Cus Zomato: Delivering convenience - Edelweiss

 
Cus Zomato: Delivering convenience - Edelweiss
June 2021
Sector Report

Internet

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                                                                   cus
                                        Zomato: Delivering convenience

Pranav Kshatriya                   Nihal Mahesh Jham
+91 22 4040 7495                   +91 22 6623 3352
Pranav.Kshatriya@edelweissfin.com   Nihal.Jham@edelweissfin.com

Sandip Agarwal                     Pulkit Chawla
+91 22 6623 3474                   Pulkit.Chawla@edelweissfin.com
Sandip.Agarwal@edelweissfin.com                                      Edelweiss Securities Limited
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                                                          Contents

                                                          Executive Summary ................................................................................................. 2

                                                          Ordering frequency- Key Driver of LTV .................................................................... 5

                                                          Quality of Network Effects .................................................................................... 12

                                                          Dissecting disintermediation ................................................................................. 15

                                                          Large addressable market ..................................................................................... 20

                                                          QSRs: Beneficiaries with a caveat .......................................................................... 24

                                                          Business Model ...................................................................................................... 30

                                                          Financial Outlook ................................................................................................... 34

                                                          Valuation ............................................................................................................... 41

                                                          Key Risks ................................................................................................................ 46

                                                          Global Peer Set ...................................................................................................... 47

                                                          Management Overview ......................................................................................... 62

                                                          Financials ............................................................................................................... 64

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                                                          Executive Summary
                                                          Zomato IPO is shaping up as a landmark: the first IPO of an India-based
                                                          large-scale consumer platform. In its essence, the upcoming IPO
                                                          shows investors’ hunger to pay top dollar, at rich valuations, for a fast-
                                                          growing food delivery business in a large addressable market. Indeed,
                                                          Zomato is well-entrenched and fast-growing, but also loss-making.
                                                          Our menu for this note includes sizing up emergence of food delivery
                                                          platforms globally (Meituan, Doordash, Deliveroo) and decoding
                                                          Zomato’s success recipe using our proprietary three-pronged
                                                          framework, comprising: i) quality of network effect; ii) consumer
                                                          lifetime value (LTV); and iii) total addressable market. (Link)
                                                          Food delivery platforms presuppose network effects, which drive
                                                          scale. But that’s much weaker than other global platforms due to local
                                                          clustering, which means food platforms seldom have pricing power—
                                                          thereby curtailing profitability. Global insights indicate consumers
                                                          love the sheer convenience of online food ordering, leading to higher
                                                          ordering frequency, which drives growth and – eventually – profits.
                                                          For restaurants, delivery platforms are a necessary evil: a lower-
                                                          margin channel that also cannibalises dine-in, but expands catchment
                                                          and drives incremental business. Restaurants/QSRs (McDonald’s,
                                                          Domino’s) are hence trying to disintermediate delivery platforms, but
                                                          it’s a tall order—to emulate convenience, variety and experience
                                                          offered by platforms. Meanwhile, we do view Swiggy as a worthy
                                                          competitor: smaller, backed by marquee investors and growing faster.
                                                          Zomato’s success rests squarely on its execution vis-a-vis Swiggy.
                                                          On balance, we have an optimistic growth outlook for food delivery
                                                          platforms in India and their unit economics. Zomato’s valuation has
                                                          high sensitivity to average order value (AOV), and we peg its valuation
                                                          at USD7–9bn (base case: USD8.1bn, 49% premium to its last funding
                                                          round). A notable dip in AOV due to single orders – instead of family
                                                          orders – and rising discounts due to increased competitive intensity
                                                          are the key risks to unit economics, and valuations.

                                                          A plateful of levers: A classical aggregator model
                                                          For a small fee, food delivery platforms offer consumers a variety of food choices,
                                                          ease and a consistent ordering experience. Restaurants gain from starkly larger
                                                          catchment and an on-demand delivery fleet. But, since food delivery platforms have
                                                          higher market power, they can tweak commissions for restaurants as well as delivery
                                                          partners, or even delivery charges levied on consumers, to drive profitability.

                                                          A platform’s stickiness also drives higher advertising revenue from restaurants. Food
                                                          delivery platforms also typically run loyalty programs that reduce delivery charges,
                                                          but ensure higher ordering frequency. Hence, we see food delivery platforms
                                                          operating on an asset-light model with high consumer loyalty, which gives them a
                                                          plateful of levers to drive unit economics.

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                                                              Main ingredient: Convenience drives ordering frequency, LTV
                                                              Food delivery platforms’ LTV is driven by: i) average order value (AOV); ii) take rates;
                                                              iii) delivery charges; iv) average ordering frequency; and v) churn rate. Of these, we
                                                              note that ordering frequency is the key driver of LTV; other parameters largely settle
                                                              at a steady state after initial improvements.

                                                              In this way, convenience of online ordering and an array of food options on tap are
                                                              the key drivers of increasing ordering frequency. In fact, AOV has remained broadly
                                                              flat in most geographies. Take rates tend to increase during initial years and then
                                                              plateau as platforms focus on on-boarding restaurants. Delivery charges decline as
                                                              order volumes rise, kicking in efficiencies. However, since these are point-to-point
                                                              orders, there are limits to efficiencies. Churn typically dips as customers tend to
                                                              gravitate towards one platform after tasting a few.

