Zomato and its batchmates’ future

In 2018, a video of a delivery person secretly eating from a customer’s order surfaced on the internet.

A storm for Zomato.

The company introduced new packing standards to ensure deliveries were guaranteed sealed.

But this incident wasn’t isolated.

Bad behavior reduced but it didn’t stop entirely.

One reason for this: the delivery persons aren’t employed or hold jobs at Zomato. They are part-time workers.

Zomato needs to attract delivery persons as much as it needs to attract customers and restaurants. So they can not be too strict with anyone.

Most companies deal with difficult customers.

Companies like Zomato deal with difficult customers, restaurants, and delivery persons. In a way, all 3 are customers of Zomato.

This makes operating businesses like Zomato incredibly difficult.

Such companies are called aggregators.

They don’t offer the actual service themselves. Instead, they match the consumers with service providers.

What these companies are trying to solve is extremely vital but challenging.

If they succeed in their objective, everyone wins.

Example:

A school and an office are 3 km apart.

2 pm. There are 5 cabs near the school and 10 cabs near the office.

A few hours ago, many office-goers had reached office. Hence, the cabs are around the office after dropping them.

The school has just gotten over. There are many children and parents wanting to take a cab home. But there’s too much demand and too few cabs around the school.

Earlier, this was a problem, that in some form or the other, was common. Once cab aggregators came in, this problem was solved to a great extent.

The empty cabs beside the office could see the demand near the school and get bookings.

Every party in this situation walks away happy. Win-win.

Ola, Uber, Swiggy, Zomato, Airbnb, Oyo, and Urban Company (UrbanClap) – are all aggregators.

Some names from outside India – DoorDash (food delivery, USA), Lyft (cabs, USA), Didi (cabs, China), and Gojek (delivery & cabs, SE Asia).

There’s one thing all of them have in common.

None of them have been able to make a profit – yet.

Most successful companies have some kind of a moat - something that ensures they have an advantage over others.

This is their protected forte.

For Mercedes, the moat is incredible technology and prestige.

For Xiaomi, the moat is incredibly inexpensive and reliable products.

For Google, it is incredible technological prowess.

For ICICI Bank, it is reputation and service.

For HUL, it is track record and brand image.

What is an aggregator's moat?

What makes aggregator platforms incredibly hard is the trust.

Nobody wants to have a bad experience.

So unless they’re guaranteed a good experience, most people (users as well as service providers) tend to stay away.

Everybody hopes someone else makes the first move.

Getting this system started is incredibly tough. Once started, it tends to retain this edge.

This is easily the main moat of an aggregator platform.

The moat is such that it is extremely difficult for other companies to simply replicate their massive scale.

That keeps many new entrants from entering the segment and challenging the existing companies.

The network these platforms have is incredible. And the network effects of this are just as gargantuan.

In terms of distribution, these companies have unfathomable power; the kind of power almost no company had in the past.

Early in the life cycle of many of these companies, there was a desperate land grab.

Most of these companies operated on one philosophy: number of users/customers is the golden metric. Nothing else matters.

Whether this was true or not remains unclear.

But so far, profitable or not, only the companies with the largest number of users have survived.

Companies were so desperate for gaining users, that they doled out massive discounts and incentives for everybody.

That worked.

They got what they wanted: users.

Such discounts were unsustainable. Interestingly, this is a fact everybody knew and accepted.

Customers knew the discounts wouldn’t last forever. Delivery agents knew the incentives would go away. Drivers knew the rewards would stop.

They would stop – someday.

And of course, most importantly, the aggregator companies knew this too.

Companies are meant to make money - not burn money.

So why the discounts?

Habit formation.

The companies were hoping that their discounted rates would encourage more people to start using these services.

Here comes the bet the companies took: once the users would get habituated to the services, they would continue to use the services – even without the discounts/incentives.

So what happened?

The answer is – like it or not – we’re in the middle of knowing what happened.

Today, many of us are hopelessly dependent on cab aggregators to go anywhere.

So many people who only ate out by visiting the restaurants have started ordering food from home.

Many of us feel hesitant to book a hotel room unless we see it on Airbnb or Oyo.

Habit formation has taken place - no doubt.

But – and this is a big but – we’re also seeing people going back to a life without these aggregators.

In many cities, people are tired of cab cancellations. They simply hail a ride from the streets like old times.

Many restaurants are employing their own delivery agents.

Many service providers and customers start skipping the aggregator and start directly interacting with each other.

This is extremely prevalent in the case of service providers on Urban Company and Airbnb.

There are multiple ways this could go from here.

Many businesses were doing the right thing but were still failing – until a small change happened.

Electric cars weren’t invented by Tesla. They appeared over 100 years ago. Modern battery technology allowed them to finally be viable.

Video calling isn’t new (remember Skype?). But once everyone had a smartphone and fast internet, WhatsApp video calls became commonplace.

Flipkart wasn’t the first e-commerce company in India. But they solved the issue of payments and trust – and e-commerce caught on in India.

Orkut – Facebook.

Napster – Spotify.

Yahoo – Google.

There’s no lack of examples.

Maybe there’s something, some change in the way these companies operate that’ll make things in their favor – and they’re looking for it right now – or have already found it.

Or maybe not?

The airline industry has been around for decades. Even to this date, a huge chunk of airlines struggles to break even.

One thing is clear. These companies have some things that almost no other company has.

The sheer number of people they, directly and indirectly, give income to is staggering.

They didn't just make it easier for existing customers to use services. They expanded the markets.

People who never used cabs started using cabs. Many started traveling more using only Airbnb rooms.

The number of people who've started experimenting with various kinds of foods has shot up astronomically because they can easily order.

These have become lifestyle habits.

The scale, the trust, the network.

They just need to earn a little bit more per transaction.

If and when the unit economics start working, these companies will have formidable cash flows.

But the markets are incredibly price-sensitive.

So, will they be able to?

Time will tell.?