Zomato IPO: Grocery Is An Experiment For Now, Co-Founder Gaurav Gupta Says
Zomato Ltd.’s Rs 9,375-crore initial public offering, slated to be one of the biggest for a internet-focused consumer firm, will open on July 14. The Indian company will join peers like U.K.’s Deliveroo and U.S.-based Doordash that have gone public during the pandemic.
In an interview ahead of the issue, Gaurav Gupta, co-founder at Zomato, discusses business, its grocery bet, competition with Amazon and restaurants, and unit economics.
Watch the interview with Zomato co-founder Gaurav Gupta
Here are the edited excerpts from the interview...
Sajeet: You are a unique tech platform. Explain to us how you recognize revenue and what kind of cost structures you have?
Gaurav: We're building a food ecosystem. We connect users and customers to restaurants for whatever they need. For restaurants we provide them with orders and diners. We also provide them with raw materials. These are the three core parts of our business. The operating and monetising models are different for each.
Sajeet: So how do you recognize revenue in each of those parts?
Gaurav: All of those details are part of the Red Herring Prospectus. You can refer to that. We have shared the unit economics details, but of course, there are more costs that come after that - both fixed costs and others.
Sajeet: Can you give us perspective on IPO pricing. How did you arrive at the Rs 72-76 per share pricing?
Gaurav: Valuation for any company is arrived at based on the current strength and the future potential of the business. That's what the banking community and investors have used to arrive at this pricing.
Sajeet: So, are you saying that Zomato's business potential has risen from $5-5.5 billion when you last raised funds a couple of months ago, to $8 billion?
Gaurav: The pricing reflects the strength of the business today and future potential. I can tell you that even if you even look at the last five years and look at how we've moved, I think it's a very exciting space and there's so much opportunity in front of us that we're building. So things move pretty fast.
Nishant: I wanted to get a sense of future opportunities as well. Grocery is one space that you've started to expand again. What's happening there? Will it be an important business line for you going ahead?
Gaurav: Food is very core to us, and we've created multiple things in food for restaurants, whether it's food delivery whether it's dining out or raw materials. Grocery is something new for us.
We are actually going to launch a marketplace model on Zomato for grocery. We did it last year as a response to the Covid pandemic to help our customers. We took a break from that and now we are actually relaunching grocery and we'll see how it goes. It's one of the new things that we're trying.
Nishant: What changed for you to attempt grocery again?
Gaurav: I think the external context of how online groceries playing out has changed as well. Last time we did it was to actually help our customers because at that time people were not looking for delivery. Our customers were looking for grocery coming at home and we enabled that quickly given the network that we had, and once food delivery came back up again, we actually went back to focus on food delivery.
Now we understand grocery is an important part of a hyperlocal service that we can provide to our customers and that's why we're getting back in.
Nishant: Losses is something which you know everyone will be watching out for. You've managed to trim your losses between FY20 and FY21. But how big a challenge is that going to be?
Gaurav: The way we see this is there are existing businesses and parts of the business will become mature and they of course have to be better on the unit economics front and there are new parts of business or new opportunities that you continue to invest in. I think that's the philosophy we've followed till now and even after listing, we'll continue to do the right thing for the business and continue to invest behind the right growth opportunities while we make sure the mature part of the business is actually doing well from a unit contribution perspective as well. We'll optimize for growth and unit economics like we've done earlier as well.
Nishant: So are you saying that food delivery is the mature business right now for you?
Gaurav: Even though you might think the food business in mature, there's still a lot of opportunity going forward. While we get new customers to come into food delivery, the economics for that will be different. We look at the business at a much more micro level, like at a zone level, at a customer level.
Sajeet: Do you see the business turning profitable on the operational level in the coming financial year?
Gaurav: As I just mentioned, we'll continue to optimize for growth and unit economics. We see existing mature parts of businesses becoming better from a unit economics point of view and we'll invest behind growth as we go along. I can tell you one thing, after listing nothing would change in our behavior and how we build the business as we continue to do the right thing for building the business like we've done earlier and that's about it.
Sajeet: Can you give us a sense of the sales and advertising expenses, because that has come down drastically in the last financial year from 88% to 24.8%-odd. Is this a sustainable and normalised level of sales and advertising expense going forward?
Gaurav: Whatever you see in our business has come over a period of time. So, the market has evolved; customers have understood food much better; restaurant partners have started operating much better; we've also understood the space much better. So, all the movement that you see is actually an evolution of the market over the last three to four years and not necessarily to do anything with the pandemic. How it will play out in the future, I think we'll have to see.
Sajeet: Was the evolution very fast last financial year because of the pandemic?
Gaurav: Covid has definitely accelerated a lot of behavioural changes which is good to see. For example, food has been a need for a lot of people food, has also been a sole source of entertainment for a lot of people during the lockdowns. But we also need to realize that once you order three-four times, or once you consume three-four times from a restaurant, it becomes habit for you. So, some of these habits are here to say.
Sajeet: Your average order size in FY21 went up to around Rs 396 versus Rs 278 earlier. I understand a lot of high value orders came from the premium restaurants which are attached to you. Do you see the similar level of average order value going forward as well?
Gaurav: Average order values that we see today has also been a journey, like everything else, over a period of time.
The restaurant industry of course has gone through a tough time in the last one and a half years. The good thing is the food delivery business has actually done well, so they've got good business from that and we see a lot of good restaurants even premium restaurants starting food delivery now, which they weren't doing earlier. Some of those factors are fundamental, and all these are good changes for the industry.
Nishant: There's a lot of noise against food aggregators in the country, National Restaurant Association Of India is vocal. Many premium restaurants are starting their own delivery. And you have upcoming competition from Amazon. How do you think these factors will play out simultaneously and how worried are you in terms of the competition that you're going to face going ahead?
