India’s Zomato has made a USD 1.1-billion-dollar IPO amid COVID second wave
On 11th March 2020, WHO declared that the world has stuck with a new pandemic COVID 19 and subsequently India went under nation wide lockdown on 25th March 2020. Everything
came to standstill and hospitality industry took the biggest blow. The forced shutdown of
restaurants and hotels gave the biggest food delivery companies a run for their money.
Slowly with time by the end of December 2020, a dip in the fresh cases were seen and
businesses started operating again but people were afraid of not only eating out but were also
concerned about the hygiene practices at the local restaurants which subsequently resulted in
the drop in order frequency. (Exhibit 1)
Zomato pioneered and came up with the Max Safety Delivery and Dine in initiatives. This
process includes mandatory masks for all kitchen and delivery staff, staff temperature check
before the start of the day, rider hand sanitization, strict adherence to WHO safety guidelines.
In addition to these processes Zomato also provides temper proof packaging and contract
tracing through Aarogya Setu app.
But all of this came up with a steep rise in the operating costs. Amid such turbulent times the
management took a brave decision and despite incurring huge losses launched their IPO on
23rd July 2021 which turned out to be one of the most oversubscribed IPOs of all the times.
How Zomato executed its IPO plan
On July 23, Zomato Ltd. (NSE 0.47 %) listed on the Indian stock exchanges at more than 50%
premium to its issue price of Rs 76. That was exactly a week after the food-delivery and
restaurant discovery platform's initial public offering went live, setting the stage for a crush of
startups which are looking to go public over the next few months.
Deepinder Goyal and his team meticulously planned and perfectly timed their journey to the
public markets.
On September 12, 2020, Goyal wrote an email to employees, which seemed more like an update
on a fundraise.
But somewhere in the middle of that email, he said the food-delivery and restaurant discovery
platform was on course to tap the public markets by mid-2021. This was the first time he had
given a specific timeline for an IPO.
Most people were skeptical if the timeline was achievable or too ambitious.
But in the second week of July, Zomato became the first big consumer internet startup in India
to
make
its
market
debut,
stepping
into
the
world
of
IPO’s.
What
worked
for
Zomato
as
it
executed
its
IPO?
Zomato’s initial share sale is undoubtedly a big moment for the Gurugram-based company and
the overall Indian tech and startup universe but also a playbook on how to execute an IPO,
despite
several
roadblocks.
Since the beginning of the year, Zomato shuffled its cap table with multiple funding rounds to
make itself IPO-ready, but perhaps the most significant step in that direction was when the
company managed to execute secondary transactions to help China’s Ant Group partially
diluted it’s stake.
The China overhang (due to changes introduced in April 2020 by India for Chinese FDI in
Indian companies), which is turning out to be a big stumbling block for Paytm’s IPO plans,
was very clinically handled by Goyal and his team.
With very little being spoken about Chinese shareholders on Zomato’s cap table, it worked
brilliantly for the 13-year-old venture. Within a few months, US-based investment funds such
as Tiger Global, Kora, Dragoneer and Fidelity, among others, doubled down with more cash
as
Zomato
focused
on
bringing
in
new
types
of
backers.
Crossover funds, which invest in private and public markets, were now lining up for the
foodtech major. A clutch of these eventually ended up putting in more capital as the firm roped
in more than 180 anchor investors.
How Zomato’s cap table has evolved can be seen from Exhibit 2.
Doordash bump up
While Zomato shuffled its cap table, DoorDash Inc. listed on the New York Stock Exchange.
On its debut, the loss-making food-delivery app saw its stock price surge more than 85%,
ascribing the company a market capitalisation of around $60.2 billion—up from the $15
billion it was valued at in the private market. CNBC reported that the company was trading at
just over 16 times its projected revenue for the full year based on its performance in the latest
quarter. As on July 23, the San Francisco-based firm had a market cap of $59 billion. (Exhibit
3)
Covid-19 led spike, trimming losses
After the first few months of being severely hit as the national lockdown shuttered
restaurants, food-delivery companies Zomato and Swiggy started making a recovery.
Both the companies also used this time to prune losses.
While Zomato’s revenue fell by nearly a quarter year-on-year to Rs 1,994 crore in FY21, per
its red herring prospectus, losses, however, narrowed—from Rs 2,363 crore in FY20 to Rs
812 crore in the same period.
