Are more consumers Zomato’s bane? Cost rises 5 times because of user acquisition

By: | Published: April 9, 2019 6:13 PM

In Zomato’s case, whether customer acquisition has benefited the company or not is uncertain. Even though the company has recorded high revenue growth, its costs have also seen a spike of as much as 525% (over five times).

In Zomato’s case, whether customer acquisition has benefited the company or not is uncertain.

Zomato has seen an exponential jump in its earnings, with the growth rate itself shooting up to 200% in the latest fiscal year 2018-19, compared with a 33% expansion in the previous FY18. And while the innovative food delivery company has strengthened its user base, not all is as rosy as it seems.

In Zomato’s case, whether customer acquisition has benefited the company or not is uncertain. Even though the company has recorded high revenue growth, its costs have also seen a spike of as much as 525% (over five times) which is higher than its revenue growth, a report said.

With deep discounts and other customer acquisition policies such as marketing spends, the company has landed in a rather curious state. However, “this should be viewed over customers’ lifetime value, which would be significantly higher than one year,” Kotak Institutional Equities said in the report, possibly implying that Zomato might be able to leverage its users in the future.

“We have had tremendous growth aided by promotional marketing spends to acquire new users and be the first-to-market in many cities in India. In our experience, being first-to-market gives us a distinct competitive advantage in the food delivery sector,” Zomato said in a statement. “All the marketing investment we made in FY19 will bear fruit in FY20 and beyond — when we realise the LTV (Lifetime Value) of the users that we have acquired,” the statement added.

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The added consumer base and more orders help the company by reducing its last mile per cost delivery which is related to higher orders delivered per hour per delivery person, Kotak said. For Zomato, this means that it managed to reduce last mile cost per delivery by 25% from Rs 86 to Rs 65 on a year-on-year basis. Despite this, the company has reported an increase in overall losses.

Now present in 200 cities, Zomato has a larger footprint compared to Swiggy’s 120. In fact, the food aggregator has strengthened itself in tier 2, tier 3 cities recently. Also, compared to March 2017, the company received seven times more orders in March 2018, a key positive according to the Kotak report. “From a monthly run-rate of 5 million orders in March 2018 to 33 million orders in March 2019, [it is expected] that the company revenues will grow in FY20 as well,” it added.

The competition among food delivery applications such as Swiggy, Zomato, Uber Eats and Food Panda is expected to get stiffer. “The delivery market can scale-up meaningfully in the next 3-4 years, driven by delivery infrastructure, changes in eating habits, and availability of better quality food,” the Kotak report said.

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