                                                              Mild flavour: Network effect modest…you get scale, not pricing power
                                                              Network effect in food delivery platforms is limited due to local clustering,
                                                              commoditised offerings and vulnerability to multi-homing. Network effect for food
                                                              delivery platforms are somewhat similar to ride-hailing and is lower than global
                                                              platforms in messaging, social media, etc. Typically one large player dominates even
                                                              in large markets, such as the US and China, but they have limited pricing power and
                                                              hence low profitability. Local clustering thus has had a fallout: even reasonably well
                                                              established players in a local market can lose market share as newer players with
                                                              more efficient offerings enter. Hence, operational excellence by driving down
                                                              delivery costs, among others, is critical to maintaining leadership and profitability.

                                                              Alternative recipe? Yes, but risk of disintermediation low
                                                              With restaurants’ revenue from food delivery platforms rising materially during the
                                                              pandemic, their profitability was hit due to high take rates. Hence, restaurants are
                                                              trying to orchestrate the direct food delivery platforms by collaborating with SaaS-
                                                              based ordering platforms and third-party delivery services. While overall consumer
                                                              experience is satisfactory, we believe most standalone restaurants do not have the
                                                              financial and marketing wherewithal to drive orders through their own platforms.

                                                              Many payment apps such as PhonePe, Paytm and GPay are aggregating direct
                                                              delivery platforms, restaurant discovery and ordering experience remain much
                                                              poorer than specialised food delivery platforms. On the whole, risks of
                                                              disintermediation are low for food delivery platforms, although a portion of high-
                                                              value ordering such as gourmet food and bulk orders may shift to direct delivery.

                                                              Stomach for more? Indian food delivery market can gulp lots more
                                                              Online food delivery platforms are at a nascent stage in India with an industry size
                                                              of meagre USD4.2bn (USD21bn for USA, USD90bn in China). It is, however, growing
                                                              rapidly in the country with food delivery reporting a staggering 147% CAGR over
                                                              FY18–20. However, with the pandemic nibbling away at the business, the industry
                                                              had to swallow a 41% decline. Even so, growth is phenomenal and driven by
                                                              increasing adoption of food delivery platforms, rising ordering frequency, and an
                                                              expanding proportion of restaurant food consumption versus home food.
                                                              We believe adoption of food delivery platforms in India will be a function of user
                                                              education, availability and ease of payment options, and reach of platforms. Since
                                                              India has only 45–55mn online food delivery users compared with 740mn mobile
                                                              data connections, online food delivery platforms has swathes of space for
                                                              penetration that can fuel its growth for a long time.

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                                                          Culinary comparison: QSRs are beneficiaries with a caveat
                                                          Zomato’s public filing has some interesting trends from the restaurant/QSR
                                                          perspective. We note the following. i) Jubilant FoodWorks’ recovery has been similar
                                                          to Zomato’s GOV, pointing to the strength of its delivery-based model. (QSR: The
                                                          Right Combo) ii) Active competition has not reduced as initially thought. iii)
                                                          Platforms are a long-term enabler for the sector. That said, it is a lower-margin
                                                          channel than dine-in. Incremental business drives profit but cannibalization impacts
                                                          negatively. We also compare JFL with Zomato —similarities aside, the two business
                                                          models are fundamentally different with Zomato’s being more scalable.

                                                          Tempting aroma: Consumers globally are loving food delivery
                                                          We note that evolution of online food delivery is different across players and
                                                          geographies, but with a few similarities. Many companies such as Uber, Grab and
                                                          Gojec got into food delivery because they already had riders that could deliver food.
                                                          Players such as Zomato went from restaurant listing to delivery, while a few like
                                                          Swiggy and DoorDash started as online food delivery platforms. Almost all delivery
                                                          platforms across the globe have seen a huge spurt in delivery volumes riding on
                                                          consumer convenience. However, we also note that most delivery platforms make
                                                          losses at operating level; even the most matured ones work at meagre operating
                                                          margins, e.g. Meituan at 4.2%.

                                                          Foodies can surprise: High growth driving up valuation
                                                          Zomato’s global peers trade at 2–12x 1-year forward price to sales. The multiple is
                                                          contingent on growth potential of a market and market share of the player. For
                                                          Zomato, we use a two-stage DCF model, which yields a value of INR581bn
                                                          (USD8.1bn). Our assumptions: 32% revenue CAGR over FY21–30, 10% FCF growth
                                                          for next eight-years and 10% for second-stage, and 4% terminal growth. The
                                                          valuation has high sensitivity to AOV; for instance, a 10% lower AOV will suppress
                                                          valuation by 22%. We believe Zomato’s valuation depends on its ability to sustain
                                                          and fortify its leadership in the Indian food delivery market.
                                                          For perspective, Swiggy is slightly smaller than Zomato, but has delivered stronger
                                                          growth; hence, for Zomato to sustain valuations, it must gear up.