Last year, Goyal said in a series of tweets that the company recorded 60% higher sales on
December 31 over the previous New Year’s Eve. He added that peak orders per minute hit
4,254, resulting in gross merchandise value of Rs 75 crore for the day.
First off the blocks
Sticking to the timeline and being the first to list gave Zomato a massive advantage.
The company has gained immensely from a scarcity premium as no other consumer internet
brand (one built over the last decade with considerable scale and size) has gone public in India.
Sticking to the deadline, as first mentioned by Goyal back in September, has clearly worked as
the IPO benefited from the current euphoria in the stock markets.
On January 21, coinciding with ETtech’s report on Ant group selling its shares in Zomato,
the BSE Sensex, India's key equity benchmark, hit 50,000 points. That rally has continued
over the past six months, with the index closing at 52,975.8 points on July 23.
Global bull run
Club all of this with global liquidity, low interest rates, huge IPOs in the US led by the tech
pack and aided by instruments like special purpose acquisition companies, one realizes there
couldn’t have been a better time to list for Zomato.
Overview of the industry
The Indian food delivery industry is going through a phase of consolidation to survive and
stay competitive in the market. As the barriers to entry are fairly low due to the
unsophisticated business model, the incumbents constantly face the threat of new competitors
in the market which in turn puts pressure on the already wafer-thin margins.
Newer entrants that are leveraging Artificial Intelligence are also garnering investor interest.
The current big four of the food delivery industry- Zomato, FoodPanda, Swiggy, Dunzo; need
to keep expanding the coverage of the restaurants, servicable areas and rework their pricing
models to stay competitive and grow. High cost of customer acquisition combined with low
switching cost makes this an industry with high cash burn rate.
The Indian food consumption market was at $670 billion in 2019 most of which was driven
by home cooked food. Restaurant food or food service contributed only 9-10% of the food
consumption market. This is substantially low compared to global economies like the US and
China, which have 47-50% and 42-45% contribution from food services, respectively.
However, due to Covid, the size of the food services market opportunity reduced to US$3235 billion. While food services in India are highly under-penetrated, it is likely to grow
steadily, taking share away from home cooked food. Growth is expected to be driven by
changing consumer behaviour, reduced dependence of millennials on home-cooked
food/kitchen set-up, increasing consumer disposable income & spending and higher adoption
among smaller cities.
Zomato competes with other food delivery companies, such as Swiggy, QSR chain
restaurants that have their own online ordering platforms, such as Pizza Hut, McDonalds and
Dominos, cloud kitchens like Rebel Foods, other restaurants that own and operate their own
delivery fleets and companies that provide point of sale solutions and restaurant delivery
services. That could end up reducing its market share and can impact the growth and
profitability. Earlier in 2020, Uber Eats exited from India and Zomato acquired the business
of Uber Eats for rupees 2500 crore.
Further, demand for a food delivery platform is highly sensitive to a range of factors,
including, delivery charges charged by delivery partners, incentives given to delivery partners
and the commissions charged to restaurant partners. New restaurants and existing restaurant
partners may choose competitors if they charge lower commissions, marketing or other fees,
if restaurant partners do not find company’s marketing and promotional services effective.
1.
Swiggy is India’s largest online food ordering and delivery platform and was founded
in July 2014. Swiggy is headquartered in Bangalore, India, and has been operating in 500
Indian cities. In early 2019, Swiggy expanded into general merchandise delivery under the
name of Swiggy Stores.
2.
Amazon- has also started food delivery in India, and Amazon is the largest company
in the world. If it gets into a business, it kills the competition and becomes the leader.
Amazon started the food delivery in Bangalore as a pilot in May 2020. And within a year, it
has already expanded to 62 pin codes in Bengaluru with over 2500 restaurants and cloud
kitchens. It clearly means that in the future, there is going to be a war in the food delivery
business similar to what we are seeing between Amazon and Flipkart in the e-com business.
3.
Dunzo is an Indian company providing delivery services in 8 Indian cities: Bengaluru,
Delhi, Gurugram, Pune, Chennai, Jaipur, Mumbai, and Hyderabad. The company also
operates a Bike Taxi service in Gurugram. The company is headquartered in Bengaluru,
Karnataka, India. In 2017, it was funded by Google.
4.
