Introduction
In 2021, India’s first unicorn startup decided to go public. The company had only six months’ worth of money in the bank and the decision to do an IPO was a ‘forced one’. Even though the IPO turned out to be a success, the period following was no less than a nightmare for the company. To begin with, there was no clear path to profitability. This forced even the company’s early investors to sell their stock in bulk. This resulted in the company losing almost 70% of its market cap in just six months.
In the period following that, the company took a series of steps, which not only put it on a path to profitability but also made it one of India’s most remarkable turnaround stories. In this blog, let’s talk about the story of Zomato‘s turnaround, from a bumper listing on the stock market to a 70% drop in the share price, and then turning around to become one of the most celebrated companies in India, coming right after this.
Early Days of Zomato
The story of how Zomato started is one for the movies. A young student who wasn’t good at studies somehow made it to one of the most prestigious colleges in India, IIT Delhi. He then worked on a problem, which he wanted to solve since his school days. Organizing India’s Food-Delivery Space. As I said, the story is one for the movies, so much so that we have created a two-part documentary-style book in the past on just how Zomato started. We dug deeper into Deepinder Goyal‘s school and IIT days, followed by his first job at Bain and Company where he started the first version of Zomato, called Foodlet.
To begin with, Zomato had the early mover advantage in India’s food delivery market. It started delivering food in 2015, but the company has been operating since 2008. So what were they doing for seven years during this period? Well, Zomato was a restaurant discovery platform up until 2015 they would approach a restaurant, and ask them to list and upload their menu on its platform Customers would then come to Zomato to discover these restaurants. And because of this early mover advantage, Zomato had made deep partnerships with restaurants, not just in India but globally as well.
Road to IPO
By 2015, they had over 1.4 Million restaurants listed on their platform from 22 countries. Because of this deep network effect, Zomato emerged as one of the winners of India’s food delivery space, which saw the demise of players like TinyOwl and Foodpanda. From 2015 onwards, Zomato maintained its lead in India’s food delivery space, eventually becoming a unicorn in 2018. And although they were a trailblazer in their space, the journey wasn’t all smooth.
They ran out of money several times during this period. But 2020 was probably the worst year for Zomato. The pandemic had shut down restaurants and people were hesitant to order food, at least in the early days. After the first COVID wave, Zomato’s business was down 90%. So while their costs remained the same, their revenues had vanished. During this time, in the middle of 2020, Zomato had only 6 months of runway left, which meant that if they didn’t raise money quickly, they would shut down. This is when another blow hit Zomato China
In June 2020, Indian and Chinese soldiers clashed on the border, resulting in the death of 20 Indian soldiers. But, how did this impact Zomato? You see, during this time, Zomato was in the middle of a funding round led by China’s Ant Financials. Zomato was to get 150 Million dollars from this Chinese investor, but after the border clash, the Indian government tightened the FDI rules for countries that have a border with India. Simply put, now if a Chinese investor wanted to invest in Indian companies, he had to get approval from the government, and because of this rule, Zomato was not able to get money from Ant Financials.
So this was the situation, Zomato’s revenue was down 90%, their funding money was stuck, and they only had six months of money in the bank, this was when Deepinder Goyal and the team started looking at IPO, as a way to survive. And just to tell you how desperate Zomato was at this point, they were willing to raise money at a valuation of 500 Million dollars, down almost 87% from their valuation of 4 Billion at the time.
And another thing to keep in mind is, that Zomato was a loss-making company at this point, so going public wasn’t as easy for them. However, from then, to Zomato’s eventual listing in July 2021, things got better for the company. To begin with, after the first COVID wave had passed, demand for food delivery had picked up. It not only reached previous levels but surpassed them, as people were stuck at home and the concept of ‘revenge eating’ was becoming a thing. Revenge eating was a phenomenon where people started ordering more food once the lockdown was lifted, as people couldn’t order for a while due to the lockdown.
Another thing that helped Zomato was the IPO of DoorDash in the US. Door-Dash is a food delivery startup, similar to Zomato. And they too were a loss-making company at the time of its IPO, despite that, the company had a bumper listing in the US, gaining 86% on the very first day of trading. This not only boosted the confidence of US institutional investors but also gave confidence to people in India that food delivery as a business is a solid one.
And because of successful IPOs like DoorDash in the US, market sentiments had become positive, which eventually helped Zomato when it went public. Zomato’s IPO was oversubscribed by 38X, and on the day of listing, its stock opened at a premium of 66%.
