- Restaurants and delivery partners are critical to Zomato’s business model, but few are signing up with the food delivery startup.
- Analysts were optimistic about Zomato’s prospects, but said food delivery is not a hyper-growth industry.
- Zomato added 3,000 new restaurants and delivery partners in the first three months of FY23.
Hidden in Zomato’s latest earnings are two metrics that could be a cause for concern for the company and its investors: additions to restaurants and delivery partners, which have slowed by as much as 90% after rapid growth over the past year.
Restaurants and delivery partners are critical to Zomato’s business model – a slowdown in new signups shows that supply-side stress is mounting on the food delivery platform.
According to the company’s announcements, Zomato added 3,000 new restaurants and delivery partners in the first three months of FY23. In comparison, Zomato has added an average of nearly 6,000 new restaurants and 10,000 delivery partners over the past 9 months.
Analysts sound optimistic about the company’s prospects, but say they don’t expect hypergrowth in the food delivery business.
“We think food delivery is now an established industry, with a relatively healthy duopoly structure. The unit economy is gradually improving with economies of scale, lower discounts and higher shipping costs. We don’t think it’s a hyper-growth industry, but think 15-20% CAGR- growth is possible in the next five years,” said a report from HSBC.
“The big positive surprise is that this healthy growth has come despite Q1FY23 being the first quarter of full normalcy (all restaurants were open without any restrictions), indicating that the shift to delivery has continued despite the pandemic easing,” he said. Karan Taurani, Senior Vice President, Elara Capital.
This explains how Zomato was able to add 1 million new customers this quarter, but a slowdown in adding delivery partners could halt the momentum.
Earlier, an analysis of Zomato’s customer complaints revealed a fact we’ve all become accustomed to: higher delivery costs and in some cases unavailability of delivery partners.
These problems could worsen if this declining trend in restaurant and delivery sign-ups continues, while customer numbers continue to grow faster.
It remains to be seen how food delivery startups will address supply-side challenges as they are more difficult to solve.
For now, the market appears to be excited about Zomato’s prospects, with its shares hitting a 20% higher circuit as of 3pm today (Aug. 2), adding ₹7,100 crore to investor wealth. This after a drop of 22% earlier last week.
Zomato’s Q1 FY23 at a glance
|Particularities||Q1 FY23||Q4 FY22||Q1 FY22|
|Revenue||₹1,414 crores||₹1,212 crores||₹844 crore|
|Net profit||-₹186 crores||-₹361 crore||-₹360 crore|
|Emp advantage exp||₹349 crore||₹407 crore||₹391 crore|
|Postage costs||₹572 crore||₹545 crore||₹297 crore|
|% of the turnover||65%||79%||82%|
Source: Company Reports
Recovery Comes in $ZOMATO.NSE – Positive Q1 Results as Net Loss Shrinks. – Brokerage Houses bullish on the scrip. -Breakout of the falling wedge pattern and crossing the key level of 52-54. -The resistance will be 64.72 while the support will be 54. “Disclosures: Content for educational purposes, I am not SEBI registered.”
— (@ThinkProfit) 02 August 2022
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