Foodpanda is an online food delivery platform owned by Delivery Hero, a company
headquartered in Berlin, Germany. Today, food panda is the leading brand for Delivery Hero
in Asia and is headquartered in Singapore. Food panda is currently the largest food delivery
platform in Asia outside of China and operates in 12 markets across Asia. Ola has recently
acquired FoodPanda and FoodPanda has acquired HolaChef. This consoldiation is a result of
fresh inflow of institutional money.
5.
Faasos is an Indian “food on demand” service founded in 2004. It is one of the brands
of online restaurant company Rebel Foods.
6.
Other Local Brands and Restaurants Home-Delivery Service
Industry Rivalry in Major International Markets
Yelp – Yelp is the biggest competitor to Zomato in US. It is present in 31 countries. To
counter Yelp, Zomato acquired UrbanSpoon in US but still there is major gap to reach no.1 in
US market.
HungerGo – HungerGo is major player in Singapore where Zomato doesn’t want to enter due
to tough competition poised by HungerGo.
Yadig & Timeout – Yadig and TimeOut are other major players in UAE but Zomato is
market leader in UAE with 65% market share.
Five Forces Analysis of Online Food Delivery industry of India
The most effective way for understanding competitive forces and staying ahead of the
competition is to use Porter's Five Forces. For the Indian food delivery business, we shall
attempt to evaluate these dynamics. Because company strategy will take into account linked
components, the threat of new entrants is essential to crucial. The threat of substitution may
have an impact on consumer loyalty, and it can be factored in proactively to develop a brand
with distinctive characteristics in the product. Customers' bargaining power is critical when
developing a price plan. Backend arrangements relating to procurement and inventory keeping
must take into account supplier bargaining strength. Higher levels of competitive competition
result in the formation of a red ocean.
1. Threat of New Entrants: Because the Indian food delivery business is consolidating, the
threat of new competitors has decreased to some extent. This force's overall rating is likely
to be poor. Swiggy and Zomato are the leading companies in this sector, with 75-80 percent
market share. Swiggy led the way in terms of daily deliveries, followed by Zomato.
Furthermore, Zomato's acquisition of UberEats has shifted the game even further,
concentrating the number of participants in the industry. In comparison to Swiggy and
Zomato, Ola with Food Panda has slowed down on investing.
2. Threat of Substitution: With all of the food delivery businesses' apps being available on
Handheld, the potential of replacement is quite real. Because these platforms are so intuitive
to use and are also available to consumers on their mobile phones, moving between them
is a breeze.
It is quite usual to verify it on several applications since an individual has the option of
browsing through the alternatives among the desired food. Consumers may choose from a
variety of brands, flavors, and serving sizes. To find the availability of a favorite meal, such
as ‘Biryani,' one might use two or more applications. In most cities, popular meals have
several brands and may be substituted for one another. As a result, switching apps to make
a brand decision becomes one of the most prominent reasons for substitution.
Promos is one of the most popular reasons for searching for other applications. Food
aggregators are giving promotion discounts, even on famous brands, in order to increase
OPD (Order Per Day). In the month of June 2019, ‘Natural's Ice-cream' was running a 1+1
UberEats offer, while other players were selling at a flat price. For a customer who prefers
this brand, it is critical to look for such promotions in order to get a better bargain.
3. Bargaining Power of Buyers: Customer negotiating power for food delivery is linked to
the danger of substitution. INDUSTRY PLAYER has a high score. Many promotions are
appealing to clients in order to provide them with a variety of options. Consistent offerings
and promotions send a different message to the client. On one, the offer loses its allure,
while on the other, the client sees it as merely a matter of price. As soon as the deal is
discontinued, customers prefer to avoid purchasing such items. This circumstance suggests
that the consumer has more negotiating power. This scenario is not conducive to a longterm and prosperous business. Due of extensive scheme options, even for early start-ups
competing in the same market, the customer's negotiating power rises. The factors and their
analysis for the Indian food delivery business are listed below:
a. The number of buyers in relation to the number of providers is as follows: The buyer's
power will be stronger if the number of purchasers is limited in comparison to the
number of providers. Buyer power is still higher due to the greater number of providers
accessible.
b. A buyer's purchase is dependent on a provider: If a buyer can acquire identical
products/services from multiple suppliers, they are less reliant on a single source. As a
result, the buyer's authority would be higher. Because the services provided by these
players are comparable, the buyer's reliance on a provider is reduced, enhancing his
negotiating power.
c. Switching costs: Switching costs are significant if there are few alternative suppliers
accessible. As a result, buyer power would be limited. Switching from one supplier to
another is free because both reputable aggregators are available with a simple click on
the handheld.
d. Backward Integration: A buyer with the ability to integrate or merge suppliers has more
bargaining power with current suppliers. The food delivery sector is unaffected by such
factors.
