It flatters me that a good half decade and more after I laid down the mantle of ‘theIPOGuru’, there is still no dearth of calls from media personnel seeking a view or a byte when there is a spate of high profile IPOs on. Recently, I received a spate of calls for the Zomato IPO and its Valuation. Notably, the excitement continued post its Listing too.
This intrigued me and I confess to having looked up, not so much the Zomato stock and its valuation, but the Food Delivery Business it is engaged in. The Indian Food service market can be divided into three channels - dine-in, takeaway, and food delivery. Of these three, CLSA expects the food delivery business to witness the highest growth. Its market size is expected to more than treble from $3.5 billion in FY20 to $11 billion by FY26. Growth in population, increasing smart-phone penetration, expansion into new markets and higher-order frequency from existing customers are expected to fuel this growth.
Over the years, multiple revenue streams have evolved and as compared to just commissions from restaurants which was the primary revenue stream driver for online food services platforms earlier, now, delivery fees, membership fees and listing fees for restaurants have also emerged as revenue streams. There is huge potential for growth in terms of geographical expansion too in the food delivery business, but the time frame in the march to profitability is not always certain.
There is definite potential for generating better profit if one charges customers optimally, keeping discounts lower. However, that is easier said than done as beyond a certain point, if the commission and other charges collected by a food aggregator were to significantly exceed the sum of discounts offered to consumers and cost of delivery, then there is a fair chance that both, the consumers and the restaurants, will prefer to transact directly, bypassing the aggregator.
Most of the business models in this segment lend themselves to horizontal diversification into multiple adjacent businesses like sourcing and delivering groceries, meat, alcohol, and medicine, as well as the pick-up and delivery of other items. Such a diversification might not be profitable for a while, but yet, offers good growth potential.
Overall, this is a fascinating business segment with two major players dominating it in India. The emergence of a third entrant with deep pockets in recent times should shake up things a fair bit, but as of now, the industry looks to be in good stead for expansion and growth ahead. I have my own hunch as to which of the three existing players will emerge trumps post the shootout but let me keep that bit to myself for now.
As I said at the outset of this column—Right now, I have moved on from the business of analyzing IPOs. I would be curious, though, to see which of the Mutual Funds we track have Zomato stock in their portfolio.
Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com