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“Why order food online when you can eat home-cooked food?”

From early customers to now IPO investors – everybody has put this question to Deepinder Goyal. In response, the Zomato founder once said, “Food is entertainment.”

The killer of everyday boredom, the breaker of the dal-chawal cycle, the harbinger of appetizing treats, the purveyor of convenience…

From a startup that sought to solve a ‘hungry’ problem to becoming the first Indian unicorn to hit the public markets – Zomato’s rise is the coming-of-age of not just the New India, but also its young startups.

“Going public is sort of growing up,” said Deepinder Goyal in a chat with CNBC-TV18’s Managing Editor Shereen Bhan at the HT Summit in 2019.

The IPO-bound train of startups is taking on more passengers as it rushes forth with payments providers Paytm and MobiKwik, insurance platform PolicyBazaar, beauty & fashion retailer Nykaa and e-commerce giant Flipkart with many more waiting on the platform with a ticket in hand.

After undertaking a big shake-out of how traditional India consumed food, Zomato is now crucially riding to build an appetite among Indian investors, who are scratching their heads skeptically over how to swallow up and invest in businesses like Zomato, which are loss-making, but full of potential.

The Investor Pitch

“We are all set to grow to a much larger scale. We have already proven our success. Trying to expand into more cities in India will obviously take more capital. The new revenue models we are thinking of will require huge capital expenditure. So, these are the things for which we need funding,” said Deepinder Goyal in his first pitch to venture capital investors on CNBC-TV18’s Young Turks way back in 2011. A decade later, he is making the same pitch to public market investors.

In a country with over a billion people, who are taking to the internet faster than a click, online food delivery aggregators are only scratching the surface. The runway is long with just about 70-100 million people, who think of ordering food online on a monthly basis. In FY21, Zomato had about 32 million monthly active users.

Over FY18-21, Zomato’s revenue grew at a CAGR of 62 percent. But, some investors would prefer to look at the bottom line, which is in the red. In FY21, losses stood over Rs 800 crore.

However, not only Zomato’s, but no food delivery company’s bottomline is in the green globally. Still, over the last six months, global stock markets have welcomed Deliveroo in the U.K. and DoorDash in the U.S. along with one of South-East Asia’s largest unicorns – Grab. So, Zomato’s rise or fall will be closely tracked. Not only domestically, but globally too.

In recent years, the primary concern has been cash burn pumped by the ‘privilege’ of getting large cheques from private investors. Now, Zomato’s public market investors will surely throw the dreaded question in the upcoming quarterly reviews: when will the cash burn end and profits turn up on the P&L statement?

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In response, Zomato has indicated that it wants to scale up first before turning its attention to profits. In regulatory filings, the company said, “We expect our costs to increase over time and our losses will continue given significant investments expected toward growing our business.”

Despite showing up at the stock markets with a loss-making prospect, Zomato is expected to become the largest IPO of the year in India with a post-money valuation of $8.9 billion. That’s a surge of 49 percent since it closed its previous funding round at a valuation of $5.4 billion. Through the IPO, Zomato targets a fundraise of $1.3 billion or Rs 9,375 crore.

Consider this: While making his first appearance on CNBC-TV18’s Young Turks in 2011 as the founder of Zomato’s former self Foodiebay, Deepinder Goyal pitched his restaurant-listing idea to investors and asked for just $1 million in funding!

The Kitchen Sink: The Years Of Growing Up

In the early 2000s, the lightning bolt of entrepreneurship struck Deepinder Goyal when he was a student at Indian Institute Of Technology, Delhi. “We were a group of friends and all of us always wanted to have a startup,” he said.

So, Deepinder started a web development company to build online sites for small restaurants in Delhi. It failed. But, he walked away with an insight: Why create separate websites for these restaurants when all of them should be on one website?

In 2008, Deepinder Goyal opened restaurant-listing site Foodiebay with his Bain & Co colleague Pankaj Chaddha with an initial investment of Rs 25 lakh.

The duo doubled up as food connoisseurs while visiting restaurants before starting to list menus, write reviews and provide ratings for people who needed a ‘heads up before heading out’. By 2011, Foodiebay needed $1 million to sustain itself over the next 18-24 months. The seed fund came from Sanjeev Bikhchandani’s Info Edge.

After rebranding Foodiebay as Zomato, the business started overseas operations – from UAE and Sri Lanka to Lebanon. The ambition grew as global investors – Sequoia Capital and Temasek – arrived with big cheques. Soon, food delivery became the core engine of Zomato with restaurant listings, reviews and ratings now playing an auxiliary role.