Gaurav: What that tells you is that this space is very exciting and there's so much opportunity. Order direct always existed as a channel. You could always pick up the phone and order from your favourite restaurant.
Restaurants also are saying that this is one additional channel that they're trying to digitise right now, which is a good thing. They're not saying it's a substitute for platform; and platforms like ours drive tremendous business to restaurants. An order direct channel will actually be a small part of that. We've always enabled restaurants to do better in terms of technology and be able to deliver better customer service. And in the future also wherever we can, we will do that. Our motto is if the restaurant industry grows, we will grow.
As far as competition from other players is concerned, competition is good. It keeps you on your toes, forces you to do better. We're very clear that we have to continue to execute well like we have done in the past. That doesn't go away. This is a very long game that we're playing; it's a long opportunity we are building, and we're very committed to actually just making sure that we keep pulling ourselves back up to be running in front of this race.
Nishant: The NRAI has moved the CCI against alleged anti-competitive practices like data masking. How will that impact your future prospects?
Gaurav: The issues that have been highlighted there are misplaced. We work with thousands of restaurant partners today for food delivery, for dining and more. And we continue to do that.
Our endeavour is to talk and understand their issues, make them understand how to solve for them and get back to business. To be honest, in any partnership or friendship, there are some times where you have fights right? That's part of life. It's not all rosy at all points in time. I think we will treat it like that and we will make sure that we continue to work together
Sajeet: I think all that is part of the competitive landscape. My question here is on commissions and customer delivery charges because that's the biggest revenue driver in your unit economics. You saw a sharp jump happening in that from Rs 43.6 to Rs 62.8/per order. What kind of headroom do you have to increase those commissions and delivery charges?
Gaurav: We fundamentally believe that the ecosystem has to be sustainable, and that the ecosystem has to do well for us to be able to do what we have to do. When I say ecosystem, I mean restaurant partners, I mean delivery partners, and I mean our customers. That's the philosophy we've taken so far and that is the philosophy we'll take going forward.
Sajeet: So is there head room or not?
Gaurav: I cannot comment on that right now.
Sajeet: But how do you see these two evolving over a period of time?
Gaurav: The business has to evolve. Everything will evolve. It's very difficult to predict what will happen, but yes of course, things will have to evolve.
Sajeet: The contribution margin, the percentage of gross order value, it's around 4.1% as per your RHP. It has fallen slightly from Q3 to Q4. Any reason why it is that way? Because from 6.5% in Q1, it's fallen to 4.1% at the end of Q4.
Gaurav: Our business is a mix of existing mature parts and new opportunities. You find in existing businesses or new things, as we get more new users into the fold, and we actually try to grow the category coverage, it actually impacts what contribution margin we look at and that's what's happening here.
We're getting many more new users to try for delivery even now and when you get them to try in the beginning, of course, the unit numbers are different and that's the impact that you see.
Sajeet: Can you give us a sense of what's happening in your overseas ventures? You have a lot of overseas ventures and if you look at the losses, nearly 40-45% are coming from the overseas ventures. Can you give us an idea of how these ventures are proceeding and whether they will require further capital infusion in the next couple of years so that they also mature?
Gaurav: We're very focused on India as an opportunity and a lot of mindshare goes there. We believe there's so much to do in India and that's how we're building our business.
Sajeet: How do your overseas ventures work? Is there a separate team?
Gaurav: In most of our international locations, we have only the review search and discovery platform that we run remotely.
Nishant: Does that mean you want to put less focus on the international market, and you will eventually consolidate everything and only focus on India?
Gaurav: At this point we're very focused on India and that's the main part of our business.
Nishant: The average monthly transacting users seems to have come down between FY20 and FY21. You would like to believe that with the pandemic and people staying at home, they might be ordering more. What's been the trend like there?
Gaurav: In the first period of Covid, there was a lot of fear of surface transmission and people in India resorted to what is most convenient which is home cooked food, just to keep themselves safe. But as we've realised that there is no surface transmission and food delivery is safe, we've delivered crores of orders in the last one and a half years without even a single case of transmission.
I think once that belief came back, we've seen, as you can see in our numbers as well, for Q3 and Q4 last year, people have started ordering food and now that Covid lockdowns are easing, people are also actually going and dining out.
So, I think the first wave of Covid of course was different and after that we've seen the growth and the business come back because people understood that there's no fear of surface transmission as such.
Nishant: I wanted understand the thought process behind going for an IPO amid the pandemic. Did you always plan on doing the IPO this year or did the pandemic force you to fast track your plans?
Gaurav: We felt that this is a good time for the business to actually go public and to be honest when we asked the question 'why not?', we didn't find a better answer.
Sajeet: You're raising Rs 9,000 crore in fresh issue. What is it going to be used for? Because you've mentioned that around Rs 6,750 crore would be used for organic and inorganic usage. Can you be a bit more specific?
Gaurav: Organic and inorganic are both channels of growth for us. On the organic side, of course we need to invest in getting more customers to try for delivery, to try food from restaurants. We need to continue to build our delivery capabilities and we need to build our technology infrastructure.
As we go along, for existing businesses or new businesses, if we find a suitable inorganic option to grow the business, we'll take that call at that point in time.
Sajeet: From a business point of view, the dining side of the business has been very muted for the last financial year. When do you see that picking up?
Gaurav: Yes, it's been very tough for the dining industry for the last one and a half years. Even between the two waves of Covid when we saw restaurants opening up a bit, we saw customers going back. So, we're hopeful that as the lockdown eases up and things become better, that part of the industry also comes back up and we have a lot of products there that we already have that we can leverage to make sure restaurants can make the most of it and customers can have a great experience when they come back to their favorite restaurants.