Zomato’s Profitability Paradox

Zomato’s first-ever profitable quarter brought a whole lot of cheer. Even union cabinet ministers couldn’t help themselves from congratulating the Deepinder Goyal-led company after the Q1 FY24 numbers were announced in the past week. 

Of course, Zomato is not the first consumer services (B2C) tech company to report a profit, but one cannot overlook the fact that food delivery has long been called a cash guzzler. Zomato’s quarter busts this notion. 

So, there’s certainly a feeling that this is a milestone not just for the company but also for the Indian startup ecosystem as a whole. 

Well, congratulations aside, while the profits are definitely headline-worthy, some grains of salt are actually hiding between the lines in Zomato’s Q1 FY24 numbers. We wanted to take a more practical view on where Zomato is heading. 

But before that, here’s our take, but after these major stories from our newsroom last week: 

• DealShare Dealing With A Lot: Amid bearish market conditions, DealShare is facing a series of challenges, including layoffs, scaling down of operations and now the CEO’s resignation
• Life After GoMechanic: GoMechanic cofounders Rishabh Karwa and Nitin Rana are working on two separate startups, six months after controversy hit the auto servicing startup. Read our exclusive story
• No End To Layoffs: Tiger-backed Spinny laid off 300 employees and ex-Tesla exec’s Tekion let go of 200 employees in India, while Increff and Actyv.Ai also went through layoffs this past week

Zomato Peeks At Profits

Zomato banked on Adjusted EBITDA till last quarter, but in Q1 FY24, it didn’t rely on this crutch. Instead, as we reported, the deferred tax of INR 17 Cr brought the company out of the red, but only JUST.

At INR 2 Cr, the profit is 0.0008% of Zomato’s consolidated revenue in the fiscal. So, it’s not like the situation has been turned around completely. These are green shoots that may well die down in one bad quarter or unexpected tax jolts. Nevertheless, it has brought some optimism among those watching Zomato.

The bullishness is because of how Zomato has pulled up its core food delivery business, and Hyperpure growth, which is proving to be a lynchpin for both restaurant partners as well as quick commerce dark stores. 

The bottom line improvements have come largely as a result of cost cutting in employee benefits expenses (3% lower YoY) as well as some rationalisation in advertising and sales costs which only increased by 3% QoQ and 13% YoY, whereas revenue growth was north of 17% QoQ and  70% YoY. 

One cannot deny that Blinkit’s revenue contribution of INR 803 Cr for FY23 has had a big impact on Zomato’s overall operating revenue. But Blinkit itself saw some headwinds in the past quarter. 

For one, quick commerce revenue growth was not very encouraging, and secondly, perhaps more worryingly, the number of transacting users remained flat compared to the quarter ended March 2023. 

Blinkit CEO Albinder Dhindsa is confident of reviving this after the blip of delivery partner strikes (more on this later) and other logistical challenges such as adverse weather conditions in this period. 

Blinkit Spoils The Picture

For the purposes of analysing whether Zomato can sustain this profit breakthrough, let’s discount food delivery, which saw an operating profit of INR 181 Cr in the quarter. 

The company still has to pick up the loss-making parts of its business — Blinkit, Hyperpure and dining out. Quick commerce saw Rs 133 Cr in loss, while Hyperpure’s bottom line contribution was a negative INR 35 Cr. 

Hyperpure showed its worth with 29% QoQ and 129% YoY revenue growth in Q1 FY24, outpacing the overall revenue growth rate. But as usual, Blinkit proved to be the weight that dragged down Zomato in the quarter. 

Nevertheless, Dhindsa believes that Blinkit can reach Adjusted EBITDA breakeven over the next four quarters after becoming contribution positive in June and July 2023. Despite the slow GOV growth, Blinkit’s Adjusted EBITDA loss narrowed to INR 133 Cr in Q1, an improvement of INR 70 Cr QoQ.

The company has announced plans to add 100 dark stores to Blinkit’s network in FY24, which would require the most amount of investment for the business. This will undoubtedly complicate unit economics in the short term, especially if the problem of delivery partners striking comes back to haunt Blinkit. 

