Zomato bolsters its ship with UberEats as Indian food-tech scouts a shore

Photo: Zomato
India’s food delivery market was churning in 2018. Zomato, battling leadership attrition as it sought investors, got a shock when Swiggy, a much newer company, announced a $1-billion raise in December. That was more money than Zomato had raised in the nine years of its existence and it was led by Prosus Ventures, one of the world’s most bullish investors in food-tech.


Swiggy’s formidable war chest put pressure on Zomato to scale up its own—if it were to survive in a market that relied on heavy discounts and where companies funded delivery fees from their own pockets.


The deal also made certain that Prosus Ventures (formerly called Naspers), backer of Germany’s Delivery Hero, was in for the long-haul. It put two-thirds of the $1-billion itself.


The Swiggy deal had other consequences, too. UberEats, which was at that time negotiating with Zomato for a potential sale, took the deal over to Swiggy. It then went to other potential buyers, including Amazon, until finally Zomato acquired it in January.


Zomato gave 9.99 per cent of its company stock to Uber for UberEats, making sceptics wonder if the deal was worth it as the smaller company had downsized its business over the past. Supporters, however, said the deal was investors’ show of faith in Zomato, which they believe will overtake Swiggy.


In a tough environment, Zomato’s decision to buy an expensive asset shows how it is trying to innovate differently from Swiggy, global investors fighting proxy food wars in India, and who gets funding from Japan’s Softbank in the end.


Zomato’s search for gold


Companies go through good and bad times and you want people who will support you through the good and bad times,” said Deepinder Goyal, founder and chief executive officer (CEO) of Zomato. “Until I see that in a potential investor, I don’t accept their money.”


File photo of Zomato CEO Deepinder Goyal
“Eight of the 12 people (investors) on our cap-table are the ones we got ourselves. It is a very small and focused cap-table,” he said over the phone from Gurugram, where Zomato is headquartered.


Zomato began as Foodiebay, a website that aggregated restaurant menus. Goyal had co-founded it with Pankaj Chaddha after he quit Bain & Co in 2008.


Sanjeev Bikhchandani, founder of Info Edge, the first investor in Zomato, recalled how he and his son used Foodiebay to discover new cuisines and restaurants. “One day my partner, said, ‘Have you seen this site, Foodiebay?’ I said, ‘Yeah I use it all the time.' He said, ‘Why don’t we invest?’ and I said, 'Why not!’”


“I cold emailed him (Goyal): ‘Good Job on Foodiebay. Are you raising money? Can we talk?’” said Bikhchandani, who put Rs 4.5 cr ($1 million) in 2010. Zomato went on to raise funds from Sequoia and Ant Financials, a unit of China’s Alibaba.


Zomato became the de facto eating-out reviews site and made money by serving as an advertising forum for restaurants. It expanded to table booking and food ordering—initially passing on orders to restaurants which they would deliver through their own fleet. Business was great until the market became crowded.


A dozen start-ups, like Foodpanda, TinyOwl, SpoonJoy and Twigly, opened between 2013 and 2015 but many of them either folded up or were acquired, as early business models were untenable. Foodpanda would be sold and re-sold multiple times.


Swiggy, which launched in 2014, differentiated itself by applying artificial intelligence and machine learning to logistics. It skipped dine-ins, and positioned itself as a fast and reliable delivery service for restaurants.


“The reason why Dominos became so big was not because they had the best pizzas—it was the reliability of their ordering service,” said Karan Sharma, executive director at investment bank Avendus Capital.


“Swiggy took this learning and made a company that was consumer services oriented…whereas Zomato’s (early) approach was to create high-quality content, get advertising dollars, and stay away from on-ground execution as much as possible,” said Sharma, who has advised Swiggy on all of its fund-raises since 2015.


Zomato, in catch-up mode, acquired delivery start-up Runnr in 2017 and launched a drive to sign-up restaurants in India’s biggest cities. It hired Mohit Gupta, then the chief operating officer (COO) of travel website MakeMyTrip.com, to head Zomato’s online ordering vertical.


The “Zomato-UberEats (deal) should be seen as the second wave of food-tech consolidation,” said an e-commerce analyst, requesting anonymity. “They (Zomato) realised that food business was essentially going to be a delivery business, which is where the money is going to come, and the valuations are going to come in.”


The year of trying differently


Cab-hailing company Ola acquired Foodpanda in 2017, boosting the fledgling food delivery company and UberEats entered India that May.


Zomato was in choppy waters at the time. The pulls and pressures of long-term sustainability were telling on the company’s leaders. Deepak Gulati, Zomato’s COO and president, left in 2017; chief business officer Mukund Kulashekaran, and the big blow came when co-founder Pankaj Chaddha resigned in March 2018.


Competition and discounts had expanded the food delivery business, but it led to steep losses for all companies. Online orders in the sector grew on an average 150 per cent year-on-year between 2016 and 2019, said Rohan Aggarwal, director, RedSeer and lead for hyperlocal practice.


Swiggy and Zomato’s combined losses in FY2019 stood at Rs 2,917 crore—630 per cent more than the year before. To be sure, Swiggy has spent hundreds of crores in leasing real estate for cloud kitchens.


