Zomato chalks out grand merger & acquisition plan to push growth

November 15, 2021 4:45 AM

Vinay Singh, co-founder and partner at Fireside Ventures which invests in online retail and D2C start-ups, said the M&A strategy followed by Meituan, Alibaba, and now Zomato, largely looks to solve the problem of customer acquisition.

But Zomato seems to be taking a careful approach with its investments.But Zomato seems to be taking a careful approach with its investments.

By Salman SH

Foodtech major Zomato has revealed an ambitious plan to invest $1 billion in fresh capital into start-ups that will help it build adjacent businesses in sectors including hyperlocal commerce, logistics, point-of-sale services and electric vehicle fleets.

The strategy mirrors business models of Chinese internet holding firms such as Meituan, Alibaba and Tencent, which focus on acquiring and operating multiple companies, resulting in greater customer retention and large transaction revenue.

China-based Meituan which offers a multi-suite of products across categories like travel, shopping, ticket bookings, food delivery, and several other online consumer products is currently valued at $220 billion after starting-up in 2011. It has an average transaction rate of 28.1 per user on an annual basis. This is possible due to its large base of strategic investments in 46 companies, including 4 multi-billion dollar acquisitions.

Though the model has been largely successful in China where e-commerce penetration is at around 80%, Zomato still has to prove that the same model can make economic sense in India where e-commerce penetration is still looming at 4-5% of the overall retail economy.

Vinay Singh, co-founder and partner at Fireside Ventures which invests in online retail and D2C start-ups, said the M&A strategy followed by Meituan, Alibaba, and now Zomato, largely looks to solve the problem of customer acquisition.

“If you have a suite of products and services that can be cross-sold to customers within the same platform, this way you can bring down customer acquisition costs in the long term since you don’t need to keep reacquiring consumers by spending money on social and search ads on Facebook and Google,” Singh added.

But Zomato seems to be taking a careful approach with its investments. Rather than going all in with majority stake purchase and mergers, it has instead made minority acquisitions in start-ups like Grofers, Curefit, Shiprocket and Magicpin. However, the idea is to eventually acquire majority stakes and amalgamate the acquired companies into its operations.

“As these businesses scale, we would want to be the provider of additional capital to these businesses and consolidate our stake leading to a potential merger at some point,” Zomato said in its Q2FY22 investor presentation. It has particularly identified quick commerce as an important segment to invest in.

“Within all the businesses we are looking at today, quick commerce (delivery of products in less than 30 minutes) is clearly emerging as one of the most promising ones. While we decided to not build quick-commerce on our platform, we are excited about the progress our partner company Grofers has made in the 10-min delivery space,” Zomato added.

The company’s M&A bets could be crucial for its growth, given that its cash burn for the quarter after listing has grown by a whopping 500% y-o-y in Q2FY22 alongside losses of Rs 424 crore in the same quarter. Zomato’s net cash used for operating activities (or cash burn) in Q2FY22 increased to Rs 270.3 crore, compared with just Rs 44.3 crore in quarterly cash burn reported in the same quarter last year. But Zomato believes it can “take an investment route” to build successful businesses in adjacent sectors and turn them into market leaders even if some M&As don’t work-out financially.

The foodtech major also hinted on moving to a cost-cutting mode for the near term down by either divesting or shutting down businesses which aren’t “likely to drive exponential value for our shareholders in the long term”. It has already exited most of its international operations and recently shut its operations in Lebanon, though it continues to have a presence in the dining space in the UAE market. Experts, however, point out that in the long-term Zomato may be looking at a path to profitability from its acquisitions, but warn that it shouldn’t happen at the cost of its own growth.

“Investing in multiple companies is more of a long term game and Zomato is in a position to sacrifice short-term RoI goals. Even though Zomato is a loss making entity, currently it has set a path to profitability given that it already is a dominant player in the food delivery business but not at the expense of stopping its platform’s overall growth,” said Ankur Bansal, co-founder and director of venture debt firm BlackSoil which invests in tech start-ups.

However, it isn’t just Zomato that’s taking the new M&A to grow. Billion-dollar start-ups, including Dream11, Byju’s, and PharmEasy, have lately taken the M&A route to expand their coverage into new sectors by either raising debt money or going public to fund acquisitions.

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