Is Zomato's acquisition of Uber Eats fundamentally lopsided or is it not?

On Tuesday, news started pouring in that Zomato had acquired Uber Eats India for a gargantuan sum of $350 Mn.

For Uber, this deal makes perfect sense. Despite pumping in a lot of money, they haven't been able to disrupt the market. The commissions are low. Order values are tiny and the only way to acquire and retain customers is through extravagant promotional offers. And here’s the thing. The Uber Eats India business was hemorrhaging cash for a while now. In fact, despite contributing only 3% to global orders, the Indian business accounted for close to 25% of the operational losses (in the global food delivery segment). And since the Uber IPO hasn’t exactly set the world on fire, there’s been a lot of chatter about Uber wanting to sell the food delivery business in India and pursue a path to profitability. So the deal makes a lot of sense for Uber.

But what’s in it for Zomato?

Now bear in mind, there’s already considerable overlap between food delivery apps. So it’s not like Zomato can suddenly acquire millions of unique users. Also, since Zomato is now on a mission to cut losses, many people contest that this acquisition makes very little financial sense.

However, that assessment isn't entirely accurate. For one, this battle isn’t necessarily about acquiring new customers. This battle is about getting to the top (and staying there).

Here’s a Venn Diagram to help drive home the point

The possibilities here are fixed. You could have users with only a single app — Uber Eats, Zomato or Swiggy. Then you have customers who use a certain combination of food delivery apps— Uber-Zomato, Zomato-Swiggy, and Swiggy-Uber. Finally, we have the bargain hunters who have all three apps in tow.

The first case is straightforward. Zomato gets direct access to the guy who’s only been using Uber Eats. That’s a solid lead. No questions asked. Then you have the combination users. For instance, consider the guy who uses both Uber and Zomato. Now that the acquisition is complete, all the orders that would have been routed through Uber Eats will now be routed through Zomato. That’s a definite plus, but Zomato already had access to the user. So it’s not a gamechanger either.

The next combination on the other hand — the Zomato-Swiggy user does not yield anything. He never had the Uber Eats app. So no gain here. Finally, we have the Swiggy-Uber user. Until now Zomato never had access to this little subset. With the acquisition, they can now compete with Swiggy on an even footing. We also have the bargain hunters with all three apps. But its unlikely Zomato is going to gain much here.

Apart from all this, you have the delivery partners and the restaurants and immediately you can see that this acquisition is more than just a tactic to acquire customers. It’s a counteroffensive set up to wage war with Swiggy. If the deal had gone the other way and Swiggy acquired Uber, Zomato would have had to cede a lot of market share. And making up lost ground is extremely challenging especially considering the food delivery business is a high cash burn segment. On the other hand, when you capture new markets and leverage extended economies of scale, you become more enticing i.e. your profitability prospects improve, venture money follows you and the likelihood of you surviving the long game goes up drastically. With the acquisition going through, the combined entity of Zomato and Uber Eats India is expected to corner more than a 50–55% market in terms of the number and value of orders. If all goes well, Zomato will pip Swiggy as the largest food delivery app in India.

And the most amazing thing here is that Zomato financed the entire deal through stock options without actually foregoing real cash. In return for the Uber Eats business, Zomato is expected to forego about 10% of its ownership. The whole thing is expected to be valued at about $350 Million. Also, with Uber now becoming a prominent investor in Zomato you can't rule our cross-promotional opportunities. Say, you booked an Uber to JP Nagar 4th Phase at 8 p.m on a cold windy Friday. Maybe you'll see a promotional offer for Zomato as you exit the cab and think to yourself— "Why not eat out today?"

Well, why not?

What do you think?

Subscribe to these posts- https://bit.ly/2ZKM1Tc. It's free.