Why Zomato is a GOLD MINE in the making? Let us Understand
Hi everybody. On 14th of July 2021, Zomato will officially go public. With 9000cr about to be raised, this is by far one of the biggest and perhaps the most awaited IPO of 2021. But as far the numbers of the company are concerned, Zomato seems to be in deep deep trouble!
From 2018 to 2020 while the revenue of the company went from just 65 million to 368 million dollars during the same time, the losses exploded by 20 times from just 15 million dollars to more than 300 million dollars. And everytime Zomato tried to become profitable it has lead to nothing but outrage.
They first tried to launch Zomato Gold to lock in the customers from going to Swiggy but that lead to massive losses to restaurants which forced them to shut the service down. Then they tried increasing the prices of their dishes but that ended up making the customers unhappy!
So from the outside, it almost looks like the company is stuck in a vicious cycle of cash drain which is leading to nothing but more and more losses. And this is what every single expert and fundamental analyst, more or less, has to say.
But you know what? There is one very very important factor that very few people are taking into consideration and this factor could turn Zomato into a gold mine and if you only understand this factor you can go on to make the most strategic investments into food tech space in the next 5 years.
What exactly is this X factor and how can Zomato or Swiggy turn into a goldmine investment?
The answer to this question lies in a peculiar case of a Silicon Valley start up called June. This is a story that dates back to 2013 when June became one of the pioneers to develop something called the smart oven. This oven was so amazing that it back in 2013 itself it had a screen for viewing recipes, could be controlled over Wi-Fi and it was also Alexa-compatible which allowed voice command control back in 2013 itself!
The company was doing so well that it was able to raise a series of funding from heavyweight investors. And in 2018 June also secured an investment from Amazon Alexa Fund and the company grew rapidly from 2015-2019. And just when everything looked perfect something crazy happened. Just a year later, Amazon launched their own smart oven which had exactly the same features as that of June including Wi-Fi connectivity and Alexa integration.
But the highlight over here was that Amazon Smart Oven was priced at half the price of June Ovens. While June was selling its oven for about $499-$699 Amazon’s oven would have costed you only $250 back then And that is how this rising startup became a competitor of its own prime investor and amazon started eating into profits of its own best seller.
Now the story of June is not the only incident. Every year, Amazon unveils hundreds of products and they have developed an intricate playbook to put every competitor out of business. And if you look at the procedure as to how exactly this is done, it’s pretty straightforward.
Step 1, they find a best selling product. Use the data from the seller’s profile and make a list of all the specifications that makes that product a best selling product.
Step 2, they read through the reviews and find out what exactly customers love about that product. And then, they buy a manufacturing unit to get them to make the exact same product and then they aggressively price it at 30–40% lesser than the best selling product. And this is how without trial and error Amazon takes a cake walk to make millions of dollars by selling products from all categories by successfully eliminating the bestseller himself.
The Amazon Study!
And all of this is being done because Amazon has 3 incredible superpowers. Number one, it has the consumer data. So, Amazon knows exactly how much the customer can afford and what kind of products the customer wants to buy. Number two, it has the data of every seller. So they know what features make a product the best selling product.
And last and most importantly Amazon has the super power of digital real estate by which it can give special preference and rank its products at number 1 position and make million-dollar sales. This is what makes consumer and seller data practically a GOLD MINE for Amazon! And guess what? This is exactly the case with Zomato!
In this case, Zomato has all the data about thousands of restaurants and millions of consumers who have used Zomato to order food. Zomato knows exactly which dishes are in high demand in which area. And on top of that Zomato also knows what is the optimum price for a particular dish. In fact, they even know what is the best time to sell a particular dish.
For example, Zomato knows that in Hinjewadi Pune Biriyani priced at ₹150 will go on to become best seller, and the best season for biryani is from November to December. So this way, Zomato and Swiggy are practically sitting on a data gold mine and they can use it very easy to launch their own food chain eventually undercutting the existing food chains to make millions of dollars in profits. And this can turn Zomato and Swiggy both into super profitable businesses in no time.
