t even want to grow faster.
We can actually grow 400% month on month if we want, but we’ll have to spend some money on it, but we don’t want to. So I think this is a healthy pace for us. Our customer cohorts are looking extremely good and we don’t want to lose that quality going forward.
Q: How many markets would you be comfortable to operate in?
Goyal: There’s also Turkey. We’re expecting to break even in Turkey by January. Turkey, we acquired a company, which was our largest competitor. We’re now the largest.
Q: Between the 12 -14 countries that are yet to be…would we be the number one?
Goyal: We launched Malaysia last week, and Italy 4 months ago. Some of these markets don’t have age on their side. In the US we need to double your traffic before we even think about financials there.
Q: If we give one more year time, the rest of the markets look like they’re on track to break even?
Goyal: If we don’t start investing in new businesses in those markets, certainly yes. We already have online ordering in India, Australia. We’re launching it in Philippines soon. Any future expansion will depend on more capital being available to us.
Q: You’d written an email on under performers in sales…
Goyal: Every sales team needs pressure to work. The email that I sent out was an internal email, and that’s a part of the regular conversation. There’s a lot of context behind the email. Internally, people get it. There have been conversations and you have to put it in context. You haven’t even read the whole email, and if you read it out of context, it’s going to look like what it looks like to you. If we execute well, we’ll meet our revenue targets. This was just a nudge in that direction.
Q: Do you think doubling your revenue is lowering your expectations?
Goyal: This is in line with the expectations of our investors, and our expectations are higher.
Q: Your layoffs in the US? How do things change now?
Goyal: That’s a model we’re using for every market. This is also a part of the big learning from Urbanspoon. It didn’t have any feet on street, and it was the complete opposite. The fact behind the changes we did, was because 40% of restaurants account for 90% of the market. Do we really need to put feet on street for 8%? That 8% is also the lowest quality traffic. We did that everywhere. 50% of our listings are also in the US, and it got impacted the most.
Q: Have you started monetizing Zomato Orders?
Goyal: We’re already monetizing, and the business is doing quite well.