The fact that a Unicorn Indian Startup raising funds through an Initial Public Offering is proof that the Indian Start-Up Ecosystem is alive and thriving. The Zomato IPO is one of the biggest IPOs that retail investors, as well as the big sharks, have been eying out for.
Zomato is all set to open its IPO on July 14 with a price band between Rs. 72-26. The company aims to raise Rs 9375 Crore funds and its holding company Infoedge is looking to sell off Rs. 375 crores from it. Its grey market premium price has trickled down to Rs. 10-16. This may because of its crazy valuation of Rs. 60,000 Crores for a loss-making company. Zomato has been valued more than the biggest QSRs in the country and many investors are very flimsy to consider investing in this IPO. Most retail investors question the fundamentals of the company and speculate whether the start-up can survive the next ten years.
When we take a look at the financials of the company, we can see that Zomato has been incurring huge losses in crores year on year. This has severely affected the outlook of the company by many investors whether if it is really worth investing in. But we are missing out while analyzing the company is that Zomato cant be equated to a company from the Quick Service Restaurant Industry. Zomato is a technology and logistics company and it is normal for such companies to incur heavy losses during its expansion phase. It is during this period the company aims for customer acquisition. Once a critical mass in the customer base is acquired, it makes more sense for the company to target profitability year on year and maintain a healthy balance sheet.
Zomato's biggest leverage in the Indian economy is its untapped internet penetration to its population. At the present, over 43% of the population has access to the internet based on the projection from 2019. With the advent of the pandemic, the numbers would be even higher than the projected figures. This is Zomato's opportunity to raise fresh funds to run aggressive expansion strategies to acquire customers and eventually raise the order frequency, volume, and average value per order.
While comparing to the global food tech industry competitors, we can see that prorating the fraction of the growth with respect to theirs, makes our country's potential to grow twice the size of the current industry value very possible.
But if Zomato uses the fresh funds to execute the same business model, it may still result in being a loss-making company. The answer lies in integrating a new business model to the existing set of operations by incorporating Data and Partnerships into the mix.
In this day and age of data as the new gold, Zomato is has a competitive advantage in the industry. The company can analyze massive amounts of data to understand customer behavior and order types. From the database, the would have information such as
Competitor Order Data
Peak Ordering Time
Average Order Value and Type per area
Best Selling Dishes
Sweet Spot for Competitive Pricing
High Conversion Ad campaigns
And much more information that can give actionable insights for the company to execute strategies for a set to goal with the fresh set of funds available for them
This data would be more than enough to scale their cloud kitchens aggressively while going head-on with the industry leaders in the cloud kitchen space.
Ethical Monopoly Model for Collaborative Cloud Kitchens
Clearly, with all the data Zomato is at a stark competitive advantage as compared to its peers. This can make them take advantage of the weak players and capitalize on the industry. But also the can-do an ethical monopoly-based model for collaborative cloud kitchens.
As the pandemic has struck many businesses in a lot of ways but they have been resilient to adapt to the changing conditions and run operations to make ends meet. Most restaurants have shifted their model to a cloud kitchen set up with different aggregators to bring in customers for them at a premium of 28-30% per order. This would result in them incurring fixed costs, raw material costs, and operational costs that would finally funnel into profit.
What Zomato can do here is that they can analyze the popular restaurants around the area to offer collaborative spaces that would reduce their expense to bring in more profit. The independent business would be incurring predominantly variable costs and would be able to have more flexibility in their operations.
In this current model, Zomato will take care of the supply and operations to have better profits margins and commissions for both parties.
But still, would you Go in for the IPO?
All of these are potential growth strategies that Zomato can implement but we are still unclear on the direction of its trajectory,
At least we can go in for the listing gains if we don't believe in it for the long run :)