This is an audio transcript of The Morning Brief podcast episode: Is India Eating Out of Zomato's Hand?

Priyanka Sahay 0:00  

I've been covering this sector as a pool for almost like a decade and a half or not precisely been covering almost ever since the company was called foodie Bay. And now it all seems that was just yesterday

Arijit Barman 0:13  

for journalists like my colleague, Priyanka Sahay, who have been covering Zomato. Since its inception, the last few days have been rather eventful.

Priyanka Sahay 0:23  

It's been a very, very interesting couple of days, especially on account of the motto, given the fact that the company of course has issued its numbers and the fact that the earnings call happened today and the founder did attend the call. Sure, all of us is expected at least, it's been a couple of eBay news the day.

Arijit Barman 0:45  

For most of last week, this Zomato stock was unidirectional. In one day alone, it went down 10% And then another 10%, just the next trading day, a total of 23% freefall in just 48 hours, only to recover this Tuesday, on the back of seemingly better quarterly numbers, news of corporate reorganization, but the volatility in its stock performance, a far cry from its blockbuster public markets debut last year. From the stock skyrocketing 65% on listing day, to becoming poorest performing Indian consumer Internet stock down 67%. Last week, since the start of the calendar year, it has shaved off over 71,000 crore rupees in market capitalization. Zomato clearly has been beaten, bruised, and left battered. But can Zomato turn a corner and gain new grounds? Will the second quarter numbers of this fiscal be that inflection point. But why then is a large existing shareholder like Uber exiting the company just when the stock has jumped 37% After going as low as 40 bucks apiece? In this episode, we will go beyond the headline numbers. Talk to important stakeholders like restaurant owners and also rivals who sends a business opportunity as large platforms like Zomato are getting caught in the crosshairs of regulators the law and shareholders.

Priyanka Sahay 2:40  

It just for the first time like so many months that the company has given investors a profitability target for the first time all these years are shying away from giving a target saying that this is something which they cannot disclose. But today they have now the company aims to get to and it just did a bit of break even for overall Zomato business earliest by the quarter for of this financial year. In case this has missed, it is pretty certain of achieving the target by quarter two of financial 2024.

Arijit Barman 3:14  

It's Thursday, fourth of August from the economic times. I'm your host A, and you're listening is India eating out of Zomato hands on the morning brief.

Deepinder Goyal 3:30  

We never used to say growth at any cost I actually don't know who all of us are. But we never used to be a growth at all costs.

Arijit Barman 3:38  

That's the man under the spotlight Deepinder Goyal the founder CEO of Zomato. On the face of it the expiry of Zomato is one year lock in period of its anchor book, possibly turn the blizzard into an avalanche and flatten the Zomato stock. But for sophisticated investors, the concerns have been deep rooted, slowing growth issues around governance. For more acquisitions like Blinkit elongating the path to profitability and essential corporate helix when interest rates and inflation are both going up

Priyanka Sahay 4:12  

in the earnings call what the company earlier denied to state any obvious targets but eventually said that there will be a broader horizon that we'll be looking at perhaps even an extended deadline, not giving any specific date for that. But what interesting thing came out was that the company has downgraded its investment in this whole quick commerce space. Essentially Blinkit is the only company that it has invested in, specifically in the Quick Commerce segment. So from 400 million that it had earlier, earmarked. It has said that we'll be putting in some three 20 million in blinkit 150 is what has been invested so far as we speak. 

Arijit Barman 4:58  

Why the downgrade 

Priyanka Sahay 5:00  

 there was no explanation as such. But see how it happens is that Blinkit's acquisition has been a contentious one. And there's been a lot of questions around the whole scheme of things, the way the deal was structured, the valuation in which the deal was locked, floor of related party transactions, conversations are also making rounds. Essentially, this pace in itself is under the radar. Because globally, we've seen the companies in the Quick commerce space, the so called 10 minutes, space is crumbling down. Why should India be any different is the big question here. And I think Zomato should take some time to address this concern of its stakeholders. 

