Zomato's conundrum - Can it really be profitable ?

In an earlier article, I had written about the problem with delivery apps.
https://rpdeans.blogspot.com/2023/08/the-problem-with-delivery-app-business.html

My contention was that the market size was limited (less than what was projected by VCs) and growth would be limited. Margins from restaurants would reduce as competition offered them lower fees, or a subscription model. Delivery costs would rise, given that gig workers were inadequately compensated. This created a conundrum of falling growth, reducing margins and higher costs. Blinkit was a way to continue growth and kick the can down the road as far as profitability was concerned. So too, I believe is the company founder’s announcement that he wants to get into the airline space (running it like a bus service) and more recently, consider manufacturing jet engines.

What I wrote in 2023, appears to hold good today, despite a lot of effort by Zomato (eternal) to be
profitable. I was called a sceptic when Zomato (Eternal) posted a net profit of 527 cr for the financial year 24-25. An increase from a profit of 351 cr in the f.y 23-24, when they first turned profitable.

However, the numbers hide the reality of the business.

The company sits on 18800 crore of cash as per the Q1 25-26 report. 8446 cr of that was the result of a fresh injection of cash, which were not deployed in the business. While the amount of cash was lower in f.y 24-25, the company still had treasury income of 820 crore, from interest bank deposits, interest on bonds etc. It also deferred 61 crore of tax. Without treasury income, the company would be loss making. Similarly for the f.y 23-24, while net profit was 351 cr, treasure income was 776 cr and a tax liability of 61 crore was deferred (also deferred the next year).

The net profit has been reducing each quarter and the dependence on treasury income has been more, as can be seen from the following table:

	Q1 24-25	Q2 24-25	Q3 24-25	Q4 24-25	Q1 25-26
Net profit Rs cr	253	176	59	39	25
Treasury income	255	227	143	195	235
Profit w/o treasury income	-2	-51	-84	-156	-210

One of the assumptions behind the Zomato & Blinkit model is of customer stickiness, since the are solving a real problem. Initial losses were attributed to advertising and it was assumed thar profits would surge once advertising stopped – except marginal spends to attract new customers.

However, while advertising spends in Q1 of f.y 24-25 were 396 crore, they increased to 671 cr of
f.y 25-16. Advertising and promo spends are being increased, not decreased. Ad spends were around
Rs 300 crore per quarter, adjusted for inflation from f.y 21-22 to 24-25. It took an extra 300 crore to
get growth for f.y 25-26, which indicates to me difficulty in sustaining growth.

Competition in the form of Swiggy (for whom increasing losses has made survival in the food delivery business an existentialist matter), fixed fee based competitors and players like Rapido, or the inceased reach of ONDC will mean that Zomato has to keep spending on discounts and advertising, competing for the same set of customers.

For the main food delivery business, key parameters have stagnated for the last 3 years.

(Rs cr)	f.y 22-23	Q1 25-26
Monthly revenue (gross* value)	2192 cr	3590 cr
Avg monthly revenue (fees)	512.5 cr	885 cr
Avg monthly customers	17.0 million	22.9 mil
Gross value/ customer/month	Rs 1289	Rs 1567
Avg no of restaurants	210000	313000
Avg no of delivery partners	326000	509000
Gross order per rest/month	1.04 lac	1.15 lac
Commission % (on gross)	23.3%	24.6%
EBIDTA %	0	4.2%
Commission on net value		29.6%
Orders** /rider/day	6.61	5.7
Discounts		20%
Platform fee %		3%
Payment to riders (excl tips)		3.8%

*In the past Zomato reported gross order value, which included tax and delivery fee & before discounts.
Currently, it reports both gross and net (after discounts) order value.
**Average order value is not currently reported. Based on past reporting, the orders per customer is known
and hence the number of deliveries per delivery partner. 25 working days per month assumed.

Zomato (food delivery business) already charges a 30% commission from restaurants. I do not see how they can increase this. There is already significant pushback from restaurants to this rate. In addition, there is a platform fee paid by the restaurant and discounts of 20%. These discounts are financed by
a combination of the restaurant, the platform and banks (on credit card payments).

For the customer comparing prices across platforms, it is increasingly clear that Zomato’s prices are equal to or higher than competition (particularly ONDC). Discounts are opaque. Restaurants are increasingly unlikely to fund them and I they, it is after increasing the price compared to a dine in option. ONDC has a commission of under 10% and the difference is apparent in a price comparison.

Addressable market: This is a function of the number of people who have disposable income, the number of restaurants and the average bill value.

Of the restaurants listed on the Zomato platform, 60% are from 7 cities (90% are in 79 cities). Almost all the restaurants in these seven cities are also listed on Swiggy and some are starting to be listed on new platforms. Cloud kitchens (which retain the commission that Zomato charges) like Rebel foods, Cure foods, Box 8 etc are in most cities. Rebel foods is in 75 or the top 79 cities with a target of 120 cities in India. A customer in the top 7 cities has a choice of ordering from Zomato, Swiggy, ONDC and at least one cloud kitchen (on a separate app). ONDC accounts for 20% of delivery orders in Bangalore.

Of the 500,000 restaurants listed by NRAI, Zomato has already listed 313000 (competition is less). At least 100,000 restaurants are in locations where listing is not viable (customers can walk to the location and everyone in the location knows the restaurant, so there is nothing to be gained by being `discovered’ on an app. Others do not want to be listed. Hence, Zomato is close to peaking in terms of the number of
active restaurants. The numbers may show an increase, but that can be because inactive (shut) restaurants can be listed.

