Imagine that you are the owner of a company that is growing every day. Your revenue is increasing every day, and success is kissing your feet everything is going very fortunate. There is only one competitor left in the market and the wait is there for the IPO massive IPO arrives listing gains of 56% to all investors and in a certain time, the stock price gets doubled.
But suddenly, You come to know that the losses of your company have increased so much that at any point in time, you may become bankrupt. If all these things happen to you then what will happen to you?
I am talking about Zomato: The company whose IPO came out very loudly. If you look at the figures, for the last 3 years this company is in very severe losses. In 2019, Rs. 964 crores, in 2020, Rs 2367 crores, at last, but not least finally in 2021 the losses stood at Rs 812 crores. The day November 15, 2021, the share price of Zomato is Rs. 160 at its all-time high the people who invested money inside the IPO and sold the shares on time made a lot of profit.
But what about the rest? Because today the share price of Zomato has come below its issue price. Now the question is, if people were seeing so many losses in the company from the beginning then why did people fiercely invest so much money in this IPO? After all, how did this happen to a great food delivery startup like Zomato? Is Zomato going to be bankrupt? And most importantly, What are the powerful business lessons that we can learn from this case study and implement in our business?
The food tech giant, Zomato. It's complicated this is because even today most of us know Zomato as a food delivery startup and this is the reason that we know so much about the company. But not about the hyper-local delivery ecosystem. Zomato and in fact Out of all its competitors, not a single startup has ever been profitable to date. There are very high chances, that these startups will not be profitable in the coming time as well.
But why, and if so, why are these investors pouring crores of rupees into these startups? Well, to understand this, it is very important for you to understand these 4 things.
- What is Zomato's business model?
- What are the problems that are coming under the delivery ecosystem at this time?
- What were the future plans of the company that is sold to the general public?
- And most importantly, What is the final game plan of the company?
So in very simple words, Zomato generates revenue in these 6 ways
- Delivery charges
- Commission from restaurants
- Advertising from restaurants
And last and most importantly, Consulting Services For Restaurant. In these 6 ways, Zomato generates revenue at this time Zomato got a 75% jump in all its orders after covid in 2021 This year is not over yet and Zomato has already doubled its revenue from last year. I know what you are thinking! If this is the case then why is the stock price falling on a daily basis? So now pay very close attention
This is Zomato's unit economics of the year 2021, in which it is shown to the people, that even if the company is within the overall losses, on a per order basis our unit economics is profitable. Seeing the thing, a lot of people invested in its IPO. But in the midst of all this. There was a lot of talk about the hyper-local food delivery space.
Which till today is hidden from all of us and that is the Dynamism of the gig economy. The gig economy is one such economy, where people do not take permanent jobs, on a contractual basis or on a freelance basis, or work for different businesses. Ola, Uber, Swiggy, Zomato, Dunzo, or Blinkit, all these companies either give you travel or hyperlocal delivery services. Even if you move from one place to another through OLA, or you can get any food from Swiggy.
Which is the final person that the service is rendering to you he is never an employee of these companies. So in very simple words, It is the driver of Ola or the delivery boy of Zomato, all these people are contract workers for these companies. It's not their employees due to which these companies get these 3 very powerful advantages
- No fixed liabilities: These companies do not have any liabilities on the side of these contract workers.
- No Appraisals: Whenever you hire an employee, then after some time you have to increase his salary, if the business is growing then only. But in this case, because these people are contract workers, their salary is never increased.
- No employees benefit expenses: Usually, companies have to do a lot of expenses for employees. This includes Insurance, Gratuity, and Provident fund Companies do not have to do these things because the people who are working with them are their contract workers.
But due to this thing, where companies are sitting on one side very powerful advantage. On the other hand, companies are facing a lot of problems. Like if we talk only about hyperlocal delivery startups then, even their companies have to face these 2 major problems.
No.1, Unhappy Delivery Staff: After talking to a Zomato delivery boy, we came to know that Zomato delivery boys get money on the basis of their target But, there's a catch so see how it works. Every Zomato delivered boy gets paid for meeting their touch points from restaurants to the customer's house. It becomes 2 touchpoints. So, if a Zomato delivery boy wants to earn Rs. 200 he has to cross at least 24 touchpoints. Which is close to 12 deliveries. And, if someone wants to earn 500 rupees a day by becoming a Zomato delivery boy then he has to do a minimum of 30 deliveries.