BG Sound 5:46  

See, we've the been in the food journey over the last decade. And we know that the food businesses making profit almost nowadays, and we know what's the nature of the business that works well, right. And all the signs and the data that we have for the blinkit business so far, we think that's a better business in terms of customer cohorts, in terms of potential scale, all of those things. So to whatever data we have so far, we just love the business. And we think that the like synergies between these two businesses are also very, very high. And in the long term, a will like business a will help us be better modes for business B and businesses B will help us more build more for businesses A, so it's going to be a cool thing to do. So that's where we're going.

Arijit Barman 6:37  

But what baffles people like me, is the adjusted EBITDA concept. It's been practiced globally by many tech companies,

Priyanka Sahay 6:47  

when EBITGA as a metrix is globally acceptable. These young internet companies have a tendency to mold it in order to suit their needs and narratives. So in case of Zomato, it has stated that they have adjusted EBITDA they call, it as EBITDA of plus share based payment expense minus rental accounting and stuff, essentially EBITDA plus the amount they are incurring on ESOP the cost that the company is incurring. Now, in my view, these are poor standards of disclosure. See, because at the end of the day, you can add in anything in any bit, and go ahead and say that this is just it. What is the point of having EBITDA in the first place for that matter? I would say that on balance sheet, we need to talk nuts and not notions. Unfortunately, these companies still think otherwise.

Arijit Barman 7:45  

In other words, it means a big term minus expenses incurred on share based payments, another word for Esop's, but in Zomato case it is meaningless. Since out of an EBITDA loss number of 150 crore rupees, there is 130 crore rupees un allocated expense. So, when they say food delivery broke even on a quarterly basis, it's purely on an accounting basis without allocating any tech or corporate overhead. In April June quarter the adjusted EBITDAc loss figure was 220 crore. But what about simple profit and loss or revenue? Is there an uptick in the last few quarters, even revenues have been flat. So here's the good news first, consolidated losses are down by nearly half to 186 crore rupees, when compared to the same second quarter of last fiscal simultaneously, quarterly revenues are up 67% to a little over 1400 crore rupees compared to a year before.

Priyanka Sahay 9:00  

The statement that Zomato has issued a food delivery business specifically I'm talking about not the drawers order value stand set about to pay 6430 crore it's quite impressive as compared to say last year, same quarter similar quarter, which was rupees 4540 Crore, significant jump so impressive. Um, let us also remember that we are comparing this with a quarter which had just recovered from the pandemic, loss and business. So last year around this time, the company was just recovering and had held back its own from there it's been a significant ride. So we'll have to give it to them when I mean they deserve but how this is going to transit in the next coming quarter. Will there be a stagnation or this growth momentum will continue, we'll have to which way to watch that.

Arijit Barman 10:04  

But ideally, instead of quarter on quarter numbers, one should compare with pre pandemic numbers to get a more realistic picture.

Priyanka Sahay 10:12  

In terms of number of orders that was generated by the company, there's been a significant increase as compared to something we're sitting on somewhere around 16 Crore orders this quarter. This is against some 14 Crore orders, which was reported in the previous quarter. So, needless to say that there's been a healthy increase in the number of orders, even though the average order value or the average ticket size, rim has remained stagnant, but the numbers have increased, frequency has increased that that that is remarkable.

Arijit Barman 10:54  

Frequency of orders may have gone up. But the other key metric, that is the average order value gross order value divided by total users is stagnating. When Zomato went public last year, it came to the markets with a record high average order value driven by a shift in consumer behavior during the initial year of the pandemic. Ideally, when normalcy returned, AOV, two should have seen a bump.

Priyanka Sahay 11:25  

On the earnings call before the auction, we'll talk about the issues that have been boosting forces to the company which included inflation. And we've seen that reflecting on our bills, when we go to restaurants. And when we have food, the fact that the food prices across the restaurant industry has increased. Considering the inflation, the company was vocal enough to acknowledge the delivery charges that the company charges has also increased has been a hike in fuel prices, which has led to a hike in delivery charges. And also the willingness of the consumers to pay more delivery to get convenience delivered to the doorstep. And of course, return of people to the offices, which will lead to you ordering a larger ticket size because you're sitting with a group of friends and you'd want to order for maybe your office gathering or something. All of this has happened. But what was remarkable to know what that for once the company did not disclose the order value, the average order value, ideally they should have, but in the earnings call, the company did share that there wasn't any substantial hike in that number, it remains stagnant. My question here is that when there are so many external forces, leading to an increase in the cost of the consumption, leading to the increase in the cost of food prices, where is that amount going why is a consumers ticket size not increased? Who is absorbing that cost? Is it that the company is still in a cash bowl load absorbing that cash still as we speak? or there's more to it? So there are no clear answers to that. And I find that a bit alarming.

