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    How Zomato became profitable

    Zomato has increased the platform fee for food delivery by 25 percent from INR 4 to INR 5 per order in National Capital Region (NCR), Bengaluru, Mumbai, Hyderabad and Lucknow, Economic Times had reported last month. It has also suspended Intercity Legends, an inter-city delivery service, because of legal issues and no “significant traction among consumers.” The Zomato app also now allows customers to pay extra for “Priority” deliveries in select cities, reports Moneycontrol. While the report said this is available in Bengaluru and Mumbai, it is now also available in Delhi.

    Zomato’s experimenting with various operational levers since 2023

    In the summer of 2023, Zomato seemed to be in a pickle, with reports of protesting BlinkIt riders. Meanwhile, earnings data released in June the same year displayed a decrease in monthly transacting users (MTUs) for the company. However, executives speaking to shareholders in June of that year linked this to fewer days in February, and shutting down of the bottom 225 cities in the previous quarter. Instead, they highlighted how  the company’s contribution margin tripled from earning INR 6.6 in FY22 to INR 18.5 in FY23.

    At that time, this is what Zomato’s margins looked like :

    In its September shareholder letter, Zomato’s Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for Q2FY2024 hit Rs. 41 crore following a profit of Rs. 12 crore in Q1FY2024 and a loss of Rs. 192 crore in Q2FY23. How did Zomato do this?Through the year, Zomato has been modulating various operational levers to increase its revenues, and reduce cost. It attributed this improvement to the adjustment in June 2023 of both “cost side levers and revenue side levers” and some accumulation of operating leverage, although it did not elaborate beyond this. Here’s what Zomato has done so far, based on their earnings reports:

    • increased its commission revenue by INR 2.7 per order
    • grew its ‘ad and other revenue’ by INR 3.6 per order.
    • It reduced customer delivery charges by INR -0.3 per order, and delivery costs by INR 0.7 per order,
    • Reduced discounts and other variable costs by INR 5.2 per order.
    • Introduced a platform fee of INR 2-5 per order as Q2FY24 began.

    At the time, Akshant Goyal, Chief Financial Officer of Zomato, said the company expected this to improve contribution by “the end of next year.” For the fourth quarter of FY23, the average order value (AOV) was INR 407. As of the third quarter of FY24, it stands at INR 635.

    Zomato had also talked about increasing the delivery radius to give customers more choices and receive more orders, while at the same time lowering delivery charges to stimulate demand. However, there was no discussion on these metrics in later meetings although the company reported higher frequency of orders and an increase in monthly transacting customers in the second quarter of FY24.

    The company also noted how an increase in both the monthly transacting customers (MTCs) and monthly ordering frequency drove the order growth. Of the two, it estimated that further growth in terms of food delivery will come from MTC growth, as more low frequency users start ordering more often.

    By the third quarter earnings call for FY24, Zomato said it had managed an approximate 20 percent decline in order cancellations, rejections and orders requiring support for food delivery by increased automation of the customer support workflow. It also said that the introduction of a platform fee for all customers, including Gold members, helped in margin improvement aside from ad fee. Now we see the company increasing the platform fee, just before its fourth quarter results.

    Managing operational levers for BlinkIt services

    The third quarter results showed improved performance from BlinkIt. The company reduced its losses from INR 91.4 per order in Q1FY22 to INR 14.2 per order Q4 FY23 by increasing: commission, ad and other revenue by INR 15.3 per order and customer delivery charges by INR 3.6 per order. It also decreased: dark store and replenishment expenses by INR 48.9 per order, last mile delivery and other variable costs by INR 8.6 per order and customer acquisition spends by INR 0.6 per order.

    According to company representatives, the cost reduction helped the stores increase their gross order value of about INR 15,000 per square foot per quarter to over INR 30,000 per square foot. Officials said relevant and fast-moving assortment, store design optimised for deliveries (more storage, less aisle space, efficient order checkout) and multiple replenishment cycles in a day helped achieve the improved figures as well.

    The company also announced a prioritization of faster services to customers over improving the assortment of products, scaling-up in existing cities and reducing costs for dark store replenishments on a per order basis. During Q2FY24, Blinkit’s gross order value in some cities exceeded Zomato’s, growing at “80%+ YoY.” The company said Blinkit’s gross order value might become multiple times larger than Zomato’s GOV in overlapping cities.

    Incidentally, Goldman Sachs Global Investment Research on April 26, 2024 estimated Blinkit’s valuation within Zomato’s sum-of-the-parts analysis to be $13 billion, exceeding the food delivery platform’s value.

    Will Zomato eventually introduce surge pricing?

    Zomato’s performance over the last year shows that the company does not shy away from the idea of experimenting with various operational levers, and taking some hard calls to improve profitability. This raises the question of whether the company could be thinking of introducing some new levers as well, like surge pricing.

    Surge pricing or dynamic pricing is a business practice where the price of a product or service increases when the demand increases. This practice is easily noticeable in services like cab-rides where the ride fare increases during peak hours or in crowded places. In Singapore especially, surge pricing seems to be a common trend: it isn’t just ride-hailing apps, but also food delivery apps, car park fees, movie and concert tickets, airfares, hotel room rates, gym membership fees, as per an article by the Channel News Asia.

    In 2019, Singapore’s food-delivery app Deliveroo had explored the idea of introducing surge pricing. On its website, the app said the revised prices help riders receive additional fees for orders assigned to them in certain zones during the busiest times. However, surge pricing can also discourage customers from using the platform due to high fees. Whether Zomato opts for such pricing models depends on what Zomato’s current priorities are (for example customer loyalty, increased revenue, market expansion, etc.), as well as what its primary competitor, Swiggy, does.

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    The post How Zomato became profitable appeared first on MediaNama.

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