Like we wondered after the Q4 results in May, food delivery might well become a dependency for Blinkit in the short term, as it looks to make these investments. It’s no wonder then that so many of Zomato’s improvements (financially speaking) are on the food delivery side. 

Blinkit’s store additions are expected to be in cities where Blinkit is already present to increase the density of stores and thereby capture a larger market share in most active cities, where competition is also the highest.  

Is Food Delivery Maturing?

Speaking of competition, in May Swiggy claimed to have hit profitability in its food delivery business, as of March 2023, (after factoring in corporate costs; excluding ESOP costs). 

At the time, CEO Sriharsha Majety said Swiggy was one of the few global food delivery platforms to achieve profitability, though this announcement was not accompanied with actual financials of the company. 

On the quick commerce front, a Swiggy spokesperson told Inc42 at the time, “Instamart would reach unit economics positivity in the next few weeks.” 

Like Zomato, Swiggy also looks to be relying heavily on food delivery profits to keep quick commerce fuelled up. 

Given that Zomato also achieved profitability in the March-June quarter, we have to wonder whether food delivery as a sector is maturing and becoming more indispensable for the most active users, which are consumers in metros and Tier 1 cities. 

Competing with Swiggy, which has its hands in various delivery pies (ecommerce, D2C brands, Instacafe), will not be cheap. Even on the food delivery front, both companies have adopted similar strategies in recent months. 

Zomato Vs Swiggy: An Eternal Rivalry 

The two biggest players have made no bones about the fact that their focus is on growing revenue from customers, reducing discounts as much as possible, while also squeezing out higher ad revenue from restaurants. It looks like these measures are finally paying off for the food delivery duo, and this might feed the quick commerce ambitions in the short term. 

Zomato relaunched Zomato Gold earlier this year to fuel repeat orders, while Swiggy has the Swiggy One loyalty product. Besides this, Swiggy added a standard INR 2 fee for every order to boost profitability per delivery and both have looked to lure in new restaurants with a 0% commission promotion. 

Swiggy recently gained parity with Zomato by launching a co-branded credit card. Both companies have bolstered the dining out verticals. Zomato is expected to add a new vertical, called ‘Going Out’, next quarter that combines dining out and events ticketing. 

Both also have just one major competition in the form of Zepto, which can yet complicate the quick commerce business and spoil the wallet share for Zomato and Swiggy. Zepto is close to raising $150 Mn to expand quick commerce and its instant food delivery (Zepto Cafe) verticals.  

We don’t expect Zepto or Swiggy to completely spoil Zomato’s party, but it will definitely be interesting to see how Zomato balances its need to push Blinkit growth with its focus on sustainability. 

30 Startups To Watch: July 2023 Edition

The latest edition of our much-followed ‘30 Startups To Watch’ series, as usual, puts the spotlight on the early stage innovators in the startup ecosystem. 

In July 2023, fintech, ecommerce and enterprise tech sectors dominated our list, but startups from generative AI and semiconductors — two red-hot domains — also caught our eye. 

The 38th edition of ‘30 Startups To Watch’ features the likes of Agrigator, Rehook.ai, Fundly.ai, HexoAI, Leumas among others in the B2B segment, while Kikibix, Swytchd, OneGreen were among the consumer tech startups in the list. 

Check Out Our Full List Here

Sunday Roundup: Startup Funding, Tech Stocks & More

• Weekly Funding Sees New Low: Indian startup funding hit a new weekly low with just $11.5 Mn raised across 9 deals. This is a massive 74% fall from the already-low funding numbers of the previous week
• Results Season: Freshworks nearly halved its net loss for the June quarter, while Tracxn saw profits as well as revenue slip, and Nasdaq-listed MMT posted 3X higher profits in its latest numbers 
• Import Impasse For Laptops: Apple, Samsung, HP are said to have halted imports of laptops and tablets into India after a recent ruling increased their customs duty burden 
• New IPOs On The Horizon: Mamaearth received SEBI approval for its initial public offering, while the IPO of game development company Yudiz Solutions got underway on Friday, August 4.

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then you can follow Inc42 on Instagram, Twitter (aka X) and LinkedIn for the latest news as it happens.