BG Sound 13:17  

We can't tell the future of how life will look like precisly like I think we're so close to it. And if nothing else changes this will happen. But see, we actually live in a dynamic market. We live in a dynamic world so we don't control a lot of things that happen to us. So we'll see.

Arijit Barman 13:37  

And that's exactly the point. Inflation from food to fuel is playing spoil sport and people are cutting back on all discretionary spending, including eating out at the same time post COVID Whatever little they're spending on dining out there doing so while going to the restaurant, and not while ordering in while watching TV. And most analysts will tell you price realization growth alone is not sustainable. It has to be accompanied by volume growth. Problem is Zomato is still Metro centric, where it is slowly but surely peeking out. Despite trying to expand its footprint and offering just the top eight cities contributes 60% of the grass or the value as per the March quarter numbers. If that's not a lack of depth in the market, what is even those Zomato insists on collaborating and not competing with his stakeholders like restaurants. Most of them are unhappy with the high Commission's bundling of services or advertising dollars that platforms like Zomato or even swiggy charge from them, forcing them to Tap the CCI against what they call RT competitive behavior. Kabir Suri, co founder of Azure hospitality, that runs the mamgoto chain is a president of National Restaurant Association of India that represents the interests of five lakh restaurants nationwide.

Kabir Suri 15:22  

There are a few issues that obviously restaurants and Zomato of constantly having to deal with. There's one issue, obviously of commissions, higher commissions, lower commissions, what's the right commission, so that's one topic. Second is unbundling, which basically means restaurants want the ability to deliver goods themselves. And they feel that when they sign up with the likes of Zomato, and swiggy, you are fundamentally restricted because that's how the policy works with them. The third is data masking. So what that means is that information regarding the customer is not shared with the restaurant. So when you as a customer order online, through the app, we don't get to know who's ordering a and second is if there is any issues or preferences or engagement with a customer, we are unable to do that. So these are the three main larger issues. 

Arijit Barman 16:24  

But isn't customer data, the very mode on which these platforms have built themselves on most of principally

Kabir Suri 16:31  

before the likes was about it's tricky. Restaurants always delivered the differences that the process has been sort of streamlined and more consumer friendly, right. So what that allows you to do is basically understand your customer. Right. What I think our issues are in respect to the unbundling part, it's not that you sign up and you can't sign off an issue is that in the case of Zomato, for example, you've got Zomato Bay, so you as a customer pays Zomato Zomatoas a pays us thereafter. Right. So that's one second is, Zomato delivers the food. Third, you are listed on Zomato's portal. Fourth, you have to advertise on Zomato portal. So what that means is, if I want to be just listed on your portal, right, I have to also make sure that my food is delivered by Zomato. So what we're saying is that they're independent categories within the marketplace. We want those independent categories unbundled, why should everything be bundled? Right? So what that means is, we're happy to be listed, but we're also happy to deliver our food ourselves.

Arijit Barman 17:39  

Don't they also help in terms of discoverability? Isn't there an immediate bump in sales, the moment you sign up on on these platforms?

Kabir Suri 17:47  

So how does it work? I mean, in order for you to list you have to pay a second in order for you to list you have to discount be in the early days, when Zomato was funding the discounting themselves, the contribution of discounts were minimum. So what that what discount is done, it is basically is gradually is changing consumption, you've earned billions of dollars in trying to buy the customer, right. But fundamentally, buying the customer is a different type of customer. Ultimately, it's the food that's the hero. So if your food is not good enough, or if your food is not sustainable enough, you will get a different set of customer base. And that's the bigger problem for Zomato, which is basically when you're buying customers, or when you're acquiring customers through discounting. It's not the product, it's the price that matters. And in our understanding, at least in the food business is always the food that matters. Price is obviously relevant, but it's an open market, either you out price yourself, so you're competing with your peers,

Arijit Barman 18:48  

and where does Zomato commission stack up versus their peers from around the globe?