That to if none of these orders get canceled then which is Close To Impossible. I know what you are thinking, if so why is this Zomato deliveries boy doing this work? How do they earn their living?
Well, the reality is, that most of the delivery boys are alive on the Incentive Bonuses. Suppose you have met one of your particular targets. For example, A Zomato delivery boy surpasses the target of Rs 240 for the day of his earnings after that he is given a bonus of Rs 80. But the truth in this is that the incentive bonus will be given to him only when he remains logged in till 11 o'clock in the night and will work till 11 o'clock.
What actually happens is that it looks like a very good and profitable deal from above. But the reality is that just to earn a bonus of Rs.300 A Zomato guy has to burn petrol worth a minimum of Rs. 200. But there is a very big problem inside this system which all the delivery boys are facing at this time. Which most people don't even know. So basically, Zomato pays its deliveries boy Rs 4 per kilometer to travel.
Looking at an example, the distance from restaurants to the customer's house is 5 km. The thing for which Zomato delivery boy will get Rs. 20. This thing looks fine but the biggest problem comes when a Zomato delivery guy operates inside Tier 2 and Tier 3 cities. Because the restaurants inside such cases are not located within the local areas.
In most Tier 2 Tier 3 cities, these restaurants are a bit far from those local areas. Now in this case now the Zomato delivery boy first travels from his local area to another local area, for which he has to travel around 4 km. After that, he will pick up the food from that restaurant and deliver it to your home. Whose distance is 5 km and finally after delivering the food at your home he will come back to his local area whose distance is 4 kms? In total one Zomato delivery boy has traveled about 4+4+5 i.e. 13 km.
But you know what! Zomato will give only 5 km money to the delivery boy. This is because according to Zomato the distance from restaurants to the customer's house is only and only 5 km and there is no earning for the Zomato delivery boy in such a case. It's nothing Zomato Delivery Boys use Google Maps to navigate to customers' locations. But Google Maps doesn't show the exact location in most cases. Happens is that the Zomato delivery boy reaches the location, calls the customer, and the customer calls him somewhere else due to which 20 to 30 minutes of delivery boy gets spoiled easily
Let's say this happens in just 6 deliveries. Within 1 day, the delivery boy's 3 hours were wasted in the same way. And on top of it, from Petrol to Maintenance, From Toll fees to food. All these expenses have to be paid by a Zomato boy from his pocket.
Swiggy and Zomato Both these companies have taken 10 minutes delivery startup to fight Zepto but there is another catch, where Zepto needs to open dark stores to expand itself. At the same time, Swiggy and Zomato need not only to open dark stores. Rather, money has to be spent to maintain their food delivery space as well. Which is basically, Zepto will always have more money than these companies to expand itself. Moreover, where Zepto is focused only on Quick Commerce. At the same time, Swiggy and Zomato cannot focus on quick commerce except for their food delivery space.
Why they have invested a lot of money in their food delivery space and the reason for this is that they have a very strong exit barrier in front of them. So basically, to Survive in the Quick Commerce Space these companies have only 2 options. No. 1, Delivery in 10 minutes is not an easy thing. Due to this, all these companies have to open their dark store between 1 to 1.5 kilometers.
If they want to reduce the delivery time and at the same time ensure the safety of their delivery partner, these companies will have to open a dark store within 1 to 1.5 km. Something that costs a lot of money And No.2, Exploit the workers, Which is already doing these companies. I know what you are thinking if a Delivery Startup is making huge losses. All delivery partners are upset with all these delivery startups but in spite of knowing all these things, Why did people invest money in the IPO of these companies?
Well one reason, Hype, but this hype is not because of the branding of Zomato, rather, the future plans that were told to the people were made because of him. The company was in huge losses what almost everyone knew. But these two things were kept in front of the people and these things were marketed in a way you can't even imagine.
- Hyperpure: What will make Zomato will work on the Farm to Fork model? That is, from the farm to the fork, the whole supply chain will be controlled. Along with this, Zomato will also open many cloud kitchens. But it's too late to be in this thing
- Strengthen The Unit Economics: People were told that even though we are still in losses. But in the coming time, we will definitely be profitable. By strengthening our unit economics.
But if these companies want to strengthen their unit economics, So they have only 3 ways.
