Zomato is devalued, but there is still hope for food-tech
After Flipkart, online restaurant guide and food ordering firm Zomato was marked down by half at $500 million. The online food business has been in trouble. Last year, Tiny Owl, Spoonjoy and Dazo shut its shops. But, some still have hope.business Updated: May 09, 2016 18:46 IST
After Flipkart, another Indian unicorn (start-ups valued at a billion dollar) is hit by the devaluation bug.
On Sunday, HSBC valued Zomato, the restaurant listing and online food ordering company, at half of what it was, during its last round of funding in September 2015.
The report said that Zomato is worth $500 million.
HSBC stated that of the 23 markets Zomato is present in, none are profitable. Continued investments in delivery and loss-making overseas business will require Zomato to raise more capital, raising a question of it being a real unicorn.
HSBC’s report comes at a time when valuations are being corrected and fewer companies are being funded. Some investors are even calling it a “start-up bubble”.
Last week, two companies Valic Co 1 and Fidelity Rutland Square Trust II wrote down Flipkart by 29% and 39.6% respectively.
Zomato’s founder and CEO, Deepinder Goyal, however, disagrees with HSBC. “Delivery is a small part of our advertising business… (The report) also claims that we will need to invest in our own last mile logistics to hit profitability. We know that the unit economics of owning a food delivery fleet can never work out.”
But, Goyal failed to address Zomato’s average order size and revenue.
The online food business has been in trouble. Last year, Tiny Owl, Spoonjoy and Dazo closed its shops. Even Zomato downsized its team by 300.
Some still have hope.
“It might seem that the industry is way too limp, but it’s not all that bad,” said Saurabh Kochhar, CEO of Foodpanda -- the online food ordering firm hit its peak with 70,000 orders, and is present in 150 cities. However, Kochhar said that scale helps, only if the fundamentals are strong. “You cannot have scale if you are losing Rs 200 in every order,” he said.
Swiggy has gone the opposite way – it believes in having its own fleet to deliver. “Most of our money goes into building technology and our delivery team,” said Nandan Reddy, co-founder of Swiggy. Its average delivery time is 37 minutes, down from 48 minutes, a year ago, and does more than 35,000 orders every day.
Investors agree that the food-tech space is going through a change. “Every industry goes through a process of consolidation and all companies go through ups and downs, but there is no inherent problem with the sector,” said Padmaja Ruparel, president of Indian Angel Network.
Replying to the HSBC analysis in a blogpost, Zomato’s Goyal said the “assumptions and statements” make it look like “they’re coming from someone who doesn’t – and hasn’t bothered to – understand the space well”.
In the post aimed at 2,100 staffers across the globe that they mustn’t fret and “get back to work”, Goyal said Zomato drove over 50% of the business for some of the bigger restaurants in the country. The traffic in India grew 8% from March to April, with 8.5 million monthly unique hits. In 18 out of 23 operating countries, it’s the market leader.
Highlighting the company’s growth, Goyal said: “Our ad revenue has doubled over the past nine months. Costs have been rationalised. Burn is down 70% from the peak – it was high because we were experimenting with various business models and geographies, which we have cut down drastically – and we are now focused on the large opportunity in front of us in our core business and core markets.”
Stressing that “nobody who knows our business has marked down our valuations”, Goyal said “In fact, our existing investors are bullish about us and are willing to back us further, if needed. And they have categorically said that our valuations are justified”.
(With inputs from agencies)