I woke up on Tuesday morning and got to know that Zomato acquired Uber Eats. The news became widespread. But what is the Zomato Business model that made it buy its competitor?
Zomato is not only about being a platform to connect restaurants and consumers. It is more than that. Currently, Zomato is under heavy losses. It’s not a profitable business yet.
Then how is it getting money to survive and even acquire its competitors like Uber Eats?
Why am I covering this topic? Because it is an excellent example of a Foodtech startup.
Zomato Business Model
Zomato is surviving on its investors’ money. It is still a loss-making business. Of course, it has its own money-making techniques but it has never been into profit.
I am not saying this but their official Annual Report is telling the stats.
They will never let you know clearly that they are into losses. They will show a chart comparing their 2019 revenue with that of 2018. Pretty smart!
However, people understand that there is a difference between Revenue and Profit. Check out how their costs exceed the net revenue.
How does Zomato Earn?
So Pritesh, how is it still surviving when it is burning so much of cash? There might be some ways to fund all those extra expenses, right?
Yes, Zomato and several other food-tech startups are burning their investors’ money by giving hope that they will be profitable in the future.
These startups are competing and trying hard to retain their existing customers.
But practically it is not possible for Indians to stay loyal to a specific company.
Hence, I personally feel that these companies have rare chances to come up with some profits.
In fact, I predicted a few years ago that Food Panda will shut down due to the same problem and it really did!
It does not have any existence now after getting dumped by its investors.
Let’s talk about Zomato again.
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1] Funding from Investors
Zomato got a total amount of $909.6 Million in 16 funding rounds. Their latest funding was raised from a Private Equity Round on 10th January 2020.
Zomato Business Model is highly dependant on the investors. Once the investors vanish, so will the companies like Zomato!
Apart from Ant Financial, Zomato investors include Delivery Hero, Shunwei Capital, Glade Brook Capital Partners, Vy Capital, Ant Financial, and many others.
As per their Annual Report of FY2019, around 15% of Zomato’s revenue comes from Advertisements.
A few years ago, it was 100% dependant on advertisements because they have their own ad inventories.
Having so much of food behavior and user data, it’s easy for Zomato to target like a laser.
The ‘sponsored’ posts or ads that you see on the app or website makes Zomato the second largest chunk of their income.
3] Event Tickets
Zomato keeps hosting events by partnering with the restaurants. If you want to host an event, you are free to connect with Zomato and they will manage everything for you.
They take a commission from the tickets and that’s another source of income.
For instance, Zomato organized an event called Zomaland in Delhi, Pune, and Bangaluru where 120K+ people attended it. 200 Restaurants represented themselves as well.
This is the upcoming Zomato event in Mumbai, Bengaluru, Hyderabad, and Ahmedabad.
Event Tickets make a huge source of revenue.
4] Consultation Services
Zomato has all the data and it knows what works in each and every area where they operate.
For instance, South Mumbai might not be heavily into some cuisine as compared to Suburbans.
This was just an example. They have so much data that they can guide you extremely well. For that, they charge a hefty amount of money.
Hence, new restaurant owners pay their consultation charges and this becomes another source of revenue for Zomato.
5] Food Ordering
Of course, this is the food ordering is the business that everyone knows.
The restaurant registers itself on the app and whenever an order comes from the app, it will pay a commission of 15%-20% to the Zomato company. Fair enough?
However, this part is the major loss-making segment for this business. We will talk about it in the expenses part.
Zomato’s Delivery Revenue managed to fetch $155 Million in FY2019. This makes 75% of the total revenue.
6] Loyalty Program
Zomato sells its premium subscriptions in the name of Zomato Gold.
These users are claimed to be loyal users and they pay a subscription fee for getting some exciting offers on Zomato.
Compared to the delivery revenue, Zomato makes more money out of this loyalty program.
In March 2019, Zomato Gold subscribers crossed the 1 Million mark.
7] Other Investments
No wonder, everyone is into investments. So is Zomato!
Publicly Zomato has made 3 major investments and funding in TinMen, Grab and Loyal Hospitality.
Also, Zomato has acquired 14 businesses till now including Uber Eats.
We are not aware of other investments but these things fetch some amount as well.
Why is Zomato Facing Losses even after having so many Income Sources?
Advertisements & Promotional Activities – Zomato has been spending the majority of its money on promotions and advertisements. This is to acquire new customers.
Delivery Boys – Delivery boys need to get paid on time as well. Although they are not the employees of Zomato yet they get the commissions being a Zomato partner. There are more than 50,000 Delivery executives.
Employees and Infrastructure – Although Zomato might be a startup based on the Internet, it needs some operational costs. It needs permanent employees to work in technical aspects and some infrastructure to support them.
Server Costs – Storing so much of data and processing it on the cloud costs a lot. It’s definitely a huge cost for any tech-based company. It’s a major cost for even me while running this website. The only difference is that I don’t have investors! 😛
Consumer Compensations – This is the highest loss-making segment for Zomato as per FY2019 reports. Consumers often ask for compensation when they don’t get the desired result. As a result, Zomato gives them some cash back, replacement and much more. This cost was around $295 Million.
Why Zomato Acquired Uber Eats?
Zomato acquired Uber Eats for $350 Millon. But technically, it didn’t cost anything to Zomato.
The deal was done in the form of an all-stock transaction. It means that Uber Eats has a share of 9.9% in Zomato in the form of stocks.
Uber Eats was one of the major competitors for Zomato other than Swiggy. However, it’s very difficult to acquire Swiggy as its net worth is more than Zomato. So, Uber Eats was easy to acquire.
Four Big Players in Foodtech Industry – Swiggy, Zomato, Uber Eats, Food Panda.
Food Panda is dead. I mentioned that Swiggy is a tougher competition and hence Zomato acquired Uber Eats.
Now, Swiggy and Zomato are giving tough competition to each and it is a good thing for the industry from our point of view.
Once a monopoly comes into the picture, the industry gets disrupted. Be it Telecomm, automobile or even politics – Monopoly is the evil.
Zomato Business Model: Summary
- Food Delivery
- Loyalty Programs
- Event Tickets
- Other Investments
So, this was all about the Zomato Business Model and revenue sources. Special thanks to Sudhir Kotalwar Sir who assisted in reading and discussing the annual reports of Zomato.
If you are still reading then it means you are going to grow high in the upcoming years.
It’s not easy to read an educational piece of content with 1000+ words with too many numbers and figures. Kudos to your efforts!