I started writing this essay after reading and replying to Piyush’s tweet on Zomato. For me, Zomato’s acquiring the NBFC licence was a great move - save 2% and improve the bottom line. I was also sure - something was cooking inside Zomato. I have experienced activities on the Operations (App) and investments side, in the last few months. I started overthinking this - a sign of writing an essay. In this essay, I have tried getting into Deepinder goyal’s shoes for a while. As I am a fan of Deepinder - whenever you read this, do share your feedback :). Let’s dive in.
Let’s face it, building a large company is hard and building a sustainable-large company is harder. There is no one size fits all. Companies like ZOHO, Zerodha, Dehaat build their profitability from day 1. And companies like Zomato, Paytm, Flipkart followed the critical mass mental model. Zomato is clear, food is not going to bring profitability or the next set of growth. The management was sure once they achieve a critical mass - Zomato has inherently high LTV - they will unlock multiple profits pools. I think a large part of the Global investor's belief, in Zomato, was based on Meituan’s success in China. The Meituan’s success was largely based on burning money, in the beginning, to achieve a critical mass and diversify the offering - including Community Commerce - to the same users, and hence Meituan is more of a super app.
Most entrepreneurs ignore the structural ecosystem differences of India and China. China has been largely benefitted from one culture and one language - Almost everyone speaks Chines. If you look at China’s growth story, it was mainly in three phases. The first phase of growth was only from urban China. The 2nd phase of growth was Online companies entering into the Offline ecosystem to improve the bottom line, but that was also in the Urban part of China. And the 3rd phase of growth was/is from the Semi-urban or Rural part of China - where companies with innovative models reached the last mile of China. Look at the ecosystem in general, you will find the market leaders in the growth phase-1 and growth phase-3 across markets.
Investors had similar expectations with Zomato - but India is, unlike China, a different country. After 14+ Years of existent Zomato has close to 50 million monthly active users. But Meituan has 290 million monthly active users in just 12 years. Forget about the being stand on the expectations: Pandemic plunge the entire growth trajectory and forced Zomato to think something else. The fact is, unlike China where the internet penetrated first and the economy caught up later: helped Chines internet companies leapfrog the scale. But India's economy and internet penetration are parallel - companies have to take measured steps to be in the game. Zomato's strategy is a good example and can be a good playbook for many founders.
Let’s understand this, The wedge: Food - delivery, dine-in and restaurant - helped Zomato to display high growth and top line. And that allows the company to attract PE investment. But now Zomato is a public company, and the retail investors are the Bhagya Bidhata - Zomato has no option apart from focusing on profitability and long term growth (This I had talked about in my essay when Zomato went public).
In a recent interview, Deepinder emphasized and quoted Alibaba and Tencent for the new strategy. But the fact is these companies started investing in other companies once they achieved profitability. They had billions of dollars sitting on the Cap Table. And hence investment in emerging upstarts was the way forward. For Alibaba, Tencent etc. it was more to dominate the market. But for Zomato that is the only option, it seems. Food Delivery is not going to move the needle, but as Deepinder is one of the smartest CEOs (IMO) in India - they started looking for new needle-moving strategies.
Suppose I am running Zomato, and we have a north star metric - bring short term profitability with long term growth. This is what I will draw on my whiteboard.
Focus areas: a. Reduce expenses and b. Display consistent growth. The question that I would have asked from my team, How can we reduce expenses? These are the possible answers, we might have listed.
Cost reduction through the operation
Cost reduction by liquidating or shutting down the non-performing/experiments/high burn businesses.
Cost reduction through BAU Operation
Charge Delivery cost
Save 2% that we are paying to BNPL service providers by having our own NBFC licence. (I am taking a wild guess, the 2% might be different).
Increase product price
Increase Commission percentage from restaurants
Reduce or eliminate Direct Offers.
Charge extra by adding tax, packaging cost, processing fee etc.
Let’s control expenses from the riders' side as well.
Invest in companies that can reduce the overall food delivery business cost.
Shut down the business that has no short term revival chances.
