Should you invest in Zomato’s IPO?

-Let me write this upfront. My answer is ‘NO’, I will not.

Let’s start with what Zomato has actually done to reach the $5.4 billion valuation? Zomato was able to identify a beautiful pain point in the ecosystem of food: a). Convenience to customers like us b). Discoverability to new restaurants who were able to sell products right from day one. Given this strong business model and strong promise of solving an actual pain point, Zomato’s was able to scale new heights every single year and its valuation kept on going up and up and up.

Customer Acquisition game: As Zomato started growing it attracted investors, and as investors poured money they wanted to see growth and acquire customers not in 100’s or 1000’s but in millions. Kudos to the Brand team of Zomato for coming up with such great marketing techniques.

Source: https://buddybits.com/2018/01/creative-zomato-ads/

Hence, it became customary for Zomato to acquire more and more customers and getting new rounds of investments.

Profitability: In order to inculcate a habit of ordering food from Zomato, they will send me lot of push notifications, email marketing etc. to signup and start ordering. I am assuming for a company like Swiggy or Zomato, Customer Acquisition cost(CAC) will be INR 200/-–250/-

For every order let’s assume Zomato makes INR 20/- & hence to justify the CAC, I have to at least order 10–15 times. In order to get the customer hooked to the platform Zomato analyses a lot of data showing curated & personalized notifications, tempting food pictures and also getting you subscribed to Zomato Pro or Zomato Gold introducing switching cost.

Now expanding profitability is very important and hence Zomato can take below measures to reach that:

1. Pushing customers to order food frequently
2. Decreasing payout structure to delivery partners
3. Charging higher commission from restaurants and cloud kitchens
4. Cutting down packaging cost and some other measures

Unit Economics of Zomato: First what is unit economics-Simply put it is profit per package of food delivered.

Source: https://inc42.com/buzz/zomato-posts-positive-unit-economics-as-it-files-for-an-ipo/

A look at the DRHP shows that Zomato achieved positive unit economics with a contribution margin of INR 22.9 per order on average from April to December 2020. This is a massive improvement from the negative INR 30.5 margin logged in FY20 (or March 2019 to March 2020), which means Zomato is actually making money per order on an average, rather than burning cash to fulfil deliveries.

• Commission from restaurants and ad revenues increased from INR 43.6 in FY20 to INR 62.8 till Q3 in FY21: Restaurants might not be very happy going forward
• Delivery fees paid by customers increased from INR 15.3 in FY20 to INR 26.8 in first three quarters of FY21: Customers unhappy
• Delivery cost or money paid to delivery executives decreased from INR 52 in FY20 to INR 44.6 in FY21 till Q3: Delivery Partner unhappy
• Discounts given to users reduced from INR 21.7 in FY20 to INR 14.8 in first three quarters of FY21: Customers unhappy

As it is clear from a long term point of view, the unhappy relationship with Restaurants, Customers and Delivery Partners does not lead to a sustained business model.