1. Why Zomato is betting big on delivery business as it scales up

Why Zomato is betting big on delivery business as it scales up

The restaurant search portal believes it’s important to have a say in the delivery business as it scales up

By: | Updated: September 7, 2015 10:19 AM
zomato food delivery

Last week Zomato picked up minority stakes in hyperlocal delivery start-ups Pickingo and GRAB with a view to coming a little closer to customers. (Zomato facebook image)

THE last mile. That’s how close Zomato’s getting to its customers. Last week the seven-year-old restaurant search portal picked up minority stakes in hyperlocal delivery start-ups Pickingo and GRAB with a view to coming a little closer to customers. The firm believes it’s important to have a say in the delivery business as it scales up. After all, without service, the customer’s experience can be ruined. More importantly, the company feels it’s losing out on a lot of business which it could capture by partnering with logistics players.

Tanmay Saksena, global business head, Zomato Order explains that having been involved in the delivery element for a few months now—it had earlier partnered with Delhivery—the company realised how critical the last mile connect with the customer was. “Not all our restaurant partners are equipped to take care of on-time delivery. Also, it often happens that during peak hours, whether it’s lunchtime or dinnertime, their delivery boys are all out,” Saksena points out.  However, rather than owning the entire logistics piece, Zomato believes it’s more sensible to simply own a slice of it by partnering with specialists and focussing instead on its core competence.

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To be sure, advertising revenues will remain the bigger revenue stream for some time to come given that ad rates are raised by 3-4% annually and volumes too are growing. However, now that it has teamed with GRAB and Pickingo, the ordering piece is expected to grow at a fairly fast clip. The business is growing exponentially—20% week-on-week—it makes sense for Zomato to have some ownership of the delivery piece. “We’re looking to be doing 100,000 orders a day,” says Saksena who estimates the home delivery market for cooked food at $10 billion. The current run rate is not something the company wants to talk about; analysts estimate that in steady state Zomato should easily make commissions of 10-15% on an order.

The organic growth apart, Saksena estimates the firm could immediately add to its topline by servicing orders that weren’t being serviced because of a shortage of delivery boys. “We estimate that 10-15% of the orders that were placed couldn’t be serviced especially those over the weekends,” he says. Currently, Zomato is averaging 10,000 orders on weekends and is targetting a maximum of 40-45 minutes by which delivery boys would be at customers’ doorsteps.

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Ashvin Vellody, who tracks the internet and mobile space at KPMG doesn’t doubt the addressable market could be huge. More so because the number of mobile internet users is expected to grow at a compounded 28% between 2013 and 2017 to 314 million; also 50% of the internet user base would be mobile-only users. “The game has already moved to consumers buying on the mobile because that is a better way to make choices. It gives both the buyer and the seller far more flexibility,” says Vellody.

Indeed, with more women working, ordering in is becoming the easy way out for most couples with family incomes on the rise. That is one reason the market for online food ordering will grow, even in Tier II cities, where traffic conditions are fast deteriorating.

While Zomato’s ticket sizes, which currently average R600-650, could stay within this band, the firm believes operating profit margins will expand by 15-20% once the business scales up. Like most other start-ups, Zomato claims it could be profitable if it didn’t choose to grow and invest. Thus far the company has spent very little to acquire customers; apart from a few short periods when discounts have been offered Zomato has pretty much steered clear of such incentives. “If the restaurant owners wish to, they’re free to discount,” says Saksena who believes operating margins can go up by 15-20% once the business is bigger.

The challenge for businesses like Zomato’s, according to Milan Sheth, technology sector leader and partner, E&Y, is that they could get further disrupted. “For instance, earlier one player was doing air tickets, hotels and taxis but with the emergence of an OYO, and an Ola, sub-segments have emerged,” Sheth points out. While the model is robust and the app among the best, the company, he believes, would need to look for newer markets even as it scales up. Indeed, whether it’s specialised catering at railway stations or at homes, there’s no dearth of innovation. If Zomato is confident it won’t see too much competition, it’s because it has built relationships with close to 12,000 restaurants; the first mover advantage will pay off. Moreover, it believes its app will ensure traffic is sticky. Zomato’s 70-member strong engineering team is working hard to see the app remains as good as it is. At the end of the day, that’s the key ingredient to success.

Tags: Zomato
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