                                                          Rigours of recipe: Key risks
                                                          As online food delivery, and the gig economy in general, is at an early stage of
                                                          development, the ecosystem is evolving and there are risks to watch out for: i)
                                                          unfavourable regulations curtailing pricing or increasing delivery costs etc; ii)
                                                          increase in competition, leading to weaker unit economics and higher costs, would
                                                          impact profitability; iii) deeper-than-anticipated fall in AOV; iv) delivery and other
                                                          cost escalations and inability of platform to pass them through; and v) despite low
                                                          odds of success for direct delivery, an unlikely success can potentially disrupt food
                                                          delivery platforms’ business models, including Zomato’s.

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                                                              LTV = f(ordering frequency)
                                                               Convenience of online ordering is driving ordering frequency, which is the most
                                                                important driver of LTV.

                                                               LTV = [Average order value (INR) X take rate (%) – Delivery charges (INR) –
                                                                Discounts (INR)] X Average ordering frequency/ Churn

                                                               Average order value (AOV) tends to remain steady under normal circumstances.
                                                                Zomato savoured an AOV surge during the pandemic as: i) more family ordering
                                                                took place than individual ordering; ii) premium dine-in restaurants joined the
                                                                food delivery platform bandwagon; and iii) consumers showed increasing
                                                                preference for hygienic restaurants, even though more expensive. To be sure,
                                                                some of these factors are temporary, and might reverse.
                                                               Delivery charges tend to dip as ordering volume rises, bringing in efficiencies.
                                                                However, as these orders are point-to-point orders, there are limits to which
                                                                efficiencies can be extracted.

                                                              In our last Internet report Decoding platform economy, we had laid out the
                                                              framework for evaluation of platform businesses on the basis of three parameters:
                                                              i) LTV of customers; ii) the quality of network effect; and iii) total addressable
                                                              market. We are using the same proprietary framework for evaluating Zomato.

     Ordering frequency: Biggest driver of LTV                Convenience of online ordering driving LTV
                                                              Consumer lifetime value is one of the crucial parameters in determining the
                                                              valuation of the company. Below equations shows the LTV of customers, which is a
                                                              function of the following terms: i) AOV; ii) take rates; iii) delivery charges; iv) average
                                                              ordering frequency; and v) churn rate.
                                                              LTV= {Average order value (INR) X take rate (%) – Delivery charges (INR) –
                                                              Discounts (INR)} X Average ordering frequency/ Churn
                                                              We note that LTV is largely a function of AOV and ordering frequency since other
                                                              parameters largely settle at a steady state after initial improvements. Globally, we
                                                              have seen improving average ordering frequency as the biggest driver of LTV while
                                                              churn dips as customers tend to gravitate towards one platform after trying a few of
                                                              them.
                                                              Average order value has largely remained flat in most geographies. Besides,
                                                              platforms have cut down on the discounts for attracting consumers and driving
                                                              repeat orders. Besides, these platforms have increased the take rate as restaurants
                                                              also see the benefit of higher asset turnover. Delivery charges are seen declining
                                                              with increasing ordering volume bringing in efficiencies. However, as these orders
                                                              are point-to-point, there are limits to which efficiencies can be extracted.

                                                              Average ordering frequency is rising across the globe
                                                              Across the globe, cohorts tend to indicate that popularity of food platforms
                                                              continues to be on the rise. This trend has been consistent across both developed
                                                              and emerging countries. Not only are the total number of users rising rapidly, the
                                                              frequency of ordering has been on an uptrend across the world. GrabFood, which
                                                              has seen a sharp increase in GMV per user cohorts across users. While average order
                                                              value grew substantially only in 2020, average ordering frequency has been the
                                                              major driver of GMV per user cohort.
                                                              Similarly, the cohort for Doordash shows that the marketplace GOV from each
                                                              customer cohort has gone up year after year. Also newer cohorts are spending

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                                                            higher. For instance, spend of 2018 cohort in Year 2 is higher than that of spend of
                                                            2016 cohort in year 4 and 2017 cohort in year 3.

              GrabFood – GMV per user cohort                                                  DoorDash – Marketplace GOV cohort

    Source: Company                                                              Source: Company

                                                            In China, Meituan’s ordering frequency almost tripled over the last five years.
                                                            Coupled with rapid growth in new users, this has been the primary driver of growth
                                                            for its gross merchandise value (GMV).

                Meituan – Rising average transactions per user                                Meituan – Transaction cohort

      30                                                          28.1
                                                        27.4

      25                                     23.8

      20                          18.8

      15                12.9
             10.4
      10

       5
             FY15       FY16      FY17       FY18      FY19       FY20

     Source: Company, Edelweiss Research                                         Source: Company, Edelweiss Research

                                                            Average order value (AOV) trends are mixed
                                                            While GMV has increased across companies, not many of them have seen any
                                                            meaningful increase in their AOV. Rather, there is no clear trend in the AOV across
                                                            the board. DoorDash and Delivery Hero in developed markets have seen a drop in
                                                            their AOVs over the last few years. On the other hand, Meiutan has seen a 14.3%
                                                            AOV CAGR over the last five years, but the AOV spurt was in the initial two years
                                                            while the three-year CAGR is barely 3.7%.

