Zomato has shut down some of its subsidiaries in the past couple of weeks. What is the motive here?
No Longer Delivering Groceries
Last Saturday, Zomato said that it has decided to shut down its grocery delivery service from September 17. The company said that this move has been taken mainly on account of gaps in order fulfilment, leading to poor customer experience. The mail sent by the company said that Zomato has realised that it is extremely difficult to pull off such a delivery promise with high fulfilment rates consistently, in a marketplace model (like the company’s).
However, this doesn’t mean that Zomato is completely getting out of the grocery delivery business. Zomato said that it had invested $100 million (about ₹745 crore) for buying a minority stake in grocery delivery platform Grofers. Zomato said that the Grofers has found high quality product market fit in 10-minute grocery. Zomato added that it believes its investment in Grofers will generate better outcomes for its shareholders than its in-house grocery effort.
So, the company might be pulling out of the grocery delivery business, but investment into Grofers by Zomato shows how the company still has its eyes on delivering groceries, and even promising quicker delivery than other companies in the same category.
Apart from shutting down its grocery delivery service, Zomato is also pulling the plug on Nutraceutical. This news of the shutdown comes at a time when the government is trying to get stringent about private label norms for marketplace businesses in the country. The online food delivery company ventured into the nutraceutical business last year with the launch of health and fitness products.
Earlier this month, Zomato said that it has decided to shut down its Singapore and United Kingdom-based subsidiaries. Zomato said that these two entities did not have any active business operations, and their shutdowns would not have any impact on the firm’s turnover or revenue. Last month, Zomato divested its stake in its U.S-based subsidiary Nextable Inc., for $100,000.
The shutdown of these businesses is part of a ‘clean-up drive’ by Zomato. But we believe that they might not be an indication of Zomato struggling to maintain its businesses. Just take a look at Zomato’s initial public offering (IPO). The company went public in July, and despite deep losses, and mediocre prospects for profitability, shares have jumped over 70%. In FY20, the company’s B2B restaurant supplies subsidiary ‘Hyperpure’ clocked eightfold growth in revenue to $14.7 million in FY20 from 1.8 million in FY19.
In Zomato’s recent Annual Report, the company said that their contribution margin went from ₹47 per order in Q1 FY20 to +₹27 per order in Q1 FY21. Also, Zomato’s not-for-profit foundation, Feeding India, has served more than 123 million meals to people in underserved communities in India. So, Zomato is doing good on several fronts, as shown by the above data.
The decision by companies to shut down their inactive business operations, so that they can focus on profit-making subsidiaries is not something new. In fact, it could be seen as the best logical move. Why spend money on places which are not giving you lucrative returns and instead divert your focus on those businesses that are expected to make profits in the near future.
But are online grocery delivery spaces profitable? Take this projection for example: During the COVID-19 pandemic, India’s grocery delivery has witnessed a huge jump in demand by industry estimates. The market has climbed nearly 80% to $2.66 billion in 2020 and is on track to reach $20.25 billion by 2025. So, we know that this market has the potential to become big, which is why companies are eager to get a share in this pie.
Hence, it makes complete sense why online food delivery companies are competing heavily against each other to capture a market share in hyperlocal grocery delivery space. Because, there are loads of money to be made in that segment. There is already BigBasket, Amazon Fresh, Flipkart Supermart in the ‘grocery delivery’ market, but now Swiggy’s Instamart has also joined the race. Now, Grofers will be competing with these companies, backed by investments from Zomato. There are also reports which say that Swiggy is looking to acquire Dunzo, a hyperlocal delivery services startup.
We can see that there are a lot of apps in this segment. But the question we have to ask here is that, does everyone who enters the segment end up making profits? Is there even enough money to be made from these new segments?
In The End
A venture capitalist who has invested in hyperlocal delivery firms told Inc42, “These startups are navigating different paths primarily because there is pressure to make units profitable — particularly for Zomato and Swiggy.” According to HSBC, as mentioned by Inc42, the average order value in food delivery hovers around ₹400, which has increased significantly compared to pre-COVID era. However, because of high delivery cost, and expenses incurred on discounts and market, profitable growth is still doubtful.
Zomato and Swiggy might be the duopoly, occupying a major market share in the food delivery market. But they are diversifying into grocery delivery, to make better profits. The thing we have to understand about startups is that they have to burn a lot of money if they want to make their mark in any industry. Flipkart was able to build a large ecommerce consumer base, as well as a sophisticated supply chain operation after spending nearly $6.1 billion in investor money between 2007 and 2018.
Zomato and Swiggy might have to burn a lot of cash in the form of discounts, and marketing, before they make profits through these avenues. However, it is a game which have to be played carefully because the future of online grocery delivery apps after the pandemic, remains uncertain. Although they might not completely disappear from our lives, people might use these services less and less every day.
The opportunity is huge, but the window to make money in these new markets might be short. So, companies are racing to make profits from these industries. Hence, we believe that startups will further revamp their strategies in the future, change their business models in order to capture a bigger market share in both food delivery as well as hyperlocal delivery spaces. But how successful will they be in implementing their newer strategies, we have to wait for a while before we see the results…