Zomato has created a business that looks—if not quite—distinct from Swiggy’s. Though bulk of Zomato’s revenue comes from online ordering, it has fast-growing verticals like Gold, a subscription-based dine-in discounts programme, an advertising business, and B2B operations called Hyperpure, which supplies food inputs to restaurants.


Swiggy, on the other hand, has launched Swiggy Go and Swiggy Stores, services that allow people to courier items and order groceries from stores, enabling higher utilisation of existing delivery fleet.


“One (Swiggy) is saying if I increase the use-cases for my customer, my customer will become more loyal to me and I will be able to increase the utilisation of my delivery fleet and reduce my cost per delivery,” said Aggarwal, of RedSeer. “The other player (Zomato) is saying that I will centre my approach around restaurants. So, everything that a restaurant needs and I will fulfill, be it dining out reservations, loyalty program, food delivery, raw materials procurement and even restaurant branding initiatives.”


Zomato, spunk and spanked


Zomato has created a brand eponymous with restaurants, “foodie”, and “cool”, said Karthik Srinivasan, an independent brand consultant and former national head of social media at Ogilvy. Brands like Tinder and Netflix have taken a page out of Zomato’s social media playbook, posting quirky comments online as they innovate in traditional marketing.


Srinivasan recounted Zomato publishing an ad in a national newspaper’s matrimonial section that said: “well settled smart and loving brand looking for those who can’t cook”—a play on Indians’ desire for spouses who can cook.


The company has also made goodwill a core brand ethos: it acquired Feeding India, a non-profit that serves free meals to underprivileged; launched a feature that allowed customers to request restaurants to not send plastic cutlery; and even announced 26-month paternity leave to new fathers.


“Zomato stands out among brands, and one reason for that is that it has an extremely vocal CEO,” said Srinivasan, talking about Goyal. In July 2019, there was controversy when a customer on Twitter spoke against Zomato for sending a “non-Hindu” delivery man to him. “Food doesn’t have a religion. It is a religion,” Zomato had replied to the customer on Twitter.


“He (Goyal) took a stand publicly knowing that that was not the predominant sentiment in the country at that point, which is quite amazing,” said Srinivasan.


“Deepinder is one the most creative persons I have met as an entrepreneur. He has got imagination; he has got drive,” said Info Edge’s Bikhchandani.


Goyal has got flak too. Hundreds of restaurants revolted against the Gold programme in August, starting an online campaign called #LogoutZomato that alleged Zomato had forced them into offering discounts they could not sustain. They threatened to end their partnership with the company over Gold, which locks in customers paying Zomato a fixed price to enjoy complimentary drinks and foods at dine-ins. Gold has one million customers globally, making it one of Zomato’s most successful initiatives.


Restaurants alleged that Zomato had “grievously” overlooked their interest and earnings, leading to bad press for the company. The company subsequently changed how Gold worked: in place of flat complimentary food and drinks it started, among other tweaks, fixed discounts at restaurants to contain the backlash.


Making most of UberEats


Food-tech is a cash-guzzling business and one where profits are elusive, and this is where the UberEats deal comes back into the picture. The average order value in Indian food-tech is around Rs 270 ($3)—far lower than $30-$40 in western markets. And even most food-techs in western markets are not profitable.


Zomato and Swiggy require more capital to grow. With more than 40 per cent stake in Swiggy, Prosus Ventures already has high exposure to the venture. Similarly, Ant Financials has put about half of the total capital raised by Zomato to date.


“There are only half a dozen investors who can put in that kind of money, and both Swiggy and Zomato are eying those,” said an analyst who requested anonymity. “The pack is led by Softbank.”


This person added that Softbank has negotiated with both parties, but “has been non-committal so far, owing to its own troubles. However, Uber combining with a larger player (to sell UberEats) does increase the chances of Softbank aligning with them in the future.”


Raising funds has also become tougher with start-ups settling for little or no growth in valuations in new rounds. Case in point is Swiggy’s $112 million raise in February, where existing investors that put in money valued it at $3.6 billion, barely 10 per cent higher than Swiggy’s valuation in December 2018.


Swiggy went from $1.3 billion valuation in June 2018 to $3.3 billion in December that year.


For Zomato, buying UberEats is about killing competition as much as it is about creating stronger competitor.


“We did Uber deal for two reasons: UberEats India was very strong in some particular cities in the south where we were the number three player, so our spends in these cities were high,” Goyal said. Secondly, Zomato has got UberEats’ order volumes.


"We have been successfully able to transfer 95 per cent of Uber Eats' India business over to Zomato post the acquisition. If Zomato and UberEats orders were x and y, after integration we have managed to keep 99 per cent of x plus y.” he said.


Goyal confirmed talks with Softbank, but said no deal has been signed yet. The recent $150 million round from Ant Financials in January is part of a larger $500 million fund-raise that will close by March. “There are a few new names. Softbank is not there,” said Goyal, adding that Uber may put in money his company but that will be explored later.


That money better closes soon. Amazon is exploring the India food delivery market and new start-ups, like Dunzo, are beginning to influence how people order items.


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