In July 2008, two alum of IIT-Delhi, Deepinder Goyal, and Pankaj Chaddah, birthed Foodiebay, now known as Zomato. The concept first came into Deepinder’s mind when his colleagues had a perpetual demand for paper menu pamphlets of various restaurants, to order food. That’s the moment when the idea of a potential business start-up flared across his eyes. He saw this as an opportunity to convert these paper menus into a digital app, providing easy accessibility.
Fast-forwarding twelve years later, the Gurgaon-based start-up, now turned into one of the biggest, leading competitors in the cash-intensive online food delivery market, acquired UberEats India on the 21st of January, 2020 in an all-stock transaction, for around $350 million. This transaction gave Uber, the US-based ride-hailing service a 9.9% shareholding in Zomato. This all-stock transaction connotes the first big merger in the online food delivery market. UberEats will discontinue its term as a separate app and the users will be redirected to the Zomato app. The online food delivery market has been dominated largely by Swiggy and Zomato. Other competitors like Foodpanda bit the dust way back. Likewise, UberEats was never in the race to become a powerful player in the hyper-competitive online food delivery market because of its high cash burning and poor unit economics, which means that the lifetime value (amount of revenue generated by a single user during the entire usage of the service) does not exceed the cost per acquisition (amount required to acquire a user). Even after providing discounts, UberEats could not make its business profitable. The brutal battle between Zomato and Swiggy drove the UberEats business into losses, morphing it into nothing but collateral damage and a burden for its parent Uber.
While Swiggy is a little ahead of Zomato, the acquisition of UberEats has given it more arsenal and strength to take over the online food delivery market as the combined entity makes about 50-55% of the market share in terms of value and volume of orders. According to The Economic Times, the entire deal is worth around $350 million. An Uber executive in conversation with The Economic Times said, “In parts of Tamil Nadu, Kerala, and Madhya Pradesh, UberEats has a stronger foothold compared to Zomato with an about 30% market share”. UberEats augmented three percent of the global UberEats revenues and income, but contributed a colossal twenty-five percent of UberEats global interest, tax, depreciation, and amortization losses, as per sources acquainted with the information.
Zomato is a loss-making business. It lives on its investors’ money. According to the statistics depicted on its Annual Report, it earned a revenue of $68 million during the financial year 2018, and $206 million during 2019. However, the important thing to note here is the cost and operating expenses incurred to generate revenue. A business is only profitable and lucrative if the cost incurred does not exceed the revenue generated. The total cost of Zomato during the financial year 2018 was $80 million and $500 million in 2019. Many other start-ups also survive by ensuring their investors’ profitability in the future. Zomato makes money through advertisements and promotions, event tickets, consultation services, investor funding, food ordering, other investments, and of course, its popular loyalty program.
Zomato acquired UberEats as it was one of its competitors apart from Swiggy. It could not acquire Swiggy since it has more net worth, more assets than Zomato. This will create a duopoly that will benefit consumers by keeping prices low due to increased demand. If a monopolistic market power comes into the picture, the industry will get disrupted. What is left to see is that who manages to hold a greater share of the food delivery-business now.