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Zomato to not pick up equity stakes in companies for now

The online food delivery platform is looking to conserve cash aggressively.

Zomato’s Founder and CEO Deepinder Goyal revealed that the company was not planning any further equity investments because it has covered most of its objectives in Zomato’s shareholders* letter disclosing results for Q4 2022.

Why it matters: It is notable that the announcement coincides with the recent downturn witnessed across global markets including India. The market slump has also resulted in a drop in funding for start-ups. Zomato’s announcement affirms that most companies will be looking to solidify their bottom line instead of making risky bets.

Why Zomato invested heavily in 2021: Goyal had said that Zomato was a hyperlocal business and would need to diversify outside of food delivery to tap into economies of scale in the long run.

  • This was the rationale provided by the company behind the investments:
    • Put building blocks in place for a quick-commerce business in India,
    • Accelerate digitisation and growth of the food and restaurant industry.

The plan with Blinkit: Goyal did not clarify whether the company intends to acquire or merge with Blinkit but added that there was “a lot to do as the business is at its early stages”.

  • He said that the company has grown well in the past six months, and reduced its operating losses significantly.
  • Zomato will be providing a short-term loan of up to $150 million to fund Blinkit’s short-term capital needs.

How Zomato is dealing with the gig worker shortage: Goyal acknowledged that Zomato is facing stress on the availability of delivery partners in select large cities since April last week.

  • “This is short-term in nature, as the post covid economic recovery has brought back jobs in cities, and we lost some delivery partners to such jobs,” Goyal added.
  • “…all the workforce which migrated to their hometowns (or villages) during the first COVID wave, hasn’t yet come back to the cities for work— thus hampering our Delivery Partner Acquisition Rate,” he  reasoned.

Gross Order Value (GOV) growth: Zomato’s GOV grew by six percent as compared to the previous quarter and 77 percent year-on-year to Rs. 58.5 billion.

  • Zomato’s Average Order Value for the whole financial year was Rs. 398 as compared to Rs. 397 for 2020-21.
  • “The AOV increased by three per cent in FY22 over FY21 for the top eight cities. We currently don’t see any material downward pressure on the AOV,” Zomato’s CFO Akshant Goyal said.
  • Deepinder Goyal said that the top eight cities contributed 60 percent of Zomato’s GOV in the fourth quarter and the top 300 contributed nearly 99 per cent.
  • The GOV share beyond the top 300 cities is currently minuscule at less than one percent.

Source: Zomato

What about customers on its platform: Akshant Goyal said that the company saw a marginal increase in its average monthly transacting customers at 15.7 million growing from 15.3 million in the previous quarter.

  • “Likewise, average monthly active restaurant partners and delivery partners were at all time highs as well,” he revealed without getting into specifics.
  • He also said that Zomato’s new customer addition was similar to Q3 numbers despite reduced marketing spends (14 per cent quarter-over-quarter).

Impact of rising fuel prices on delivery costs: Akshant Goyal said that the increase in fuel prices increases the cost of a delivery. “One could say that part of our progress on improving contribution margin is getting pulled back because of fuel price increase, as we haven’t yet fully passed on the incremental cost to customers,” he said.

Cities covered by Zomato: Akshant revealed that the company launched in more than 300 new cities in the fourth quarter.

  • It is present in more than 1,000 towns and cities across India.
  • Akshant, however, added that the new cities launched during the quarter added only 0.2 per cent to the company’s GOV.
  • Deepinder said that the contribution margin in a smaller city is lower than the larger cities, given the lower order values.

Views on competition: Akshant said that the food delivery category remains very competitive. Here are some of the competitors listed by the company:

  • Other aggregators/platforms
  • Cloud kitchens
  • Branded food services players
  • Restaurants which own and operate their own delivery fleets
  • Traditional offline ordering channels such as take-out offerings and phone-based ordering, local publications, and other media where restaurants place their advertisements

Zomato’s cash balance: Akshant said that the company has $1.6 billion of “unrestricted cash” at the moment.

  • “Our capital needs are currently limited. Losses in the core food business are reducing rapidly,” Akshant said, adding that there was no need to raise any further capital.
  • Deepinder said that the company was looking to conserve cash aggressively.

Zomato Instant (10-minute food delivery) and the NBFC: Deepinder said that Zomato will not need a significant amount of cash to get these plans off the ground.

“We do not have any answers here yet as the pilot has been live for a few days and only in one location. We can perhaps give you some update on this in the next quarter. If the pilot is successful and we decide to scale it beyond the current handful of locations, then there will be capex needed to set-up the food finishing stations,” Deepinder added.

How Zomato’s dining-out business is doing: Akshant said that the resurgence of COVID-19 in the beginning of January 2022 and the resultant lockdowns set the restaurant industry back from the progress they had made in the previous quarter as customers avoided eating at restaurants.

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“We are working on a product update here and aiming for profitable scale-up this year,” Akshant said.

Snapshot of Zomato’s financials: The company’s revenue grew with eight percent QoQ and 67 percent YoY to Rs.1540 crore in Q4FY22. The company adjusted EBITDA loss reduced to Rs. 220 crore in Q4FY22 as compared to Rs. 270 crore (-19% of Adjusted Revenue) in Q3FY22. The loss stands at Rs. 360 crore before the adjustments.

Source: Zomato

*Disclaimer: The author is a shareholder of Zomato.

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I cover several beats such as Crypto, Telecom, and OTT at MediaNama. I can be found loitering at my local theatre when I am off work consuming movies by the dozen.

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.

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