Kabir Suri 18:55  

The main differences labor cost across the world labor costs is much higher than India, you cannot use a foreign model in India labor, for example, your average salaries in India where minimum wage is much much lower than what the West has as a minimum wage. However, in my understanding, if you do the math correctly, it should not cost more than 60 to 70 rupees. Maybe now that the oil is a little higher 80 rupees to deliver a good within five kilometers, right? What is that comprise of that comprises of gasoline average at the bike cost? And you average out the labor costs, are you divided against the number of transactions, the AOB. So technically, that's what it should be. But when you get into the percentage game, it changes. For example, if your AOV is 1000 rupees, and you're getting charged 20%, that's 200 rupees, right? So technically is the margin in the benefit of the module, right? So what many chains and many restaurants with a higher AOV are asking for is a lower commission based on that to create the sustainability of the business.

Arijit Barman 20:05  

Sensing this collective angst and business opportunity, players like Thrive have come up to offer an alternative to restaurants and cloud kitchens that work predominantly on delivery models. 

Dhruv Dewan 20:20  

 I'm Dhruv actually run this company called Thrive. It's a food delivery platform used by over 11,000 restaurants right now, I do have experience prior to thrive, where I used to run hashtag loyalty,

Arijit Barman 20:35  

having worked with restaurant partners as their SAS vendor, Dhruv's, hashtag loyalty pivoted to cater to an important missing piece.

Dhruv Dewan 20:45  

We were working with a ton of restaurants and we realize they're not making any money. And they use our tool for various marketing, automation ads, customer acquisition and whatnot, right. But at the end of the day, top line look great bottom line was horrible. And that's when we felt that we need to dig deep into this game of food delivery. And that's how sort of things got started. So what does Thrive really do? So we realized food delivery as three components. One is the infrastructure, which is your technology system. Second is your entire delivery infrastructure in terms of logistics, and third is bringing in discovery, right? So it felt that currently with the way aggregators work, all of this is very bundled, right? It's one percentage, or one commission that I pay sometimes goes up to about 35 40%, because I'm paying for ads, etc. On top of my listings, right. So we felt it's time to really unbundle the way food delivery works. And that's how Thrive started, we felt that rather than creating everything ourselves, we will work with various ecosystem partners to create a very valuable system where everyone, everyone sort of profits. So we started as a direct ordering platform said that, hey, you're a restaurant, you get the order, we'll fulfill it, it's our systems, and it's our rider partners, as simple as that. And we will charge you a significant low commission. And the cherry on top is we give customer data. Today, aggregators still don't give customer data.

Arijit Barman 22:20  

But the main differentiator, much, much lower commissions charged from the restaurants. 

Dhruv Dewan 22:28  

Today, on an average, a restaurant would pay somewhere around 23%. On Zomato swiggy, that's an average new restaurants go up 30%. The old hostels are at about 15 16%, we charge 3%. For our commission, there is a gateway Commission, which is 2%. On top of that, and costs are outside. So there's a significant drop. In terms of the value our we put out to restaurants.

Arijit Barman 22:57  

With scale, comes unit economics, provided you focus more on value and less on volume. And Dhruv says that is doable, even with full transparency, and sharing customer data 

Dhruv Dewan 23:12  

Food delivery. For us when we did our research, extensive research speaking to folks at current platform restauranteurs all the organizations that run from companies like DoorDash. In outside India as well, consensus was food delivery in India is simply a zero sum game, nobody's making money. Our theory has always been to change, food delivery from a zero sum game to a positive sum game, right? How to grow in a sustainable manner. Web from day one, every partner in our ecosystem is making money at a unit economics level. From our initial strategy point of view, we've been targeting businesses plus that rupees 500 AOB right will not go through when going after the sizes which will be 60 rupees or 82rupees right . So second thing for us overall, I think it is still a little early. I think once we have sufficient scale or in discovery that the new model that we are working on is going to evolve.