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                No clear trends in AOV across global companies (rebased to 100)

      200

      170

      140

      110

        80

        50
                      FY15                    FY16                       FY17                     FY18                    FY19                      FY20

                     Meiutan                   Doordash                       Just Eat Takeaway                    Delivery Hero                   Grubhub

    Source: Company, Edelweiss Research

                                                              Zomato AOV spurt led by family, premium ordering
     Zomato’s AOV increased 32% in Q1FY21 to                  Zomato witnessed a 32% increase AOV post lockdown announcement as highly
     INR378, from INR287 in Q4FY20 as lockdown                mobile young professionals started working from home and they tended to order
     resulted in larger ordering for family, and              for the family, instead of ordering for an individual. Also, premium restaurants,
     ordering from premium restaurants                        which were solely for dine-in patrons, were forced to list on food delivery platforms
                                                              in the wake of pandemic. Yet another reason that can be attributed to the increase
                                                              in order value is customer preference for premium restaurants, which tend to have
                                                              higher hygiene standards.

                                                                              Spike in Zomato's AOV during pandemic

                                                                        450
                                                                                                                                                             407
                                                                                                                                                394
                                                                                                                                   378
                                                                        360
                                                                                                          292          287
                                                                                  265       273
                                                                        270
                                                                (INR)

                                                                        180

                                                                        90

                                                                         0
                                                                                Q1 FY20   Q2 FY20        Q3 FY20     Q4 FY20     Q1 FY21     Q2 FY21       Q3 FY21

                                                              Source: Company, Edelweiss Research

                                                              That said, we expect AOV to trend down once the economy starts opening up and
                                                              more individuals start ordering (as opposed to families). Furthermore, expansion
                                                              into newer cities is expected to exert pressure on the average order value. However,
                                                              we expect AOV to come down by only 6% in FY22 to INR360 (from INR381 in FY21)
                                                              and remains higher than the pre-pandemic level. We note that the low pre-
                                                              pandemic AOV was also supressed due to food delivery platforms promoting flat-
                                                              priced meals and affordable single-serve meals, which may not come back.
                                                              Moreover, we expect the pandemic to drive more users to more hygienic

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                                                          restaurants, which tends to be more expensive. Hence, we do expect AOV to reduce
                                                          to INR360 in FY22, but will remain higher than the pre-pandemic level of INR280.

                                                          Take rates tend to stabilise
                                                          We observe that take rates tend to increase initially and then settle at a steady state.
                                                          Food delivery platforms begin with lower take rates to incentivise restaurants in a
                                                          bid to on-board them. As they business starts picking up, they tend to increase take
                                                          rates to cover the cost of delivery, promotions, etc.

                                                          There can be a difference among take rates across platforms in a country. While
                                                          companies such as Deliveroo and Delivery Hero have the highest take rates in the
                                                          world (25–30%), the take rate for DoorDash and Uber Eats would be in the vicinity
                                                          of 11–14%. Meituan’s take rate (13–14%) is also among the lowest across countries.
                                                          We attribute the lower take rates in China to higher penetration, denser population
                                                          driving down costs, and higher competition.

                                                                      Take rates – A global view

                                                                 35
                                                                            29
                                                                 28
                                                                                            22.8
                                                                 21
                                                           (%)

                                                                                                             13.6           12.9
                                                                 14                                                                         11.7

                                                                  7

                                                                  0
                                                                        Deliveroo         Zomato           Meituan        Uber Eats      DoorDash

                                                          Source: Company, Edelweiss Research

                                                          While take rates have been rising over the last few years, we need to be cognizant
                                                          that this trend is unlikely to continue for long. There has been opposition from
                                                          restaurants and regulators alike, who feel the need to protect restaurants from
                                                          higher take rates charged by aggregators. In fact, several cities including New York,
                                                          San Francisco, Las Vegas, Washington, etc. had put a temporary cap on delivery
                                                          commission to protect interests of restaurants during the pandemic.

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                  Meituan – Monetization rate                                                   Uber Eats – Take rate

        15%                                               14.0%                       25%
                                               13.5%                13.6%                        22%
                                     12.3%                                                                   20%
        12%                                                                           20%                           18%

                           9.0%
         9%                                                                           15%                                                    12.90%

                                                                                                                                 9.70%
         6%                                                                           10%

         3%                                                                            5%
                 1.1%

         0%                                                                            0%
                 FY15       FY16      FY17      FY18      FY19       FY20                       2016         2017   2018         2019*        2020*

      Source: Company, Edelweiss Research                                           Source: Company, Edelweiss Research
                                                                                    *Uber started combining Uber Eats in Delivery segment and changed
                                                                                    the definition from 2019 onwards. Hence, prior years are not
                                                                                    comparable

                  Deliveroo – Take rate                                                           DoorDash – Take rate

      32%                                                                             12%
                                                                                                                                          11.7%

      31%                                                                             12%
                                               30%       30%
                                                                                                                    11.0%
      29%       29%       29%                                       29%               11%

                                    28%
      28%                                                                             11%           10.3%

      27%                                                                             10%

      26%                                                                             10%
                FY15      FY16      FY17      FY18       FY19      FY20                             FY18            FY19                  FY20