4. Bargaining Power of Suppliers: In this scenario, suppliers are taken into account for the
aggregators' cloud kitchens. The primary goal of enlisting suppliers is to achieve
standardization. Suppliers operating throughout the country, though, are crucial to the deal's
success. Regardless of geography, the customer wants a comparable experience with
whatever meal he orders. Though these raw resources are simpler to obtain by in Tier One
cities, they might be difficult to come by in subsequent levels. In India, organized providers
operate in two ways: directly and through distributors. Because India's geography is so
dispersed, it's critical to consider supply chain difficulties when assessing supplier
bargaining strength. Due of the smaller volume needs, direct deliveries face logistical
problems in reaching remote sites. Due to numerous handlings and longer travel times,
shipping items in part loads might have an impact on product quality. Damages and
leakages also eat into profits, reducing suppliers' total compliance. In the event of lower
volume logistics, the cost of logistics also rises. While a supplier has a nationwide contract
with an aggregator, the logistical component must be considered when determining the
contract price. It becomes much more crucial in the case of low-shelf-life items, since an
increase in transportation days decreases the product's shelf life.
Suppliers frequently negotiate location-based pricing, making the aggregator's job more
difficult. Paying greater raw material costs in some locations for a meal that is priced
similarly across the country tends to detract from the overall value offer. Despite the fact
that each raw material category has numerous companies competing in that market,
suppliers' bargaining leverage remains moderate due to supply chain constraints.
5. Rivalry among existing Competitors: India's e-commerce market is rapidly expanding.
According to statistics, internet food orders have increased by more than 100 percent in the
last three years. As a result, it's fair to say that online meal ordering and delivery is a popular
business concept right now, and it's projected to grow with each passing year.
However, when it comes to the 5 troops, things are a little different on the ground.
According to Zomato's yearly income statistics, a few elements in the report were rather
shocking. Zomato's revenue for FY2019 is $206 million, according to the company.
Zomato had the greatest revenue in 2019, with $68 million compared to $68 million the
previous year. Before you get too enthusiastic, you should realize that Zomato spent $500
million on marketing in fiscal year 2019. Zomato claims that they are losing Rs 25 per
delivery. As a result, one must evaluate if Zomato was profitable in FY2019. This
necessitates an understanding of how to develop a long-term Business Strategy.
The competition in this business is heating up. Players are burning at a very high level to
establish themselves against the competition, as seen by the above statistics. With this
rivalry, the Indian food delivery sector is being transformed from Blue Ocean to Red
Ocean. The acquisition of UberEats by Zomato has reduced the number of participants,
resulting in Moderate Competition Rivalry.
Overview & History of Zomato (Acquisitions)
Overview- Zomato Ltd is an online food delivery business. Customers utilize the site to find
and review restaurants, read and submit user reviews, browse and upload images, order meal
delivery, reserve a table, and make payments while dining out. Its services have grown to
include Online Ordering, Table Reservations, a White label Platform, and a Point-of-Sale
system, enabling restaurants to engage with their consumers. Apart from delivery and
discovery, the company was India's first foodtech unicorn, and it has continued to add new
services.
Zomato was founded in 2008 by Deepinder Goyal and Pankaj Chaddah and is the fastest
growing restaurant discovery website. It was formerly known as Foodiebay, but in 2010 it was
renamed Zomato. It not only gives information on nearby restaurants, but also features like
online ordering, table reservations, and management. Zomato is now available in 10,000 cities
across 36 countries, with 1.2 million popular eateries and 80 million monthly users. It has 10
million reviews and 18 million bookmarks and is available in ten different languages. It
provides restaurant owners with a platform to supply a big number of people with high-quality
meals.