Arijit Barman 24:15  

That's a good 100 bucks more compared to Zomato. And Dhruv says it went all the way up to 650 rupees before stabilizing at 550 levels simply by focusing on value and not on the 50 rupee gulab jamun just to drive sales numbers.

Dhruv Dewan 24:36  

I think the idea was, this is a shortcut five for restaurants we just show your're working in free to use your paying basis usage. So initially, when we started, we felt okay, we want to change behavior we want to change category. Over time we realize that they're in a market like India, and how deeply ingrained current aggregator platforms are We really have to put effort, money and time into discovery.

Arijit Barman 25:05  

And that's why strategic players like jubilant food works. Indian franchise owners of Domino's Pizza come on board as key investor and partner after the initial VC, and angel funding rounds to scale up further. Within two years, thrive has 11,000 Plus restaurants across a little over 100 cities on the network, and eight lakh users. But once you add the 3 million users that relied on them for tech support, in their earliest SAS avatar, the compounding effect will become that much more as they focus going forward on Discovery. That's the competitive landscape. Mind you. Thrive is not alone. There are quite a few like them mushrooming across the country. But how is Zomato addressing all that? Some cosmetic changes seem underway, like an internal reorganization. But most importantly, it is finally making important corporate disclosures around conflicts of interest involving key management personnel, something it should have done months ago. Let's go back to Priyanka and figure out why.

Priyanka Sahay 26:27  

I'm glad that the company took time out disclose this, in as many words that Zomato's co founder and ex CFO Aakriti Chopra is married to Blinkit's founder which the company has just acquired Albinder Dhindsa. Now the lack of disclosure of the relationship between these two executives was the big trigger. Needless to say that the company said that it was a public knowledge perhaps it was a public knowledge to somebody like me who have been was been covering the sector for not many years, but was it a public knowledge to the retail investor could invested in the company. I would doubt let me intrigue you with this tiny little detail on of who's with the company okay that will help us understand how Zomato is like structured and what the power structure of the company so as as much as for my sources again, there are five people who do how things work at Zomato Deepinder Goyal. Rahul, Ganju Aakriti Chopra, Mohit Gupta Ashant Goyal, combining their initials there together abbreviated as drama. High time investors and worse it that we wer able to decode this drama see where the investments are growing up.

Arijit Barman 27:48  

My take, if you are a lodestar among unicorns, and Zomato was having tapped the public markets first, the sense of responsibility governance goes up exponentially. As I've already argued before, some of its actions like conflict of interest over personal investments of deepinder goyal in companies where Zomato later puts money like ship rocket or blinkit. Its largest so far, by the way, or key personnel churns right after listing. Governance lapses ESOP largest to key managerial personnel, despite ongoing losses smacks of bad judgment, hubris and a scant regard for minority shareholders. If retail investors lose money in this volatile market, and due to such a legit misdemeanors, the trust will be broken and the entire ecosystem will suffer. Just look at the recent letter to the shareholders. The question answer format in the results note can be interpreted quite differently. There is a lot of flowery language and PR speak for a listed company who claims to be a leader. There is no data point anywhere on market share, or at least estimated market share. Isn't that odd? Also, the company has literally moved out and closed down almost all its international operations except the Middle East, but for some reason they do not disclose the right of costs for these acquisitions done. Remember, all the initial capital that they raise was for acquiring abroad and almost all failed and closed down? You have been listening to is India eating out of Zomato his hand on the morning brief with me or Arijit Barman. Thank you Priyanka. Kabir and Dhruv deeply appreciate. 

This episode was produced by Vinay Joshi , Surbhi Modi from ET, and Soundarya Jayachandran from Aawaz, who's also the sound engineer along with Indranil Bhattacharjee from ET executive producers Anupria Bahadur, and yours truly. We hope you liked this episode. Do share it on your social media networks. The morning brief drops every Tuesday, Thursdays and Friday. Do tune into at play our latest platform for all audio content, including the morning brief. Thank you goodbye, and good luck. All clips used in this episode belong to their respective owners credits mentioned in description

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