    Source: Company, Edelweiss Research                                             Source: Company, Edelweiss Research

                                                                Take rates of Indian companies: Already elevated
     Take rates of Indian companies, including                  Indian companies such as Zomato and Swiggy currently charge a take rate of 22–
     delivery charges, are 22–25%, while for                    25%, which is on the higher side globally and among the highest in developing
     global peers they range from 11–30%                        countries. Higher take rates can spur risk of disintermediation, as well as new
                                                                competitors entering the segment. Amazon is also eying this segment by offering
                                                                half of the current take rate. However, since Amazon does not have a different cost
                                                                structure, we believe these introductory take rates will be neither sustainable nor
                                                                scalable. This, at best, may keep industry profits low till competition wanes out.
                                                                Zomato follows a different commission structure based on the type of restaurant.
                                                                While non-chain restaurants pay a much higher commission, outlets part of a chain
                                                                pay lower. At present, the commission rates vary anywhere from 18–40% of the
                                                                order value. The amount depends on parameters such as order size and restaurant
                                                                type. Companies such as Jubilant FoodWorks (JFL), which lists on the platforms like
                                                                Zomato to receive orders but deliver through their own fleet, pay a 6–8%
                                                                commission.

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                                                                           Estimated commission take rate

                                                                     30
                                                                                                                                           24-26
                                                                     24

                                                                     18
                                                                                                                 14-16

                                                            (%)
                                                                     12
                                                                                       6-8
                                                                      6

                                                                      0
                                                                          Only Listing/Self Delivery          Large Chains          Non Chain Restaurants

                                                           Source: Edelweiss Research

                                                           One of the key concerns of restaurants has been a potential further increase in take
                                                           rates by food platforms would eat into their margins. However, a comparison of
                                                           Zomato’s historical take rate trends, comparison with global peers and also
                                                           Amazon’s potential entry in this segment (pilot underway in Bangalore), we expect
                                                           steady take rates.

                                                           Delivery costs economises with scale
                                                           Companies have been focused on reducing delivery cost per order by taking several
                                                           initiatives. For instance, Zomato has seen a steady decline in its last-mile delivery
                                                           costs. The delivery cost comprises payment to delivery partners along with an
                                                           availability fee. Reduction has been achieved by a combination of higher throughput
                                                           and lowering of availability incentives.

                                                                           Zomato – Delivery cost per order trending down

                                                                    100

                                                                    88           86

                                                                    76
                                                            (INR)

                                                                                                       65
                                                                    64

                                                                                                                             52
                                                                    52
                                                                                                                                                45

                                                                    40
                                                                                FY18                   FY19                  FY20            9MFY21

                                                           Source: Company, Edelweiss Research

                                                           However, once companies undertake steps to optimize delivery costs per order,
                                                           these costs generally stagnate at a certain level. For instance, Meituan in China has
                                                           seen its delivery rider costs now stabilize within RMB4.5–5. Given these are point-
                                                           to-point deliveries, optimization and economies of scale can be improved only to a

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                                                              certain extent and idleness of a rider cannot be reduced beyond a degree. Due to
                                                              this, cost per order has started increasing for Meituan.

                                                                              Meituan- Delivery cost per order

                                                                         6

                                                                                                                    4.8                         4.9
                                                                                                                                 4.7
                                                                        4.8                                 4.5

                                                                        3.6                    3.2

                                                                (RMB)   2.4

                                                                        1.2
                                                                                 0.4

                                                                         0
                                                                                 FY15         FY16          FY17    FY18         FY19          FY20

                                                              Source: Company, Edelweiss Research

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                                                             Quality of network effect is modest
                                                              The network effect in food delivery platforms is curtailed due to local clustering,
                                                               commoditised offerings and vulnerability to multi-homing.

                                                              Network effect for food delivery platforms is somewhat similar to ride hailing
                                                               and is lower than global platforms in messaging and social media.

                                                              Typically a large player dominates food delivery, even in large markets (US,
                                                               China), but nevertheless has limited pricing power and hence low profitability.

                                                              Restaurants are trying to disintermediate food delivery platforms by going direct,
                                                               but considering challenges of on-boarding customers on individual restaurant
                                                               platforms, they may succeed only in gourmet food or high-order value cases.

                                                             Network effect helps achieve scale, but pricing power is limited
                                                             Various factors determine the quality of network effect, such as: i) network
                                                             clustering (local or global clustering); ii) commoditized or differentiated supply; iii)
                                                             vulnerability to multi-homing; and iv) risk of disintermediation. Besides, the gradient
                                                             of customer acquisition cost (CAC) over time series is a good measure of the quality
                                                             of network effect. Exhibit 14 summarises network effects in case of food delivery
                                                             platforms.

