Daybreak - The ray of hope in Zomato's grim quarterly numbers

Episode Date: February 17, 2023

A few days ago, Zomato announced that it was withdrawing its services from 225 cities in India on account of "not so encouraging" performance.Last week, the food tech giant also reported its financial results for the last quarter of 2022. It saw its losses soar 5X to nearly 350 crore rupees.The volume of orders also declined during this period. But in these numbers there also lies hidden a glimmer of hope for the company.Tune in.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Ramon, Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. A few days ago, Zomato announced that it was stopping its operations in more than 200 cities across the country. The last few months have been quite gloomy for India's largest food delivery platform. A week ago, Zomato also released its financials for the final quarter of last year,

and things did not look very good. Its losses shot up by five times to nearly 350 crore rupees. In the same quarter in the previous year, this number was 63 crore rupees only. The company's stock has also declined by 37% in the last one year. In fact, for three consecutive days this week, Zumato's shares were in the red. Add to this the multiple top-level exits that the company has been seen recently. From co-founder Mohed Gupta, who left in November last year, to Gunjan Patidhar, the company's chief tech officer who quit last month. The company saw four higher-ups leave within a span of two months.

There was so much being said about this attrition problem in Zomato that CEO Dipindar Goel was forced to address it in an official statement on LinkedIn. Things currently seem a bit shaky for the food tech giant. Even the number of orders declined in the last quarter, and that led to a fall in revenue. A minor fall, but a fall nonetheless. The number of new users who order at least once a year also fell. From 23.6 million in 2021, it fell to 23 million in 2022. Now, all of this is a bit troubling. But there is something more in these numbers that could actually be a real hope for Zemato

in these bleak times. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Das Sharma, and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Friday, the 17th of February.

Let me begin by taking you back to some of the things that Zumato has tried to do in order to expand its business and how these things actually panned out. In 2017, Zumato launched its flagship loyalty program called Zomato Gold. In the next five years, it went through all the ups and downs you could ever imagine. It was scaled back and then rebranded as Zomato Pro and then scaled back again and finally shut down. And then just last month, it relaunched again. Last week, when the company released its financials, it said that this loyalty program, Zomato Gold, onboarded almost 9 lakh members within a span of a month.

In his letter to shareholders, CEO Dipindar Guell said, and I'm quoting, the new gold program is built on top of what we have learned over the last few years, iterating on feedback that we have received from customers, restaurant partners as well as investors. We think that the new program is more sustainable for customers, restaurant partners as well as our profits and losses. We expect this program to drive loyalty and higher frequency of ordering going forward.

End quote. Now, please note the use of the words loyalty and frequency in Goel's statement. This is because it has something to do with the glimmer of hope that is there for Zomato. I'll come back to it later. One of the main issues with Zomato's loyalty program was how unhappy it made its restaurant partners. This was because of the heavy discounts that the membership was offering to customers on behalf of these restaurants. So in 2019, nearly 2,000 restaurants across the country joined the hashtag logout campaign. This was meant to be a signal of their withdrawal from the

Zomato Gold Program. Among the other things that it tried, Zomato also expanded into multiple countries in the Middle East, Europe and Africa. But none of these businesses saw success. In 2020, when COVID hit the world, Zomato also decided to try its hands at the grocery business. That did not work out as well. It also created a nutrition supplement business. Again, did not work out. And then there is the Blinket acquisition. which has raised many questions. In fact, ever since it went public, Zomato's stock price is down by more than 50%.

So now, after listening to me tell you about all of Zomato's troubles, you're probably thinking, how can there even be a silver lining in all of this, right? Well, it turns out there is. To find out, stay tuned. Remember I told you earlier that the number of orders on Zomato fell in the last quarter? Now, it is a problem for sure, but there is more to it.

The Kent's deputy editor, Sita Ramanji, wrote about it recently in his newsletter Trade Tricks. He says that the decline in orders is the result of a shift in something that is more fundamental, which is Zomato's user base. In the December quarter, Zomato's average monthly transacting users fell to 17.4 million from 17.5 million in the previous quarter. And this fall is not just limited to those who ordered food on Zomato at least once a month. Even the number of new users who order at least once a year fell from 23.6 million in 2021 to 23 million in 2022. But there is still light at the end of the tunnel for Zomato. Because there is one important number that is actually looking pretty good.

Remember what Dipender Goel said in his recent statement about the relaunch of Zomato Gold? He had said, and I'm quoting again, we expect this program to drive loyalty and higher frequency of ordering going forward. End quote. Now, as it turns out, the number of users who place more than 50 orders in a year shot up by 50% in 2022. And what does that mean? Zomato's loyal customers are on the rise, and they may not make up a big chunk of Zomato's

total users, but they are really helping drive up the number of orders for the company. And that is quite something. To help you understand why, I'm going to refer to something that the Ken CEO, Praveen Gopalakrishnan, had written about internet users in India two years ago. He had basically done a numerical breakdown of India's internet. internet consumers. And he came to the conclusion that if you want to make money in India as an online business, your market size at the outer limit is somewhere around 70 million users. Now, imagine these users in the form of a pyramid. The base of the pyramid is made up of

around 40 million of these users. These are the entry-level shoppers who almost never buy anything online. Maybe once a year for something really important like a phone because it is on discount. These are people who are extremely price sensitive and they will think twice before paying for delivery even. Then there are the occasional shoppers in the middle of the pyramid, about 20 million in number. Think of parents who will only order from Zomato on birthdays or anniversaries or other special occasions. And then right on top of the pyramid, we have what Praveen calls the California users. These are the ones who are turning out to be the saving grace for Zomato right now. There are around 10 million such users in the country. And who are they? They are

people who shop for almost everything online. Turns out, I am one of them too. Maybe you are as well. These are people who buy everything through the internet. From products to groceries to food, these are people who have OTT subscriptions. These are the people with the highest spending power. And as it turns out, these are the kind of customers that all internet-based companies are fighting for. And they may make up a small portion of the pyramid, but according to one founder that Praveen spoke to, they account for nearly 40% of the money spent by this pyramid of 70 million users. The reason why everyone is fighting for the same users on top of the pyramid is because the users at the base of the pyramid are not growing as fast as they should.

So according to the latest numbers, it seems that somehow Zomato is already appealing to this category of California users. And that, my friends, is the silver lining for Zomato. These frequent customers now command a bigger proportion of Zomato's annual transacting users when compared to 2021. It is these customers who are helping. prop-up Zumato's food delivery G-OV or gross-order value

and revenue. And even if the company is struggling to add new users at the same pace as before, Zomato has every reason to be happy that more of its revenue is coming from a loyal customer base. But again, it should not

bask in this glory for too long. Daybreak is produced from the Newsroom of the Ken India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras.

Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.