Under 9000 restaurants (5% of those listed in 2020) have over 100 people rating the restaurant. These are the restaurants more likely to go in for a commission-based model, or do their own delivery, instead of a 30% fee to Zomato, which will hit revenues at the top end for Zomato.

Consumers: There are between 25 and 30 million households in India that are consumers of food delivery apps. My previous article a year ago, suggested a figure of 20 million. I have considered both projections for 2025 and more optimistic estimates. As a reality check, even in this `consuming class’ only half the households have a two-wheeler. About 80% of these households can be accessed by the Zomato network - it would not be viable for Zomato to cover the remaining – which is why expansion to new towns was paused a year ago. Assuming an addressable market of 25 million households and 1.2
people per household ordering food, there is a possible market size of 30 million people in the medium term, of which Zomato has 23 million customers.

Bill value: In 3 years, the gross order value per customer per month, has increased by 21% - from Rs 1289 to Rs 1567 (before considering a 20% discount). This is a 6% annual increase. Considering that
discounts have increased over the past 3 years, the real increase would be between 5 and 6% p.a which is in line with inflation. The average customer is not paying more in real terms, nor ordering more often.

Costs: A key assumption about the business model is that increasing income would result in more
orders per restaurant (or dark store) , resulting in more orders per rider, which reduces costs per delivery. However, the number of deliveries per rider has reduced (for both Zomato and Blinkit).
After 3 years of optimization, a Zomato delivery partner now deliver 5.7 parcels per day, down from
6.6 per day, three years ago.

Competition has lower rider utilization than Zomato. Even at Rs 50 per trip (excluding tips), drivers
get less than the minimum wage for unskilled labor in cities. Even if Zomato delivery partners also
handle Blinkit deliveries, the average person doing both deliveries will still get less than min wage.

I believe there will be considerable pressure on costs – possibly due to legislation, on account of delivery partner compensation.

An interesting comparison for Blinkit

	Q4 22-23	Q1 24-25	Q1 25-26
Orders	39.2 mil	78.8 mil	176.7 mil
Avg Net order value	522	516	521
Avg monthly customers	3.9 mil	7.6	16.9
Avg monthly riders		105000	243000
Stores	363	639	1544
Discount (Gross-net value)		16.8%	20.0%
Revenue/Gross order value	16.42%	19.1%	20.3%
Net order value/store/day	6.25 lac	7.89 lac	7.34 lac
EBIDTA as % NOV	-9.9	-0.1%	-1.8%
Orders per rider/ day		10	9.7

There are 19300 PIN codes in India.

The area covered by a PIN code in India, is a proxy for the catchment a dark store can service.
20% of PIN codes with 33% of the population has at least 1 restaurant or organized retail store.
That is a proxy for Urban India and the possible market for e-commerce.

5% of PIN codes (965) with 11% of the population have a combined total of 5 or more restaurants and
organized retail stores. In the short term, that is the addressable market for e-commerce. It is also the size of India’s middle + affluent class (150 million or 34 million households).

There are 1789 PIN codes that have a prosperity level of 8-10 (on a 10 point scale which measures household ownership of durables). These are 10.42% of households.

The reason for this apparent disparity (965 and 1789 PIN codes both contain 10% of households
that q-commerce might target) is that among the 965 PIN codes (densely populated urban areas) there are many households without enough purchasing power. A major assumption of VCs when assigning very high valuations to Q commerce or food delivery companies is that increased adoption among dense catchments, will reduce delivery costs and improve operating efficiency. While that may happen in the longer term, currently Zomato (Eternal) almost reached the addressable market. The number of deliveries per rider has actually dropped as volumes have increased.

Blinkit is present in the 965 `core’ PIN codes and of its addressable market (commercially feasible to deliver) of 1789, it is present in 1544.

Swiggy’s Instamart and Zepto are also present in all the PIN codes that Blinkit is in. Among the off line retail players who have ventured into Q Commerce, Jio Mart (2000 Pin codes), Amazon fresh and Big basket are present in PIN codes covered by Blinkit. Therefore rather than Blinkit growing its business
within a PIN code, there are more competitors chasing the same customer, with price being the main
differentiator.

There is also growing pushback from customers on `hidden’ charges in their bills and from traders who feel – with justification, that Q-commerce which has bene competing by discounting, has hit their business.

The quick café business, part of Blinkit, is a combination of cloud kitchen & food delivery. More established cloud kitchens like Rebel foods, Curefoods and @kitchens are losing money in the same business. The hyperpure business is also EBIDTA negative.

To sum up – Both the food delivery and Q-Commerce business have plateauing growth, margins have peaked, revenues per customer are unlikely to grow in volume terms and costs will increase.

There are also a host of potential legal and regulatory challenges that can derail the business. These are:

- Allowing FDI in Q-Commerce, when FDI rules do not permit an inventory model.
- Dark stores and cloud kitchens operating in residential areas.
- Regulations governing gig workers may lead to higher wages. Even a 2% loss in margins will be hard to overcome. A brief gig worker strike can result in mass switching to alternate platforms.
- Regulations around transparent pricing, differential pricing etc.
-Lax enforcement around FSSAI compliance.

- There is also a GST demand for Rs 803 cr (more than its cumulative profit to date).

Why coffee chains are still not profitable

The coming Unicorn meltdown

Why Indian retail is different

____________________________Rahul Deans_______________________________________

Further reading:
https://inc42.com/features/eternal-battles-its-eternal-problem-food-delivery-zomato/

Article on 803 crore GST notice