Both Zomato and Swiggy have already ventured into it using something called the concept of “Cloud Kitchen”. And there are 2 Zomato services that very few people are talking about. And those are: Zomato Kitchen and Zomato Hyperpure.
Understanding the Depth
To understand the depth of this you first need to understand what is a cloud kitchen. In simple words, cloud kitchen is nothing but a super efficient restaurant which only gives out take way orders and has no dining space. It’s basically just the kitchen of the restaurant that takes online orders and gives it out to delivery.
A simple example of the same is Behrouz biryani. Its got no outlets but has got a fantastic digital presence. And this concept of cloud kitchen ladies and gentlemen is a revolution in the making. Why? Because it has got some game changing cost benefits over a conventional restaurant. Now, just to put that on paper with standard assumptions and costing here’s what the comparison with the conventional restaurant looks like.
If you take a conventional 50 seater restaurant it would require 6 lakhs of rental cost considering that you would need 2000 sqft of area. 20 Lakhs in rental deposit, 8–10 Lakhs for licenses, 8–15 Lakhs for equipment, working capital which includes inventory, salary and light bill will require about 20 lakhs.
And most importantly, the monthly revenue needed to break even in 2 years is abut 20 lakhs. On the contrary, if you look at a cloud kitchen the space needed would reduce significantly and would cost you just about 50,000 to 1 lakh in rent.
Apart from that, you just have to pay 1 lakh in rental deposit licenses would cost you the same, equipment would cost you the same but the working capital needed to operate a cloud kitchen will go down by 50% as compared to a restaurant to just 10 lakhs and most importantly the revenue needed to break even in 2 years also goes down by 50% again to just 8-10 lakhs.
And the benefits? Well you’re looking at saving of 5 lakhs in rent per month. You save 19 lakhs in rental deposits, 10 lakhs in working capital which results into the best part that is 10 lakh rupees less is needed as a monthly revenue to break even in 2 years.
And this is the insane cost benefit that a cloud kitchen has over a conventional restaurant. And here’s where most people underestimate the power of digital marketing. People, instead of investing into infrastructure heavily even if a fraction of the money, in this case, even if 1 lakh rupees is rotated in marketing it is more than enough to drive an insane amount of traffic to the cloud kitchen and on paper what looks like 2 years can even be achieved in 1 year.
A standing example of the same is Rebel Foods. Now, this is the company that owns Faasos and Behrouz Biryani. And you know what? Both these brands, individually, bring in about 16-17 crores worth of business per month! And they have about 300 cloud kitchens across 35 cities in the country.
Best part: all of this was done in less than 10 years from 2011 from 2020. and here’s where Zomato Kitchens come in. And all these brands like Fasoos, Behrouz, Good Bowl, Box8 they are all using Zomato or Swiggy to sell their dishes, right? Well, in that case, if you see Faasos and Zomato, Behrouz and Zomato share the exact same relationship as of June oven and Amazon.
So just like Amazon had sellers’ data and knew everything about what worked for June and what did not. Zomato knows exactly which Behrouz cloud kitchen is doing well and which is not. Just like Amazon had customer data and knew exactly what is the purchasing power of the audience and who wants to buy an oven.
Zomato knows exactly who is more inclined to buy a sandwich who is more inclined to buy a roll and who is more inclined to buy a biryani. And most importantly just like Amazon had the superpower of digital real estate to enlist its products on top Zomato can particularly open up its own cloud kitchen and list its products at the top with an aggressive pricing model and undercut its own best sellers like Behrouz and Fassos.
And the best part is instead of being so evil Zomato and Swiggy are doing it more ethically now which is where ventures like Zomato Kitchens and Swiggy Access come into play. Zomato kitchen is this wonderful partnership between Zomato and a bunch of hand picked brands across the country wherein Zomato uses its superpower of data and chooses the most profitable location in a particular area.
In this case, it is the rise of the next generation food-tech startups and Zomato’s IPO will mark the beginning of this revolution in India. That’s all from my side for today guys. If you learned something valuable please make sure to hit the like button in order to make me happy and keep bringing these types of case studies!