“I have experienced an increase in food prices, the additional delivery costs, new tax inclusion in food price etc. in the past 3 to 4 months”
Double Clicking on VI points: I would have brainstormed with the team to identify the areas that can be liquidated or impact the bottom line significantly. And this would have been the summary of all those brainstormings.
We must liquidate (Find a buyer) or shut down businesses to reduce the cost:
We should liquidate our fitness-based mobile application - find a buyer ( they sold to CureFit)
We should find a buyer for our D2C experiment in Nutraceuticals (It seems there was no buyer, they have to shut down the experiment.)
We are unable to sell Lebanon operations to local players let’s shut it down. (It might be the case that there are no local players)
Let’s also shut down the food international markets.
Of course, these decisions must have taken place in multi-steps: (Businesses Identification, valuation measurement, buyers selection, impact on the top line and bottom line, etc.). This might have taken 3 to 6 months. The real impact of these we shall see in the next quarter earning.
Another side - One team of Zomato was working to identify potential vertical upstarts.
Once they were sure - now they can control the cost and achieve profitability. The 2nd piece of the puzzle was to display consistent growth. And as the food was not signalling any massive growth opportunities. Zomato management decided to utilize the IPO’s cash sitting on the balance sheet.
As Zomato has good cash flow and fresh capital raised through IPO was sitting idle in the bank - $1.239 billion. Zomato decided to attack the 2nd part of the north star metric - Show consistent growth without burning money. Out of many options Investing in vertical upstarts those who can create a $10 billion business and give them the long term moat was one of them.
Outsiders and retail investors missed the fundamental point - Zomato’s knowledge directory. Even though Zomato is not profitable, the knowledge directory that it has built over the years is worth billions of dollars. Zomato started using its knowledge directory to
a. Identify upstarts that have the potential to win their category.
b. Upstarts can give them the long term moat.
c. Minimize, overall, the business operating cost.
Zomato invested at a better price because investee companies understand the value of - Zomato's knowledge directory.
Now revenue of these upstarts will bring profitability in the near short term and scale/growth in the long term.
If you go and ask Zomato’s investee companies whether they would have accepted the same dollar at the same price from other investors - the answer might have been a big NO. If you look at the buying price - that is, only, double from the last funding valuation. Zomato is a lead investor in most of them.
We shall have a look at Zomato’s recent investments.
$75 million in Bigfoot Retail Solutions Pvt. Ltd. (Shiprocket) for an 8 per cent stake
$50 million in Samast Technologies Pvt Ltd (Magicpin) for a 16 per cent stake
$100 million investment in Grofers earlier in August 2021 for ~10 per cent stake
Zomato has sold its fitness-based mobile application Fitsho (Zomato has acquired Fitsho in 73 Cr. just 11 months back) to the health-tech startup CureFit for $50 million (370 Cr.) and has invested another $50 million for a 6.4 per cent shareholding in CureFit.
₹112.21 Cr. investment in AdOnMo Pvt Ltd, an Outdoor advertising technology company, for a 19.48% stake: This investment is more towards utilizing the AdOnMo platform to acquire more customers. [An afford towards reducing business operating cost]
They have also pumped ₹37.39 crores for a 5% stake in UrbanPiper Technology Pvt Ltd, a software services company. This investment was primarily focused on upgrading restaurants with the help of UrbanPiper. [Creat long term moat]
On average Zomato is owning 10% of the investee companies. They have been clear to engage in an opportunity that has the potential to become a $10 billion company. Ownership of 10% means all of these companies will create at least a one-billion-dollar valuation.
These companies will reveal their financials in the next two to three quarters. And Zomato’s revenue = Zomato’s revenue + % revenue of invested companies. [Not related to this article: If you are thinking to buy Zomato’s shares - I would say this is the best time. You might not get this price every]
In summary, what I would like to say, as an OTT analyzer, - Is that Zomato is cooking something amazing, and that might be testy for all the stakeholders. Building anything significant takes a minimum of 10 years, and founders with a growth mindset shall always navigate the hard phase of the journey. There is a lot that we all can learn from Deepinder and his style of evolution leadership.
I publised this essay on 03-09-2022