                                                                           Scorecard for quality of network effect for food delivery platforms
                                                             Parameter               Score                                   Remark
                                                                                                 Food delivery platforms are local in nature as a limited
                                                             Network clustering      Low
                                                                                                 number of restaurants can cater to a cluster
                                                             Commoditized or
                                                                                     Medium      Few exclusive cloud kitchen and restaurants tie-ups
                                                             differentiated supply
                                                             Vulnerability to multi-             Multi-homing is possible but only a few platforms are there
                                                                                     Medium
                                                             homing                              and consumer can be locked into with loyalty program
                                                             Risk of
                                                                                     High        Risk of disintermediation is real only in high-value items
                                                             disintermediation
                                                                                                 Network effect strong enough to drive scale but not pricing
                                                             Overall                 Medium
                                                                                                 power
                                                             Source: Edelweiss Research

                                                             Network clustering
                                                             In terms of network clustering, food delivery platforms are local in nature; these
                                                             platforms may boast a large number of restaurants but for a customer, only the
                                                             number of restaurants which can deliver to him matters. Hence, if in one locality a
                                                             platforms can onboard higher number of restaurants, and have sufficient delivery
                                                             fleet to match another platform, consumers in that area will want to migrate to that
                                                             platform basis the better choice. Hence higher number of restaurants at overall level
                                                             does not add value to the network if the size of the network in certain area is weak.
                                                             Localisation reduces the barrier to entry and hence there have been examples of
                                                             existing players losing market share to newer and more efficient players. Despite
                                                             DoorDash’s late entry in the US food delivery market, it captured a 55% market share
                                                             on the back of its efficiencies.

     Food delivery platforms are local in nature
                                                             Initially, the US too had more localised monopolies, creating an oligopolistic
     as limited number of restaurants can cater              structure at a national level. Grubhub was a leader at the national level. However,
     to a cluster                                            DoorDash managed to scale up much faster than any other player during the
                                                             pandemic with better execution, which was largely around the number of
                                                             restaurants, delivery speed, etc. This resulted in a nearly 55% market share for

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                                                              DoorDash, whereas other players lost market share. We note that even in larger
                                                              markets, superior execution can rapidly drive market share. Hence in a market like
                                                              India, which has a long growth runway, better execution to drive growth is key to
                                                              value creation.

                                                                            Food delivery market share in US

                                                              Source: Bloomberg Second Measure

                                                              Commoditized or differentiated supply
     Food delivery platforms can differentiate via
                                                              Food delivery platforms tend to fall somewhere between commoditized and
     exclusive ties-up with local popular                     differentiated supply. On the one hand, the supply is differentiated because there
     restaurants, but it comes at a cost                      are many restaurants and type of foods to choose from. Some platforms even have
                                                              an exclusive partnership with popular restaurants. But, on the other hand, if all of
                                                              these food delivery platforms provide more or less the same menu—all restaurants
                                                              are available across platforms—the supply would get commoditized. The point
                                                              of differentiation therefore shifts to delivery cost, delivery speed, ease of use
                                                              and other features.

                                                              Vulnerability to multi-homing
     Food delivery platforms are addressing                   Multi-homing measures the switching cost of a platform. It simply means how easy
     multi-homing issues by introducing loyalty               is it for users to switch between platforms that provide similar services. Food
     programs                                                 delivery platforms may see multi-homing on both – consumer and delivery
                                                              personnel side. To reduce multi-homing, companies can opt for loyalty bonus or
                                                              membership offerings that promotes frequent ordering on one platform, or they can
                                                              enter into exclusive partnerships with popular restaurants. Some platforms also
                                                              introduce their own cloud kitchen, which not only increases choice, but also captures
                                                              a higher portion of value from the transaction.

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                                                                            Swiggy Super and Zomato Pro – A comparative snapshot
                                                                             Swiggy Super                             Zomato Pro
                                                                             INR89 (Bit)/ INR169 (Bite)/ INR329
                                                            Price                                                       INR200/3 months
                                                                             (Binge) per month
                                                                                      Bit' plan - Five free deliveries
                                                                                       per month.
                                                                                      'Bite' plan - Ten free                   Up to 30% extra off on food
                                                                                       deliveries per month and one              deliveries
                                                                                       'Buy One Get One free' from              up to 40% off on each dining
                                                            Features
                                                                                       restaurant partners                       experience
                                                                                      'Binge' plan - Unlimited free            Faster delivery with top-rated
                                                                                       deliveries and unlimited 'Buy             valets
                                                                                       One Get One free' offers from
                                                                                       partner restaurants
                                                            Cities           80                                         41
                                                            Partner
                                                                        > 7,000                                       >25,000
                                                            Restaurants
                                                            Source: Company, Edelweiss Research

                                                            Risk of disintermediation – Low in most cases
     Since impromptu and frequent ordering
                                                            Food delivery platforms, for a small fee, offer consumers choice, ease and consistent
     drives the bulk of order value on food                 ordering experience, which has led to rapid adoption among consumers. However,
     platforms, we believe the risk of                      for restaurants, food delivery platforms charge a significant commission for availing
     disintermediation is low                               a higher catchment area and an on-demand delivery fleet. High take rate impacts
                                                            profitability of restaurants, especially for high-value orders. Hence, premium
                                                            restaurants are increasingly looking to connect directly with consumers for food
                                                            delivery. However, since impromptu and frequent ordering drives the bulk of order
                                                            value, we believe the risk of disintermediation remains low.

