Is Zomato running low on cash?

In 1942, a slogan was made famous by the Soviet leader Joseph Stalin: “Not a step back”. Ni shagu nazad! It did not come from bravery as much as desperation. His Red Army was fighting the Germans in the bloody Battle of Stalingrad in WWII. When the stakes are high, you have to erase that line of retreat. Perhaps that’s what is driving Zomato too.

Otherwise its founder and CEO Deepinder Goyal seems like a nice man. Remember his “food does not have a religion, it is a religion” line? The whole message of oneness in diversity reeked of goodness and accommodation. Then why won’t he give in to restaurateurs’ demands. They have been agitating and hashtagging furiously, asking for food-service aggregators (FSAs) to stop deep discounting for diners, cut down on freebies, and reduce the fee restaurants have to pay to be listed. The restaurant partners seem genuinely anxious.

“Is it fair to destroy an entire industry to benefit the valuation of a couple of companies?” asked one of their representatives at a press conference held in October. This was when both the registered industry associations, The Federation of Hotels and Restaurant Association of India (FHRAI) and NRAI announced that they have joined forces against the “predatory practices” of Zomato and others FSAs.

Negotiations had been on for months and, while other dineout platforms such as Dineout and EazyDiner had modified their terms to mollify the hotels, Zomato kept forging ahead. Not one step back! In August, at the height of this stand-off, the aggregator announced Infinity Dining under their now infamous Gold Membership. Subscribers could order to ‘infinity’, that is order food and drink endlessly for a fixed price.

Restaurateurs saw red and launched the #Logout movement on August 14. Perhaps it was strategically placed before Independence Day, a public holiday which would have given Zomato a good deal of business.

In less than 24 hours, around 1,000 restaurants dropped out of various platforms including EazyDiner, Dineout, Magicpin and Nearbuy, apart from Zomato and, within 45 days of its launch, the Infinity Dining feature was pulled out. According to NRAI, till date, 3,000 restaurants have logged out of Zomato Gold out of the initial 6,500 restaurants. There was a lull in anger when Zomato came back with another salvo, in September, — Gold Membership benefits, of freebies, would be available for home-deliveries too, but with fewer offers. The scheme initially was sold to restaurateurs as an initiative to promote premium dining for select customers. Enrolment fee for hotels for dining-in Gold programme is Rs. 30,000-75,000, but for delivery enrolment they would be charged only Rs.10,000. It was a big carrot to dangle in front of struggling business owners. The president of NRAI, Anurag Katriar seemed to be tiring in the fight, from the tone of his message. He asked his association members and associates to stay away from such gimmicky marketing ploys. The association had spoken to Zomato already, asking them to refrain from this move but the aggregator was adamant. While it was to be an elite programme with only 5,000 subscribers, that number went up to 1.4 million spanning across 6,500 restaurants,drawing in FY19 revenue of $49 million.

Why is Goyal’s Zomato relentless in its march?

One reason could be that it desperately needs volume because it is burning cash. In a previous story published in Outlook Business, the start-up shared that it is losing Rs.25 per delivery, wherein the last mile cost per delivery is Rs.65. Goyal added that this is a better situation as compared to FY18, when the last mile cost per delivery was Rs.85. An increase in the number of deliveries per rider per hour from 0.9 to 1.4 helped them in bringing down the last mile cost. The aggregator needs higher volume, for higher revenue, for higher valuation. The whole circus needs investors to keep it running till it gets its business model right. In its last funding round, Zomato had raised $61.88 million led by Berlin-based Delivery Hero and is in talks to raise another $600 million in a round led by Ant Financial.

Today delivery contributes nearly three-fourths of the food aggregator’s earnings. Though Zomato started out as a restaurant-discovery platform, after Swiggy entered the scene in 2014 with a big bang, Goyal’s aggregator had to change tack and get into delivery too. Delivery revenue increased a whopping 4x in FY19 to $155 million from FY18’s $38 million. But, losses multiplied too, 24x from $12 million to $294 million (See: Food for free). Gaurav Gupta, co-founder and COO of Zomato, says it was spent on changing consumer behaviour and building the logistics network. That could mean so many things, maybe they shared discounting with a few restaurants or maybe they spent it on hoardings or on funny promo lines such as “Every day is fries day”. Then they may have spent it on their delivery partners such as Runnr and Grab or promotional expenses.

Even Swiggy is losing money. In FY18, it reported losses worth Rs.3.97 billion on operating revenue of Rs.4.42 billion. While Swiggy refused to respond to our questions, an investor in the company acknowledges that discounts are costing everyone dearly. Zomato’s competitor will be reducing customer discounts gradually after three to four months, thereby saving precious cash. The investor says that discounts has done its job, of building volume in terms of consumers and suppliers, and now it is time to stabilise the business and cash flow. It would mean lower YoY growth of 50% instead of 3x or 4x.