In 2018, Zomato shifted gears becoming a unicorn following multiple rounds of investment by the Chinese-owned Alibaba affiliate Ant group, which skyrocketed valuation to $2 billion. That year, co-founder Pankaj Chaddah left. Zomato’s monthly revenue rate hit $100 million and monthly orders crossed 20 million.

Most importantly, the battle was on. In 2018, rival Swiggy raised $1 billion – the single largest fundraise by any foodtech startup in India at the time. The online food delivery segment was inching close to becoming a duopoly.

As competition went up, Deepinder Goyal knew what was coming. “All it takes to fight in that space is money,” he said.

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Duopoly, Discounts & Daggers

In fact, Swiggy is older than Zomato when it comes to food delivery. Started in 2014, the Bengaluru-based Swiggy pushed rapidly in South India while Zomato busied itself with global expansion of its restaurant listing business via acquisitions.

Once Gurgaon-based Zomato entered the food delivery market roughly two years after Swiggy, the competition started playing out in different halves of India. Zomato ruled the North while Swiggy dominated the South. Eventually, many smaller players could hardly face the financial firepower of the two biggies in the space.

“Over the last couple of years, it has been a two-horse race for three times. Then, somebody else has come in, somebody else is gone,” said Deepinder Goyal in an interview with CNBC-TV18 in 2019.

As it is today, Swiggy was battling Zomato toe-to-toe in all parameters – average order value, monthly deliveries, reach in terms of cities and more.

The battle escalated between the two rivals when UberEats went up for sale. Given UberEats’ strong presence in the South, it made sense for Swiggy to show interest. But, withdrew after hearing the ‘astronomical’ quotation from the other side of the table.

Itching to go truly pan-India, Zomato swooped in to acquire UberEats to rattle Swiggy in its backyard. In exchange, UberEats secured a plump 10 percent stake in Zomato.

In this kind of aggressive market, where not an inch was given up, both Zomato and Swiggy began to run out of funds as fast as they raised them.

“When somebody else, who is trying to compete with you, has a lot of money, for a short time, you have to react with money itself,” said Deepinder Goyal.

He assured that Zomato was ‘not slugging it out with Swiggy in a stupid way’, but finding ways to keep up the ambition and yet reduce the cash burn led to disgruntled stakeholders.

In 2019, Zomato’s delivery riders went on a strike in more than one city. They protested the food delivery aggregator’s decision to withdraw some of the incentives, which led to lower earnings per delivery. This followed a layoff of nearly 10 percent of customer, delivery and merchant support teams at Zomato’s headquarters in Gurgaon.

Meanwhile, the restaurants went up in arms as deep discounts offered by Zomato and Swiggy kept customers from visiting the diners. Zomato was accused of favouritism, monopolistic trade practices, greed and exploitation. It was just the start. This clamour would only rise to a crescendo in times to come.

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The Pandemic Period Of Pain And Gain

More than 75 percent of Zomato’s revenue comes from the food delivery vertical. The pandemic closed the tap. Restaurants were shut as total lockdown was enforced to stop the spread of COVID-19. Wide-spread fear of catching the virus kept consumers from ordering food online as well.

Last year, Zomato’s monthly transacting users fell by half from 10.7 million to 5.8 million. There was another blow. Monthly active users reduced from 41.5 million to 32.1 million.

Meanwhile, Zomato got busy with COVID-19 initiatives. Under its non-profit organisation Feeding India, it sought to provide food to the poor, especially the daily-wage workers. Later, it also sought to crowdsource funds to secure oxygen cylinders.

On the sidelines, as online grocery marketplaces were a hit during the pandemic, Zomato started its own pet project so that it could put its latent delivery fleet to some use and open another source of income. But, Zomato Market failed. On the grocery delivery front, Swiggy surged ahead taking on players such BigBasket and Dunzo. Today, Zomato has invested $100 million for a 10 percent stake in Grofers with the hope of becoming a challenger in the sector after listing.

Also, days before Zomato’s IPO fanfare, news emerged that SoftBank is investing $450 million in Swiggy as it offers a better ‘superapp play’ with a grocery delivery business that is better than Zomato’s.

Back to food delivery, Zomato’s orders picked up once people grew bored of eating home-cooked food all the time and cases began to taper off as restrictions eased as well.

Last year, the average order value on Zomato touched Rs 400 as family orders went up as against the earlier single-orders from young professionals in offices. (To be kept in mind: AOV is expected to fall once offices open up.)