                                                            Weaker network effect has kept profitability under check
                                                            Due to local clustering of food delivery platforms, the risk of disruption by a new
                                                            player remains high. Hence, we note, largest players typically command a market
                                                            share of 50%-plus in most geographies, but they still operate at low margins. Despite
                                                            over a 65% market share in the Chinese market, Meituan’s operating profit margin
                                                            in food delivery is a meagre 4.3%. Most other companies have a negative operating
                                                            profit. That said, we expect profitability to improve as market matures and larger
                                                            players create efficiencies of scale, which act as an entry barrier for new players.
                                                                            Operating margin of global companies are low

                                                                      10
                                                                                    3.6

                                                                       0
                                                                                 Meituan        Just Eat Takeaway        DoorDash          Delivery Hero
                                                                                                        -5.2
                                                                      -10
                                                                (%)

                                                                                                                            -15.1
                                                                      -20

                                                                      -30

                                                                      -40                                                                       -36.2

                                                            Source: Bloomberg, Edelweiss Research

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                                                              Dissecting disintermediation
                                                               Restaurants are keen on exploring solutions to reduce their dependence on food
                                                                delivery platforms considering high take rates that eat into their profitability.

                                                               SaaS-based ordering platforms such as Dotpe and Thrive are creating ordering
                                                                platforms for restaurants, along with integration of third-party logistics players
                                                                for order fulfilment.

                                                               While deploying these solutions is relatively easy, pushing consumers to adopt
                                                                direct ordering is the biggest challenge for restaurants.

                                                               We see large QSRs and chain restaurant with enough resources to drive direct
                                                                ordering; other restaurants will find it challenging to market their platforms.

                                                              Direct delivery – Crucial to restaurants’ profitability
     Shift in restaurant business in favour of
                                                              Although food delivery platforms help restaurants drive volumes, they also create
     delivery, from dine-in in the wake of the                two challenges: i) food delivery platforms do not share customer data with
     pandemic has eaten into their profitability              restaurants; hence restaurants find it difficult to create patronage; and ii) food
                                                              delivery platforms charge a high fee, which significantly impacts profitability. High
                                                              fees is a significant challenge for premium restaurants. Many dine-in restaurants do
                                                              not offer home delivery due to high charges levied by delivery platforms. However,
                                                              the pandemic has significantly altered the revenue mix for restaurants with dine-in
                                                              revenue almost entirely going away.

                                                              In order to address the issue of consumer data and high commissions, some
                                                              restaurants are working with SaaS platforms such as DotPe and Thrive to create
                                                              seamless ordering systems. These ordering systems, if required, can also source
                                                              delivery fleet from third-party delivery partners such as Dunzo, WeFast and
                                                              Shadowfax. In order to drive usage of their own platforms, restaurants are
                                                              leveraging social media platforms, such as Instagram and Facebook for popularising
                                                              their services. Indian Hotels has also launched their own app “Qmin” offering food
                                                              delivery from their restaurants and kitchens, which have INR1,000 as the ordering
                                                              threshold.

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                DotPe – Direct delivery

     Source: Company

                                                             Discovery and variety – A key challenge for customers
                                                             On the consumer experience side, we note consumers are likely to go to the
                                                             restaurant portal to order only if they are aware of the direct ordering facility, are
                                                             sufficiently incentivised, and the experience is as good as ordering on a food delivery
                                                             platform. To incentivise, restaurants offer no delivery fee apart from other
                                                             discounts. Since the address and payment details are stored by SaaS platforms,
                                                             despite their web-based interface, user experience is reasonably smooth.

                                                             While direct-to-consumer has numerous advantages for restaurants, the main
                                                             challenge continues to be pertaining to discovery. These companies have also
                                                             realized this problem and have consequently tied up with popular payment
                                                             platforms such as GPay, PhonePe and Paytm. Using these apps, customers can
                                                             search for restaurants and order directly via these apps without the hassle of
                                                             searching them individually.

                                                             Although this adds discoverability, but the experience is not as sophisticated as on
                                                             food delivery platforms as there are no options to sort the restaurants according to
                                                             various parameters, there is no visibility on how much time restaurant will take for
                                                             delivery, rating of the restaurants, etc. Considering payment apps are not sufficiently
                                                             integrated with restaurants’ and third party logistics providers, we do not expect
                                                             discovery platforms to become as sophisticated as food delivery platforms, and thus
                                                             the experience offer is likely to be sub-par.

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                  Direct food ordering is available on platforms like Google Pay, Phonepe and Paytm

    Source: Company

                                                              Consumer experience, outside discovery, is seamless
                                                              Technology integration for direct delivery works in such a way that SaaS platforms
                                                              can on-board restaurants in a matter of days by creating digital menus, integrating
                                                              the billing system and offering third-party delivery platforms on-the-go. For high-
                                                              ticket size, third-party delivery platform costs work out lower than those charged by
                                                              delivery platforms. Since SaaS platforms work this through an Application
                                                              Programing Interface (API), consumer get a fairly seamless experience with a
                                                              WhatsApp or SMS update on food dispatch with a link to track delivery personnel in
                                                              real time.

