SIMPLY PUT: “Zomato’s Delivery Charges Are More Than Its Stock Price”

Welcome back, readers. Food delivery startup Zomato is in a soup for several reasons – the primary one being the 70% fall in its stock price since it hit an all-time high back in November last year. The other reason is the “high conviction buy” recommendation by a research firm, putting focus on an already-battered stock.

Zomato has been unable to keep any of the parties it serves happy – customer complaints are unending, its restaurant partners have?raised concerns?several times, its delivery executives are?unhappy?over incentives being cut down, the government is?wondering?if Zomato’s business practices are anti-competitive, and lastly, shareholders have seen their investment value fall faster than the escape velocity of Jupiter.

And the one equity research firm which stood behind the company was also trolled. Brutal times, these.

But memes on social media don’t always tell us the full story – retail investors have actually increased their stakes in the food delivery startup over the last three quarters.

In the same period, foreign investors and mutual funds have pulled out their money – the foreign investor pullout can be attributed to the?overall FII selloff?that emerging markets like India have seen over the past few months, but the mutual fund pullout suggests institutions are paring their stakes.

Retail investors, on the other hand, have increased their stake by more than two times. Here’s what a Stocktwits India poll suggests about the stock.

Delivery issues aside, Zomato charges and price hikes are a pain, too

To be clear, the kind of business that Zomato is in, customer complaints are but a given. From wrong food items being delivered to quality, hygiene, delays – this is just a sample of what companies like Zomato and Swiggy face on a daily basis.

Keeping those issues aside, Zomato has also been called out by its customers over prices – food prices on Zomato are often higher than the actual prices in those food outlets. It’s a problem which no one seems to be keen on solving – not Zomato and not the restaurants either.

The reason for the sometimes-massive difference in prices is easy to understand – Zomato charges 24-28% of the order value as a commission from restaurants, who understandably pass on the cost to customers.

Essentially, you are paying a much higher price for dining in than dining out. In some cases, the prices could be as much as 35% higher. And it’s not a problem restricted only to Zomato – even Swiggy users have similar complaints.

Sample this – I wanted to order everyone’s favorite, fried rice, the other day. I went over to Zomato since I have a membership, but the service did not have any delivery partners to assign to that eatery.

Naturally, I switched to Swiggy and tried to place the order, but backed out because the final price was 75% higher than what I would have to pay at the eatery myself. I thought to myself that I would much rather pay the additional cost to the eatery instead of having Swiggy take it away.

And it’s not just a few instances of Zomato (and Swiggy) charging much higher prices – social media is full of these experiences.

Zomato’s boilerplate response to this is that the prices being charged by restaurants on its service are not under the company’s control. However, things like delivery charges and surge pricing are under the company’s control. And the reason restaurants charge higher on Zomato is because of its commissions, nothing else.

This is a cash burning business – and analysts think Zomato has no other option

Zomato’s ballooning losses could continue to be its Achilles' heel for the foreseeable future. This is a cash burning business, and analysts think Zomato has no other option but to continue doing this.

Zomato’s ?4,400 crore acquisition of Blinkit has drawn flak for different reasons – from it being an expensive purchase to being a cash sink, the overall outlook has been negative.

However, analysts at HSBC Global Research suggest this is a necessary evil for the company if it wants to remain competitive with Swiggy.

To jog your memory, Blinkit is a grocery delivery service, rivaling the likes of Big Basket, JioMart, Swiggy Instamart among others.

Analysts at HSBC believe Zomato needs to now integrate Blinkit into the Zomato app if it wants to realize the synergy gains from this acquisition. Not only would this help Zomato users, it would also help the company increase user stickiness and reduce customer acquisition costs for both Zomato and Blinkit.

On the outset, this logic looks sound – after all, acquisitions are made for synergy gains. But the analysts at Jefferies believe this could likely be a cash guzzler – something that Zomato investors might not like,?yet.

Zomato’s task is cut out, and for the sake of its investors and everyone else who loves food and wants it delivered, let’s hope the company manages to weather this storm.

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