- Increase Commissions: Increasing commission from restaurants, automatically unit economics will be strengthened but in this case, there is a very high chance that many platforms after delisting themselves from these restaurants will come with their own applications. Or some other competitor comes into the market and shifts over it.
- Reduce Workers Pay: Cut the money off all the delivery partners you have But by doing this, delivery partners will also start abandoning all these platforms.
- The most dangerous one: Price To Discount Illusion: What is being done with people even today.
I'll explain to you with an example, Where I live there is a restaurant near my house says "Pot Au Feu" which sells very good biryani and I eat it regularly from there. Now look at this very very carefully in the actual menu of Pot Au Feu Restaurant Half Chicken Biryani is listed at Rs.130. This biryani is listed above Zomato, know how much Rs. 255. Moreover, if I order from Zomato and I want extra gravy. So I have to pay extra for gravy too. Whereas if I buy directly from a restaurant, So I don't have to pay extra for any gravy. On top of that, this restaurant is just 2 km from my house and the thing for which Zomato charges very heavy delivery charges from me.
On one hand, If I order directly from the restaurant then I don't need to pay any delivery charges. Everything is in front of you If I order my biryani from "Pot Au Feu" using the Zomato app and that too after applying a 60% discount coupon. Even then I will have to pay a minimum cost of Rs 170-180 for this biryani. On the other hand, If I directly call "Pot Au Feu" to place my order and takeaway it for Rs 130.
And more importantly, Where I have to wait for at least 40 minutes to eat after ordering from Zomato. At the same time by calling "Pot Au Feu" directly. I can place this order in just 15 to 20 minutes. So, in very simple words, the discount given on all these platforms is not a discount, is rather an illusion.
All these startups whether it is Swiggy-Zomato or Ola-Uber, most of the Big Economy Startups are trying to change the Consumer Behavior of all of us and yes they are successful. Today there is hardly anyone who would think of going to a restaurant to pick up their food. But, You know what!! None of us are attached to Swiggy or Zomato. Rather, we are attached to the discounts given by these people. That is, if a person is getting more discount on Swiggy, So he will order from Swiggy. If one is getting it from Zomato, then he will do it from Zomato.
As of today, the customer is not loyal to any company. So in simple words, None of us is attached to the brands but the discounts they offer. In reality, is a deception consumer awareness is increasing day by day and as soon as a new competitor comes into the market very high chances, from delivery partners to customers, everyone will leave these startups and shift towards that competitor. But the question is, knowing all this Why all investors are giving crores rupees to these startups.
Why did the Zomato-Blinkit deal happen?
Well, Let me tell you. There is such a game plan behind all these things that people like you and me are not even aware of. That is, GMV Pumping Evaluation of startups not on the basis of their profits. Rather it happens on the basis of their GMV or Gross Merchandise Value. In very simple words, Revenue. In the year 2021, Zepto arrived and quick commerce started in India before Zepto, neither Swiggy nor Zomato were in a hurry to deliver in 10 minutes.
Then what suddenly changed, is that all these people except the food delivery startup segment are now paying so much attention to the quick commerce segment. This is the place: where the concept of GMV begins if you observe too closely. Before the entry of the Quick Commerce segment, when Swiggy and Zomato used to do food delivery only, the average order value size was at that time, Rs. 250-350. But as soon as they enter Quick Commerce, their average order value size increased from Rs 600 to 900. Whether profit or not by taking entry in Quick Commerce But the average order value size has increased due to which the company's revenue has started increasing automatically. As a result, when revenue gets pumped up, valuation gets pumped up automatically.
So in the best case, The investors who are there will sell their stock to the rest of the new investors, or to the general public like you and me. And all this brings us to the most important thing what powerful lessons are, and what we can learn from this case study. We can implement in our life.
- Learn to read the sides: Whenever you are investing wherever you are so you always explore all the sides of that thing because, in 99.9% of the cases you will be shown the side of the investment that you like best after reading in the news that this startup has been evaluated for so many crores, never invest in these startups. Instead, Dig down and do your own research along with this, you also talk to those people who are associated with these startup. Because from there you will know the truth, which is not being told to you.
- Question everything and repeat: A startup is raising funding, raising why? After all, what is he going to do with the funding? Do startups need to raise funding? A startup is buying out another startup why doing this? After all, what is there with this deal that we are not being told? Question each and everything. Because while doing this, you will not only get to know the things that are being hidden from you inside this process. But you also have to know about all those things that no one knows every company has secrets.