Post IPO Challenges
The period following the IPO was very challenging for Zomato. The hype that made the IPO successful slowly started dying, the company was still losing money, and the geopolitical situations had become tense. In early 2022, Russia attacked Ukraine and the market sentiment suddenly turned sour. Foreign investors started pulling money out of the Indian market, and this impacted Zomato too.
The situation worsened after Zomato announced that they would completely acquire Blinkit, a grocery delivery startup they had invested in earlier. And the main reason Zomato decided to acquire Blinkit, was that quick commerce was a fast-growing sector. One analyst for eg estimated that the quick commerce market can become worth 20,400 Crores by FY25 and can reach 60,300 Crore Rs by FY30. Although it sounded like a good long-term plan, Investors didn’t like it in the short term.
As a result, investors began offloading their shares. Two of the largest investors in Zomato, Tiger Global and Sequoia sold half their stake in the company each, in total selling 5% of the shares available in the market. This is reflected in the company’s stock price too. Around this time, Zomato’s share price had hit the lowest ever at around 40 Rs. From a high of 150 Rs, it had lost almost 70% of its market value in less than six months. Analysts further predicted its fall.
Road to Profit
Aswath Damodaran, who is a well-known investor and valuation guru, pegged the right value of Zomato’s share at 32 Rs. For Zomato, the writing on the wall was clear.
They have to become profitable soon, and if not, they might never recover from this fall. The company started by focusing on key cities. In February 2023, the company announced that it would exit its operations in 225 small cities in India. These were the cities where they had their delivery fleet but didn’t have enough revenue coming to make business sense.
The company then laid off around 4% of its workforce, which was around 150 people at the time. And finally, Zomato increased its commission rate from the restaurants. From 27%, the company announced they will now charge 33% commission from the restaurants. And these steps worked.
These were the quarterly results of Zomato in March 2023, and this was the result in June 2023. The company had moved from a net loss of 347 Crore Rs to a net profit of 2 Crore Rs in just two quarters. And by now, Blinkit too had started showing improved numbers. Some of its dark stores had turned profitable and this gave them the confidence to open more dark stores.
For the first time, Blinkit as a whole became a contribution-positive business for them, which meant it no longer was a liability for Zomato. Deepinder in a letter to shareholders said that he believes Blinkit will drive more value for shareholders than Zomato a decade from now.
Future of Zomato
In the end, what does the future look like for Zomato? Well, Deepinder has an answer to that. He wants to make the company worth $100 Billion by 2030 and wants to make 1 Billion in profit.
Just for comparison, in August 2024, at the time of my writing this blog, Zomato is valued at around 24 Billion dollars. So Deepinder wants to make the company six times in size in the next six years. Now one thing is for sure, Zomato won’t become a 100 Billion dollar company just by delivering food. According to various studies, India’s entire online food delivery market will be around 35 Billion dollars by 2030, so even if Zomato captures 50% of that, it is still only around 17 Billion dollars.
The next thing for Zomato is Hyperpure, its B2B vertical, something the company thinks could be bigger than the food delivery segment. Under Hyperpure, Zomato directly sources products such as fruit and vegetables, groceries, and dairy, from farmers, and then supplies them to restaurant partners. This also helps Zomato build a strong relationship with the restaurant. In the most recent quarter, Hyperpure brought in a revenue of 859 Crore Rs.
And although it was only a quarter of Zomato’s total revenue, it is growing at a much faster rate. To put it into context, in the
recently released quarter numbers, Zomato’s food delivery business has grown at a rate of 53% YOY, whereas Hyperpure has grown at a growth rate of 100% YOY. So it will be really interesting to see, when will Hyperpure’s revenue will surpass Zomato’s food delivery business.
Conclusion
And finally, we have Blinkit, the quick commerce arm of Zomato. And even though this space is very crowded right now, Blinkit has some ambitious plans to stand out and beat its competition. Firstly, the company is looking at a home service vertical, similar to Urban Company. It will attempt to fulfill home services in 10-15 minutes, similar to grocery delivery. The company is also looking at high-commission products like electronics and home decor to sell on its platform, something which wasn’t the case with grocery.
So, that’s all I have for you in this Blog, let me know in the comments if you think Zomato could be worth 100 Billion by 2030. And I will see you in the next one.
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