History- Zomato initially started out in Delhi, then the services were extended to cities like
Mumbai and Kolkata. With the tremendous user base and growth rates that Foodiebay brought
in to the founders, they decided to modify it and take it international. And that’s when this
venture started being called Zomato, as we know of it today. It was in 2010 when Foodiebay
was officially rechristened as Zomato.
Zomato began growing internationally in 2012, with services in Sri Lanka, the United Arab
Emirates, Qatar, South Africa, the United Kingdom, and the Philippines. New Zealand, Turkey,
and Brazil were added to the list in 2013. During this period, Zomato continued to improve its
tech infrastructure in order to keep up with the growing smartphone trend and published its
app. In order to expand its presence in other nations, the firm began aggressively acquiring
international competitors. Zomato bought Gastronauci, a restaurant search service in Poland,
and Cibando, an Italian restaurant finder, in 2014. The next year, Zomato completed its most
significant acquisition, NexTable, a US-based online table reservation platform. Soon after, it
acquired another US-based restaurant directory, Urbanspoon, but had to shut the app within
just five months.
Zomato's chances of survival were bleak with the significant layoffs and losses of 2015. To
minimize costs in its weaker business elements and transfer the attention to more revenuegenerating sectors like reservations, the company fired off around 300 employees, or nearly
10% of its overall employment. After a sluggish 2016, in which Zomato saw further misfortune
in incomes, the organization chose to move back activities in nine of the nations it had extended
to, dealing with them distantly to guarantee it didn't miss out on the business sectors.
Zomato gained this Delhi-based beginning up to utilize its cloud-based point deal item for
eateries called MaplePOS and rename it has Zomato Base. This additional an arrangement of
business arrangements in the organization portfolio. Zomato gained Sparse Labs, which is a
coordination’s innovation-based star-up in 2016 to get an involved group zeroing in on the
improvement of the conveyance experience of Zomato clients. The organization that gives
drone administrations was obtained by Zomato in 2016 to help the brand dispatch a robot-based
conveyance network in India and afterward further grow it abroad. The securing sum is as yet
undisclosed. Alongside these three, fire up, Runnr and TongueStun Food were acquisitions
made to access specific administrations and more escalated marking. Recently, it was
announced that Zomato has acquired UberEATS for an all-stock deal, where UberEATS
withdraws from India, gets a 10% stock in Zomato and leaves Zomato as a market leader in the
industry. (Exhibit 4)
To understand the challenges faced by Zomato a better here is the SWOT analysis of the
organization.
Strengths:
1. Known Brand- Zomato has a great brand image among customers, having won several
accolades. For example, the Online Ordering Award in India in 2019, the Asia-Pacific
Gold Winner in 2015, the Users' Choice Award in 2015, and numerous other awards
have been given over the years.
2. Marketing- Zomato's commercials are extremely humorous, and people engage with
the brand pretty quickly. The firm is quite active in its innovative marketing techniques,
both online and offline. It employs a variety of digital and social media channels to
enhance consumer interaction, including Facebook, Twitter, Instagram, TikTok,
LinkedIn, YouTube, and others.
3. User Friendly - Zomato's mobile app and website are both fairly simple,
straightforward, and user-friendly. It allows users to share photos, write, read reviews
of local eateries, and place food orders online.
4. Business Model - Customers and restaurants use Zomato's web platform, which follows
a unique economic strategy. Both platforms allow them to communicate with one
another. Customers may buy the cuisine online or visit the hotel if they like it and are
impressed by the photos and reviews. The intriguing aspect of this economic model is
that it does not need the platform to own anything.
5. Global Presence - Zomato is said to be operating in more than 25 countries around the
world, according to estimates. Countries such as the United States, Australia, Ireland,
Canada, Portugal, Indonesia, Brazil, Turkey, New Zealand, South Africa, the
Philippines, the United Kingdom, Qatar, Sri Lanka, and the United Arab Emirates are
among them. However, in these nations, the platform has collaborated with over 1.5
million eateries. It demonstrates the breadth of the platform's offerings.
6. Brand Awareness - Zomato has roughly 11.2 million monthly active users, according
to one estimate. During the covid-19 epidemic, the number of people using the
platforms skyrocketed. However, in the nations where it does business, the corporation
has developed a significant awareness.
