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Is UberEats the wild card Zomato needs to rule India’s food delivery market?

While Zomato claims to process 1.2 to 1.3 million orders per day, UberEats, delivers 300,000 to 600,000 orders a day.

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The rumored Zomato-UberEats deal might turn out to be a wild card for the 11-year-old Gurugram-based food-tech startup which is backed by Alibaba’s investment arm Ant Financial and InfoEdge.

The ongoing talk, if and when it materializes, would likely tip the balance in the Indian food-delivery sector in favor of Zomato, which lost out on being number one despite being earliest in the game.

Analysts and industry veterans KrASIA spoke to believe the merger will benefit Zomato at various levels.

“Zomato wants to take its competition out of the market, and at the same time find a strong backer in Uber,” Satish Meena, an analyst at research firm Forrester, told KrASIA. “Zomato has been in the market to raise funds for some time now and if they get UberEats, they might have a shot at becoming number one.”

If the deal happens, Zomato would get Uber on its cap table and thus can explore synergies with the Uber’s ecosystem. Industry insiders that KrASIA spoke to said Uber might connect Zomato to SoftBank, which has had multiple meetings with Zomato and Swiggy in the past, but so far has stayed clear of food tech in India.

Meena believes, Uber partnership will allow Zomato to explore synergies in the international markets as well.

According to media reports, Zomato claims to process 1.2 to 1.3 million orders per day, while Swiggy clocks 1.4  to 1.6 million orders a day. For UberEats, this number ranges from 300,000 to 600,000, or around 20% to less than 40% of Zomato’s daily orders. With the Zomato-UberEats merger, the combined order number might just trump Swiggy’s. Although, Meena believes, the Naspers-backed, Bengaluru-based company is still far ahead of Zomato, and UberEats acquisition would close that gap.

Ashish Sharma, CEO at InnoVen Capital India believes acquiring a company doesn’t necessarily mean a clear-cut transfer of customers from one company to another.

“Most M&A deals have multiple strategic rationales beyond acquiring the target’s customers and one-plus-one will not be equal to two,” said Ashish Sharma, CEO at InnoVen Capital India.

According to him, maintaining leadership in food delivery space requires heavy investment and a strong cap table. In many markets like China, it effectively ends up in a duopoly. As companies focus on improving unit economics, it’s natural to expect some consolidation.

It is difficult to say whether Zomato would take the crown, given that Indian consumers use multiple apps and are mostly driven by discounts.

“Zomato and UberEats have different offerings. While Zomato is focussed on fine dining, UberEats focuses on low-cost meals, primarily under INR 200 (USD 3),” he said. “Since their focus and customer profile don’t overlap, Zomato can tap into UberEats’ market and expand.”

Uber’s last-mile delivery muscle would also add to Zomato’s delivery fleet at a time when all the food delivery companies are losing money on every order. As per an Economic Times (ET) report, while Zomato and Swiggy lose USD 0.1 to 0.4 (INR10-30) per delivery, for UberEats, this figure ranges between USD 0.7 to 1.1 (INR 50-80) per order.

With the proposed merger, Zomato would take on the cash burn for UberEats and thus would need to streamline its internal processes. As such, Zomato has slashed discounts and promotions after its losses went up 9.4x to USD 139.4 million in FY19.

Picture by Avanish Tiwary

Of late, the late-stage investors have been wary of putting in a lot of capital in businesses with high cash burn.

“After the WeWork saga, investors are guiding their portfolio companies to focus on unit economics and execute on the path to profitability,” said Sharma. “In such an environment, I expect that there will be more consolidation opportunities not just in food tech but other categories as well.”

Different approaches 

Founded in 2008, Zomato started out as a platform for content, primarily focussing on restaurants and food reviews.

“Zomato never wanted to deliver food. Initially, they worked with restaurants to provide the technology so that they can receive orders, manage fleet and deliver it on their own,” Meena explained. “But that was something that was not scalable.”

When Tiny Owl and Swiggy entered the food delivery market in 2014, it forced Zomato to get into deliveries.

Swiggy has always been a logistics company with the sole focus on delivering food to customers from restaurants. Whereas, Zomato began in-house deliveries in order to hold on to its customer base and in the process, became a full-stack services provider.

“During the phase when food delivery companies were building their businesses in India, Zomato spent a lot of time and money in acquiring companies outside India,” Meena said. “Since the food delivery was not its priority initially, Zomato lost the top spot despite being the early-mover.”

Currently, apart from deliveries, Zomato is targeting customers who are eating out with its offerings such as Zomato Gold, table booking, and food festivals. “Zomato is trying to expand into the market where they are not relying on food delivery but also making sure they take a cut whenever customers eat outside,” Meena said.

In their attempt to veer into newer models and yet be in food-tech space, both Swiggy and Zomato have dove deep into cloud kitchen model—delivery-only kitchens that are shared among multiple restaurants. Companies charge commission plus subscription charges for the physical space they provide to these internet-only restaurants.

At present, Swiggy operates 1,000 shared, deliver-only kitchens, and owns two food brands called  Homely and The Bowl Company, while Zomato has a platform to connect cloud kitchen developers and restaurants. Under this model, it runs about 650 cloud kitchens. Unlike Swiggy, it neither owns the cloud kitchens nor has private food brands.

Both of them are figuring out new revenue sources to compensate for the losses they incur delivering food and maintain the market share,” Meena said. According to him, this is precisely why Zomato is diversifying its eating out business and getting into content, while Swiggy is focussing on delivering grocery and concierge service with new products Swiggy Stores and Swiggy Access, respectively.

As Indian consumers are price-sensitive and lack loyalty, the majority of food-ordering and delivery business is discount-driven. The food tech companies are losing money not only because of the nature of the business they are in, but also due to competition, which is going to become cut-throat with Amazon’s impending entry in the market. The reliance on discounts is further going to increase in 2020 as Meena predicts consumer spending to remain slow.