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Uber Eats acquisition might help Zomato lure investments from SoftBank

SoftBank has not invested in any foodtech company in India, yet.

Picture by Avanish Tiwary

Zomato’s USD 350 million acquisition of Uber Eats India, which gives Uber a 9.99% stake in the emerged entity, might lend Zomato an upper hand in convincing SoftBank, that has till now not made any bets in food tech in India, to take a bite of Zomato’s pie.

An investor who did not wish to be named said that, with SoftBank’s two portfolio companies—Uber and Alibaba on Zomato’s cap table—owning 9.99% and 23% stake, respectively, the Japanese conglomerate might now be inclined to invest in Zomato.

“SoftBank has been waiting for a market consolidation like this to happen. In the past, it has had multiple discussions with Swiggy which didn’t materialize as it wants to pick the leader in this space. It doesn’t want to repeat the mistake it made by choosing Snapdeal over Flipkart,” the investor said.

SoftBank, which has gone through a rough year in 2019, is betting on the Indian market as it prepares a local team to scout new investments in the country.

Hari Krishnan, fund manager at Astarc Ventures, said, Uber Eats acquisition, gives Zomato a better story to tell potential investors that the acquisition goes in its favor when it comes to the food delivery battle in India. “Zomato has been struggling to raise money in the past which is why the same set of investors have put in money this time. The acquisition might help change that,” he said.

Zomato is in the midst of raising USD 500-600 million, of which it has already received USD 150 million from Ant Financial, Info Edge, Sequoia Capital, and Singapore government-backed Temasek Holdings.

Krishnan said Swiggy has been currently dominating the food tech market, but the dynamics would change with this acquisition. In a blog post, Deepinder Goyal, founder of Zomato said, “This acquisition significantly strengthens our position in the category…we are the undisputed market leaders in the food delivery category in India.”

The acquisition will surely give Zomato a dominant position in the South Indian market—its weaker den—over its archrival Swiggy.

“South has not been a market where we have been typically very strong. On a per order basis, we were burning more (cash) in these cities but this will now improve our unit economics. Food delivery is almost 80% of our revenue, so if our business goes up by 20% and I have paid 10% of my stock, it will be a win-win deal for us,” Deepinder Goyal, founder of Zomato told local media Economic Times.

Post the acquisition, which dictates Uber Eats to shut down its platform in India and redirect all its customers as well as restaurant partners to Zomato, the Alibaba-backed food delivery unicorn is expecting to get 80% of Uber Eats business. “We will get about 20% new users on a monthly active basis and manage 25% extra orders,” Goyal said.

Zomato will also get access to almost 500 restaurants that were earlier on Uber Eats platform from South India.

One of the reasons Swiggy has a stronger base than Zomato in South India is that Swiggy is a Bengaluru-based company and started to expand its operations in the southern part of India first. “After Bengaluru, the next big market for Swiggy was to expand to Hyderabad, from where Swiggy surprisingly gets more orders than it does from Mumbai,” a person in the know who did not wish to be named told KrASIA.

A Swiggy delivery person’s two-wheeler parked in Bengaluru. Photo by Avanish Tiwary

“Similarly, for Zomato, since they first had a restaurant discovery business out of Gurugram, they have good relationships with restaurants in North India, which gives them an edge there,” the person said.

“Zomato entered food delivery space one year after Swiggy and had to play catch up for some time. By that time Swiggy was busy capturing the Southern market,” Krishnan said.

The source quoted above said Uber Eats made an interesting move in South India by going after a smaller market in South India, where neither Swiggy nor Zomato was very strong. “It went there first and forged exclusive deals with restaurants there, so it had the first-mover advantage,” the person said.

Naspers-backed Swiggy has 160,000 restaurants onboard across 520 cities and its average value order revolves around INR 300 (USD 4.21). Zomato said there are 150,000 restaurants on its platform with an average value order of INR 270 (USD 3.79).

A table for two

Investors and analysts KrASIA spoke to say the India market can only sustain two large players in each sector and with a large addressable market like food tech which is expected to reach USD 17.02 billion by 2023, it’s only natural that space gets consolidated.

“Building a scaleable business in large consumer categories like ride-hailing, food delivery or e-commerce requires a lot of patience and capital. Capital tends to get concentrated very quickly in the top one to two players making it challenging for others. So, consolidation is a natural phase of market evolution,” said Ashish Sharma, CEO at InnoVen Capital India.

Sharma said that raising capital for growth or late-stage startups has definitely become more challenging after the failed WeWork IPO and rather a weak post IPO performance for tech stocks. “In India, if you look at several categories, it’s already a duopoly as the market is not deep enough for three to four players to build sustainable businesses,” he said.

People in the industry say, the Zomato-Uber Eats deal benefits Uber far more than Zomato, as Uber Eats was no threat to the existing players. Even after this consolidation, the fight for the larger share will still be between Zomato and Swiggy. But Uber, which has been looking for optimization and has been eyeing profitability globally, has not only gotten rid of a loss-making unit but has pocketed a 10% stake in a USD 3 billion valued company.

Uninvited guest

Goyal told ET, Zomato burns USD 15 million every month towards its food delivery business, which is a significant improvement from USD 45 million monthly burn rate in March 2019. A media report said both Zomato and Swiggy burn anywhere between USD 50-60 million every month.

Sharma said it will be interesting to see if a mere consolidation improves unit economics, as historically it’s been a mixed bag. “In segments like travel and e-commerce it had a moderate impact and even in payments, entry of new players has changed the market dynamics.”

For instance, when MakeMyTrip acquired Go Ibibo for USD 1.8 billion in 2016, the thesis behind it was to consolidate their powers, get Naspers on the cap table, and better the unit economics. But then new players emerged, forcing both the brands back to splurging money.

Krishnan from Astarc Ventures said the monthly burn rate for food delivery companies might escalate with the entry of Amazon into food delivery which already has a large customer base in India. “With Uber Eats gone, Amazon will be the third contender in this race and it’s not going to be easy for Zomato and Swiggy. Amazon is already offering a competitive commission rate of 6% to restaurants as compared to 20-22% that they have to pay to Zomato and Swiggy,” Krishnan said.