Weaknesses:
1. Feedback impacts Growth - Zomato's platform's openness is both a strength and a
drawback at the same time. Many people are turning away from the platform because
of the unfavorable reviews and negative customer feedback. Most crucially, when
individuals update their status through check-ins, they cite the restaurant's location
rather than Zomato, which allowed them to be there.
2. Competitors - In recent years, the online food ordering market has become quite
competitive. The platform's market share growth is being stifled by a slew of new apps.
Users can, however, switch to other brands due to the variety of options available.
3. Safety Breach - Zomato's security system has been hacked several times in the past.
The hackers got access to the platform's server and stole millions of users' personal
information. However, the platform's insecure security scheme is deterring new users
from joining.
Opportunities for Zomato:
1. Technological Advancements - Zomato, as we all know, is a food-ordering website.
Artificial intelligence and automation technologies should be prioritized by the
organization. In terms of improved security, updated functionality, and a more userfriendly design, it would open the door to a whole new universe.
2. Online Users - Over the last few years, the number of smartphone and internet users
has risen dramatically. It is a fantastic chance for any digital firms, such as Zomato, to
reach out to new customers and get them onto the platform. The covid-19 epidemic has
accelerated the platform's expansion.
3. Market Expansion - Zomato's services are presently available in 25 countries. The meal
delivery business should expand its platform to other countries and areas. If the
company waits too long to expand, another online platform will imitate the business
model and profit from the expansion.
4. Zomato Community - The number of monthly active users on Zomato is in the millions.
They can look at images and read other people's evaluations, but they can't speak with
each other. The firm should think about extending its platform to include a social media
component. It would increase user engagement even further.
Threats to Zomato:
1. Fragile Business Model - Without a question, Zomato has the benefit of being the first
to market in India. The platform might have taken its business strategy to the worldwide
market and established itself as a global brand. The company's business model has now
become extremely vulnerable. The concept may be used by any new IT business with
programming expertise.
2. Government Policies - Cybersecurity concerns, data privacy concerns, identity theft
concerns, and other internet difficulties have made individuals wary of their online
activities. As a result, many countries are enacting new rules and standards that digital
businesses must adhere to. It would have a direct influence on the platform of the firm.
3. Competition - The industry for internet meal delivery has grown quite competitive. The
company's ability to extend its platform and retain clients is being hampered by the
competitive market.
The PESTEL Framework
1. Political: In year 2015 under the leadership of Honorable Prime Minister Narendra
Modi, the government of India launched its one of the most ambitious projects, the
Digital India campaign. The campaign was launched in order to ensure that all the
government services are made available to the citizens of India electronically. In order
to achieve the said objectives, the government significantly strengthened the online
structure to provide better connectivity to every corner of the country. The scheme also
enabled high speed internet networks even to the rural areas of the country. This
campaign worked in favor of Zomato as internet connectivity is one of the most
important things required by both its customers and partner restaurants.
2. Economical: From 2011 to 2014 Zomato registered a tremendous growth of 1399%.
This was a result of its expansion to 22 countries which includes the developed and
economically prosperous countries with high per capita income. There are currently
approx. 5000 employees at Zomato and it has also somehow managed to provide the
employment to youth of the country. Zomato has also raised capital through IPO and
the issue was sold like a hot cake.
3. Socio Cultural: In the last six years Zomato has turned up to be one of India’s favorite
food delivery applications. With the launch of Zomato Gold, it helped the individuals
to discover new restaurants to dine in too. Zomato has greatly impacted the food culture
of urban and sub urban population. With the rise of income and more and more young
people living away from their families, online food delivery has become vital and
Zomato is exploiting this opportunity explosively.
4. Technological: Being an internet-based startup in this digital era has worked very well
in Zomato’s favor. One major advantage that Zomato enjoys out of this technological
innovation is the faster service, which is a most sought-after quality when it comes to
food. The interface is fast to operate and the only thing required is to log in and place
your order.
5. Environmental: The company's ability to achieve business sustainability is determined
by how it responds to environmental concerns. Zomato Company has no substantial
environmental impact because it is a service company.
6. Legal: According to Indian law, the corporation must follow all rules that govern
technology companies in the nation (Wikiwealth, 2017). This guarantees that it is
utilized appropriately without being abused.
Exhibits
Exhibit 1
Exhibit 2
Exhibit 3
Exhibit 4
Zomato’s revenue over the years
Gross Order Value
Delivery Unit Economics