Zomato-Uber Eats: Why landmark deal may change Zomato for good but not online food delivery market

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Published: January 23, 2020 8:55 PM

The ruthlessness of the Zomato versus Swiggy battle consumed the loss-making Uber Eats to the extent that it became baggage for its parent Uber, which has already been going through a challenging phase, after exits from Russia, China, Southeast Asia, and an IPO that didn’t give expected results.

Deepinder Goyal led Zomato was valued at 3.6 billion dollars by HSBC last year.

Much like Foodpanda, Uber Eats was never in the race to become a dominant third player in the hyper-competitive, discount-driven instead of customer loyalty, high cash burning, poor unit economics, and lower ticket size online food delivery market. It took nearly three years for Uber Eats to realise that entering a market at the infancy yet growing stage and capturing the market share by bringing the global best practices under the Uber brand won’t let it win over customers even if it plays the discounting game. The ruthlessness of the Zomato versus Swiggy battle consumed the loss-making Uber Eats to the extent that it became baggage for its parent Uber, which has already been going through a challenging phase, after exits from Russia, China, Southeast Asia and an IPO that didn’t give expected results.

“We will continue to invest in growing our local Rides business, which is already the clear category leader,” Dara Khosrowshahi, CEO, Uber had said in a statement announcing the acquisition. Zomato bought Uber Eats in exchange for 9.99 per cent stake in the company after winning it with perhaps a better bargain than what Swiggy offered. “The positioning Zomato is looking at now is becoming more dominant in the South that they were missing earlier. South was all Swiggy while Uber was making some progress there. From an Uber perspective, this will still benefit them because they have not actually exited the market. They would want to get an upside based on an increase in valuation of Zomato,” Arun Natarajan, Founder, Venture Intelligence told Financial Express Online. Deepinder Goyal led Zomato was valued at $3.6 billion by HSBC last year while Swiggy is valued at $3.3 billion.

Good Consolidation?

While consolidation in foodtech market, which anyways never had even a handful of players, may leave customers with fewer choices of platforms to order food from but in reality, it has always been largely about Swiggy or Zomato. Hence, in the sector which has been plagued by poor unit economics, consolidation perhaps is a good thing. “It is a good thing that the industry is consolidating. They have been burning money on every order primarily due to hyper-competition and aren’t charging for deliveries. These things are not sustainable. So consolidation gives you that pricing power. Customers will hopefully understand the value proposition and will pay for the delivery or buy without discounts,” Rajesh Raju, Managing Director, Kalaari Capital told Financial Express Online.

This also put a question mark on to what extent the industry could take away discounts or increase the price. India has always been a price-sensitive market and whether these platforms can increase the prices even if they get pricing power is the question mark. “The competition in this space is going to continue to be intense, and the food delivery category is still very small compared to the overall food service market in India,” Deepinder Goel, Founder and CEO, Zomato had said in a blog post announcing the deal on Tuesday.

Comments from Zomato and Uber will be updated as and when received for this story.

Uber had projected around $107.5 million in losses for Uber Eats in India during August-December 2019 period. Around 26,000 restaurants Uber Eats serviced across 41 cities, as reported by PTI, will add to the Zomato’s overall strength of more than 1.5 million restaurants across 24 countries. Zomato posted revenue of $206 million and $294 million in losses in its FY19 annual report while Swiggy reported losses worth around $337 million and revenues stood at $185 million in FY19. The Uber Eats acquisition takes Zomato’s market share beyond 50 per cent while Swiggy’s share remains around 40-45 per cent, according to media reports.

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“We see the Zomato – Uber Eats transaction as beneficial to the long-term sustainability of food delivery in India. Acquisition of Uber Eats should drive incremental value to Zomato as it gains a competitive position in key states and markets and increases its consumer base without many of the associated fixed and short-term variable costs needed for growth. Uber will also benefit as an investor as it has (so far) in the other markets where it has exited but retained an equity stake,” said Nikhil Bahadur, Partner, and Head of Private Equity Mergers & Acquisitions, Kearney.

The Unchanged

Nonetheless, even as Zomato focuses on curbing losses and improving unit economics, the current deal may not help in cutting discounts and losses overall. Discounts may be reduced when there is no competition. As long as Zomato and Swiggy are fighting it out for the same customers, it will be difficult for either of them to drop discounts in the short term at least. “Volumes won’t matter because per delivery if you are losing money, what will volumes get you,” said Raju. “Battle between Swiggy and Zomato will continue. I don’t know whether Uber will invest in Zomato ahead to retain their stake and if Zomato raises new funding whether uber participates, only time will tell,” said Natarajan.

Importantly, for sectors like e-commerce, food delivery, etc. which are under pressure for unit economics, the average size of the transaction matters and that is not going up. The average ticket size for food delivery platforms remains hovering around Rs 300. Now, if the transaction size remains small, it becomes tricky to extract unit economics from it even as such platforms go down the food chain to the customer base with lower affordability quotient. “This industry will make a lot of sense if the transaction size was Rs 500-600 which is not the case. I don’t think even if you have higher volumes, more restaurants, or better food choices, all of them are secondary to the transaction size,” said Raju.

However, this might help Zomato cut its losses a little bit because the Uber Eats’ discounts Zomato had to compete with is now out of the market. However, beyond that, unless profit is made on each order, higher volumes will increase losses. This means either both Swiggy and Zomato would have to drop discounts or continue discounts. It cannot be either case.

Moreover, it may not be possible to get all Uber Eats customers on the Zomato platform and not to Swiggy even as Uber Eats may already be using the two platforms as well. “There may be 10-20 per cent unique customers. If there will be new customers it will be because they (Zomato) may not be strong in the South. I think the southern customer will already be a Swiggy customer,” said Raju. The deal has been significant for Zomato as well as Uber Eats and the online food delivery ecosystem in India that at least for now and near future shows no sign of sanity where profits and sustainability make better sense than splurging someone else’s money and keeping its investors on the edge for returns.

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