Zomato is cutting costs too. It is minimising its cost per delivery by cutting down the delivery executive’s pay and increasing the commission charged from restaurants. While the latter seems difficult under the shadow of the #Logout campaign, Zomato has already reduced its employee’s pay from Rs.35 to Rs.25 per delivery this September. Sadashiv, a Zomato delivery executive from Mumbai shares that not just per delivery cost but also the incentive paid has been significantly reduced.

“Until the first week of September, we used to get an additional Rs.250 for every nine deliveries we did. Now it has come down to Rs.175 for 12 deliveries. On weekends, we are paid a little more. Last time I got Rs.250 after completing 12 deliveries,” he says. Zomato's Gupta says, “The pay was reduced because the operations have been more finely honed, therefore each executive can do more deliveries in a shorter span of time”. The delivery executives have become more productive, in a way, and we are not really sure how that squares with lower pay.

In September, Zomato laid off 540 employees from its customer support team at Gurugram, which is 10% of its workforce. Earlier in August, 61 were laid off. But Zomato's Gupta maintains that these changes have been planned strategically and are not abrupt. He says they have improved their technology and functioning so well that complaints/queries have come down. “Now only 7.5% of our orders need support (down from 15% in March).”

We asked the management if Zomato is running low on cash and trying to conserve it through all these measures. It has raised $688 million so far (See: Two-horse race) and going by rough calculations, using last year’s figures as base, the loss so far could be $400 million till H1FY20. That leaves the company with roughly about $300 million, and at the current rate, could last them about a year or so. To most of our specific closing questions, there was no clear answer provided and Gupta’s emailed reply said they are focused on growth and efficiency, which is “the only way to build a large, sustainable business”.

Meanwhile, Goyal is expecting 10x growth in the next five years to become profitable. He talks of expanding beyond the 500+ cities and investing ahead of competitors in cloud kitchen in 50 cities. Other platforms, he says, have cloud kitchens only in the top 10 cities. The bigger footprint certainly seems like more cash burn.

While Zomato may need aggressive expansion for its survival, restaurateurs perceive the aggregator as self-serving. At a recent press conference, NRAI’s Katriar even said that the association will be happy to give Zomato a fight if it was asking for one. That was aimed particularly at the FSA’s missive that food must be tested at specified labs. He sounds almost gleeful when he tells us that the delisting is hurting Zomato. “During their last round of funding, Zomato promised the investors that Zomato Gold will grow 5x this year to 5 million,” he says, quoting an executive at the aggregator. “After the #Logout campaign began, only 12% of the memberships have been renewed.”

Zomato is preying on restaurants’ FOMO, or fear of missing out, says Riyaaz Amlani, founder, Impressario Entertainment & Hospitality (that owns The Social). Did restaurants have such millennial worries? It appears so. “It approaches the weakest restaurant on a street to sell its programmes with the promise of footfalls and profit, and then target the neighbouring ones. When all the adjacent restaurants are on Gold, you automatically join to keep your customers,” he says and adds that even after signing up for Gold, there was no increase in footfall. Instead, the average order value fell by 25%. “Zomato is gaining power and they are misusing it,” adds Ayush Agarwal, founder of LenexisFoodWorks which owns Chinese Wok (formerly Wok Express). “The protests are an outcome of the fear and anger the restaurants feel right now,” he says.

Zomato did concede an inch. It recently modified the Gold scheme by limiting the number of unlocks per table. Now, subscribers would need to bring another non-member diner to unlock an offer. Earlier, two subscribers would head out, order two dishes, be served four and pay for two. That was 50% loss on bills for the restaurant. Zomato has also raised subscription fee from Rs.1,000 to Rs. 2,000 annually. Restaurants are not convinced. “It’s more of a PR ploy,” says Agarwal.

Restaurateurs may sulk and pout, but consulting firm RedSeer’s report had Goyal nearly thumping his chest in triumph. He tweeted their findings and extended a “big thank you and a hug” to all partners rejoining the Gold programme. RedSeer reported that 60% of Zomato Gold’s partners had seen an increase in new customers after joining it, and partners saw 35% growth in bill volume after the programme. On the other side, Rahul Singh, founder of The Beer Cafe and former president of NRAI, rubbishes the report. “Redseer’s report looks like it’s paid,” says Singh, harshly and backs it up with anecdotal evidence. “I was one of the largest restaurants on the scheme, nobody called me. Also, when did this survey happen? None of the members we know were contacted,” he says.

Singh, who runs the country’s largest beer cafe chain, also points to a possible methodology error. With Zomato Gold, you can ‘unlock’ an offer every day. If you can’t make it that day, you can ‘unlock’ it the next day. So you have gone once, but the app registers two unlocks (or two spending customers). Singh says, “Zomato wouldn’t know how much a customer is paying at a restaurant. Going by its faulty ‘unlocking’ system, I could unlock ten restaurants across Mumbai within 10 seconds of each and Zomato can say that the guy went to 10 restaurants. But they won’t have a clue what happened with these transactions. They don’t have my invoicing and neither do they have a link to my computers, so how will they know anything?”