Zomato and its peers were in the driver’s seat as they no longer had to offer steep discounts to acquire customers.

Zomato’s presence is spread across 525 cities in India. In a blog post, DeepinderGoyal pointed out that Zomato was onboarding customers from small-town India, including those who had never ordered food before, let alone place the order online. The advertising and sales expenses were slashed by half.

Solely reliant on food delivery services, both restaurants and customers had to pay a higher charge. Higher commission and delivery income along with withdrawal of discounts led to a much better looking unit economics. In FY21, Zomato posted a profit of Rs 20 per order as against a loss of Rs 30 in the previous year.

In addition, the company also asked employees to volunteer for pay cuts which led to a reduction of 16 percent in payroll costs. Layoffs followed as well.

“While the event impacted the size of the business, it has accelerated the journey to profitability,” said Deepinder Goyal.

Revenue fell by 24 percent to Rs 1,994 crore in FY21 (YoY). However, the losses narrowed from Rs 2,345 crore in FY20 to Rs 816 crore in FY21. But, the problems don’t end here.

The Rift With Restaurateurs Splits Open

At present, Zomato has about 3.5 lakh active restaurants listed on its platform. For two years, their representative body the National Restaurants Association Of India (NRAI) has been escalating the fight against food delivery aggregators.

In 2019, one by one, the restaurants and their local associations joined the #logout campaign against ‘Zomato Gold’ once it was extended to online orders, which took away the ability of diners to attract footfalls and upsell. People would sit at home and avail the 1+1 offers.

Zomato responded by sending legal notices to restaurants, which didn’t go down well, and ultimately, the Zomato Gold program had to be tweaked.

Now, ahead of Zomato’s IPO, the association has filed information with the anti-monopoly watchdog Competition Commission of India (CCI) on ‘unfair and restrictive trade practices’ by food aggregators such as Zomato and Swiggy.

The alleged practices highlighted by NRAI include bundling of services, data masking, price parity agreements, exclusivity of listed restaurants, violation of platform neutrality, vertical integration and lack of transparency on the platform.

NRAI says restaurant partners are being asked to share the burden and give discounts to maintain appropriate listings.

“The issues raised by the National Restaurant Association of India (NRAI) are misplaced”, said Gaurav Gupta, Co-founder, Zomato.

Another allegation is the ‘exorbitant commission charged’. As per NRAI’s filings with CCI, Zomato charges about 25-30% of the food order as commission, which went up during the pandemic as restaurants were largely reliant on food delivery platforms to stay afloat. A massive dent on a restaurant’s margins per food order.

Now, NRAI is calling for a ‘Order Direct’ campaign with the intention of bypassing Zomato and Swiggy. At one point, the association also planned to start its own food delivery platform.

“Order Direct has always been there since customers could always directly call restaurants. We drive 20-30 percent more business for restaurants than what they can do through order direct,” said Gupta.

That’s not all. Zomato’s IPO prospectus revealed that it is facing multiple litigations.

Competition regulator is probing the Zomato-UberEats deal. CCI has also threatened penalty for not making some merger filings for UberEats acquisition.

Zomato is also involved in 24 consumer related proceedings that are currently pending. Maharashtra FDA has issued 26 notices, alleging some listed restaurants lacked requisite licenses.

Although Zomato was among the first to introduce paternity leave and period leave for its employees, it is involved in 18 labour related proceedings around wrongful termination, incorrect payouts to delivery partners and reduction of pay, as per the prospectus. Delivery riders protested during the pandemic, asking for personal protective equipment and pay. At the end of FY21, Zomato had about 170,000 active delivery partners.

‘Out For Delivery’

As Zomato hits the markets, the risks are clear, but so is the vision. Currently, Zomato stands on a three-legged stool – food delivery, dining out and sustainability.

Farm-to-fork business Hyperpure is Zomato’s next big play. Launched in 2019, the business-to-business venture seeks to source chemical-free and planet-friendly supplies – vegetable to groceries – for restaurant partners.

“Restaurant partners ordering supplies through Hyperpure get a ‘Hyperpure Inside’ tag on their Zomato page, which is intended to provide customers with an assurance of the quality of ingredients used at the restaurant,” says Zomato. As of March 2021, Hyperpure sent ‘clean supplies’ to 9,225 restaurant partners across six cities in India.

Now, Hyperpure is being built into Zomato’s 10-year vision. “I want Zomato to enable clean food for everyone,” said Deepinder Goyal.

That’s the plan. For now, Zomato is ‘out for delivery’ in the stock markets. Only time will tell if Zomato can serve a good dish to public investors.