He says restaurants already had customers and schemes like Gold have simply made them “discount addicts”. Not hard to imagine with people hunting in every cranny, nook and app for any “OFF” listing, particularly on weekends. Goyal had responded to this allegation in his tweet, which had screen shots of discount offers on Beer Cafe’s app and read, “I welcome the NRAI president, Rahul Singh embracing the Gold standard at his own restaurants. Welcome to Gold, Rahul! @NRAI_India” This was on August 22 and Singh’s term ended this September.

The forks are out

Strategy consultant Harsh Vardhan believes Zomato urgently needs to back down, if it does not want to lose restaurant partners. In an article darkly titled ‘Zomato Gold: A crisis that was waiting to happen’, he wrote: “On its part, Zomato may have forgotten a fundamental truth: it failed to understand how the added value was being created and its role in creating it. Now, this is significant. In any partnership, if a key player tries to hog more value than he is creating in the game, the market will eventually punish him. And this seems to be the crux of Zomato’s woes.”

Also Vardhan writes, discounts can never really be a long-term plan. If you give 'A' 40% discount, then he/she may shop but, will run to your competitor in a minute if the discount offered there is a bit higher. These discounts can range anywhere between 30% and 70% on the apps. Vardhan wrote that discounts are usually used by firms to either liquidate their stocks or as a seasonal discount offer.

Ravindra Kumar Yadav, AVP, Technopak agrees that discounting only leads to short flings and restaurants really cannot afford them. A restaurant operates on a small margin. Its cost of food is anywhere between 28% and 33%, and another third goes towards manpower cost and rentals. This leaves an Ebitda of 18-23%. “A discount play which is near to their bottom line would make the business unsustainable,” says Yadav.

The eateries who have logged out have decided to fill the digital void on their own. They plan to launch their own apps. It sounds pathetically naïve. But 1441 Pizzeria’s Krishna Gupta, who had their app out this August, sounds optimistic saying it already has around 9,000 downloads with 5,000-6,000 daily users. They hope to get 50% of their customers through this by end of this year. But will it really be any match to Zomato or Swiggy’s reach?

Let’s ask a big brand, like McDonald’s, which has already tried it. “We launched our app and website in 2013. But when we started using Zomato and Swiggy, our delivery business grew exponentially, almost 6x between 2015 to 2019. They have disrupted the market and changed consumer habits,” says Akshay Jatia, director – IT and Brand Extensions, McDonald’s India (West and South).

Zomato meanwhile is trying various ways to make money. It started Zomato Kitchen for restaurant owners who are looking to expand their business into new geographies and dispatch food to customers through Zomato’s delivery services. It is already available in 50 cities with 600 kitchens. Swiggy, too, runs such cloud kitchens through Access, which currently has 450 restaurant brands.

Even as Zomato is taking all the heat from the restaurant partners, Swiggy itself is not immune to chasing volume or quietly de-risking itself via its cloud kitchens. Clearly the margins are much higher when most of the stuff is done in-house. Sriharsha Majety, co-founder and CEO, recently spoke about the company’s ambition of growing its 100 million customers by 15x in 10 to 15 years. He sees Access, Daily and POP (a cheaper, small portion meal from your neighbourhood restaurant) as growth engines. There is Swiggy Stores, launched this February for your weekly rations delivered to your doorstop. All of these services will be folded into the main app.

Food delivery is bleeding Zomato and that is why it too is diversifying furiously. The new businesses range from supplying fresh kitchen ingredients to partnering restaurants or digitizing office canteens through Food@Work. The latter already has over 70 organisations on the rolls, and 1,000 food partners across seven cities including Mumbai, Delhi NCR, Bengaluru, Visakhapatnam, Chennai, Pune and Hyderabad. These clients include names such as WeWork, Sony, Cognizant, Deloitte and so on. Each organisation can provide 5,000-100,000 employees as users to Zomato. According to its H1FY20 report, it is doing around three million orders a month.

These fledglings will take their time to scale but in the meantime it needs to keep going via its food delivery business. And that is where the conflict zone is. The warring restaurateurs believe that Zomato’s refusal to back down over Gold membership is really not about them, but about the company’s survival. Survival may be taking it too far, let’s settle for ‘safeguarding and sustaining investor interest’ (See: Slicing the pie).

Goyal has given the standoff a whole different spin. One that makes him and Zomato look good of course. There is no mention of an immediate need for fresh capital. Instead, he tweeted that #Logout really is about the small people vs the big people, more specifically “the small restaurant owner vs the large restaurant owner”. He added, “We are being painted as the bullies”. The restaurant partners are clearly not retreating and that just might give Zomato’s investors some food for thought.