                                                              Direct delivery – Impact varies for players
                                                              We believe different segments of restaurants face their own set of challenges –
                                                              resource availability and dependence on food delivery platforms is different – due
                                                              to which their possibility and success in adoption of direct ordering will be different.
                                                              Hence, we are evaluating the opportunities and success possibilities for each
                                                              segment separately. We are broadly classifying restaurants into three categories: i)
                                                              large QSR chains and cloud kitchens; ii) large chain restaurants; and iii) standalone
                                                              restaurants and eateries.
                                                              Large QSR chains and cloud kitchens
                                                              Large and popular QSR chains such as McDonald’s, Domino’s and KFC as well as large
                                                              cloud kitchens such as Rebel Foods (which owns brands such as Faasos, Behrouz
                                                              Biryani and Oven Story), Poncho Hospitality (which owns Box8 and Mojo Pizza),
                                                              typically have their own apps for food delivery. These companies also possess
                                                              enough financial, marketing and logistics muscle to provide full-stack services.
                                                              Furthermore, they can drive discovery through digital marketing branding
                                                              campaigns. However, customers are unlikely to download many QSR or cloud
                                                              kitchen apps; hence food delivery platforms will continue to drive the bulk of
                                                              delivery business.

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                                                             We note that success of direct delivery has been mixed for different companies.
                                                             Domino’s has been particularly successful with ‘30 minutes delivery’ attracting
                                                             customers’ craving at breakneck speed. Other QSR chains and cloud kitchens are
                                                             relatively less successful due to their inability to match this speed and other factors.
                                                             However, with food aggregators gaining prominence, most of these companies have
                                                             been unable to match the ease of use provided by aggregators. User experience for
                                                             food aggregators has been far superior to those provided by these apps. We believe
                                                             that this section of restaurants will be able to get 20–30% food delivery on their own
                                                             platforms. The proportion of direct ordering will be a function of strength of the
                                                             brand and their execution capabilities.
                McDonald’s, Domino’s and Faasos food delivery

     Source: Companies

                                                             Popular chain restaurants
                                                             Popular chain restaurants are characterised by high patronage, repeat customers
                                                             and relatively high AOV. They typically rely on dine-in patrons for revenue, but the
                                                             pandemic changed this dynamic. Since the take rate for aggregators is high, these
                                                             restaurants have faced a major brunt, having to pay a significant amount to the likes
                                                             of Zomato and Swiggy. Discovery is not a major issue for these restaurants as they
                                                             are anyway well-known.

                                                             Consequently, these restaurants have been at the forefront of the direct delivery
                                                             campaign. While these restaurants do have a certain connect with customers, their
                                                             ability to drive these customers to direct delivery portal, by discounting, by
                                                             marketing will determine their success. We note that chain restaurants will have to
                                                             invest sufficient marketing resources to drive traffic to their own portal.

                                                             Some of SaaS based ordering platforms suggest high adoption by restaurants –DotPe
                                                             claiming 150k partner restaurants and Tribe suggests another 15k. However, we
                                                             believe that some of these on-boarding would be for features other than delivery
                                                             and only a handful of restaurants would promote their own delivery. In terms of
                                                             cost, Tribe indicated 3% of the GMV as platforms fees and third-part delivery may

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                                                              charge ~INR100 for delivery. Hence, assuming a 10% marketing cost and a 10%
                                                              discount, own platform breaks even at an order value of INR1,000. This is
                                                              significantly higher than Zomato, whose AOV would be lower than INR400. Hence,
                                                              we believe that only a handful restaurants would opt for standalone delivery
                                                              platforms and it would drive 15–20% of their delivery volumes.

                                                                             Breakeven analysis: Own platform vis-a-vis Zomato/ Swiggy
                                                                (INR)                                               Own Platform            Zomato/ Swiggy
                                                               AOV                                                         1000                         1000
                                                               Platform Fees/ Commission                                      3%                        30%
                                                               Platform Fees per order                                        30                         300
                                                               Delivery Charges                                               70
                                                               Marketing Costs                                               100
                                                               Discount                                                      100
                                                               Total Costs                                                   300                         300
                                                              Source: Edelweiss Research

                                                              Standalone restaurants
                                                              For small standalone restaurants, while implementing order management platform
                                                              is relatively easy, diverting orders to their own platforms will be challenging. We
                                                              believe that restaurateurs will find it challenging to attract consumers to their
                                                              platforms. Hence, we believe that this segment is unlikely to see any traction with
                                                              direct ordering. Consequently, they will continue to remain dependent on food
                                                              aggregators for both discovery and delivery.
                                                               We believe that most restaurants are not adequately equipped for driving the
                                                              marketing campaigns for online ordering platforms. From consumers’ side, while the
                                                              ordering experience is seamless, discovery will be a challenge. We believe that
                                                              consumers are likely to order from standalone platforms only in case they are aware
                                                              exactly what they are looking to order and are adequately informed about the
                                                              benefits thereof. Standalone restaurants will require significant marketing support,
                                                              which smaller restaurants will not be able to manage. Hence, we believe adoption
                                                              of the standalone platform will be limited to premium restaurants or larger chains
                                                              that can afford enough.

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                                                           Large addressable market
                                                            Food delivery platforms have made online food discovery and ordering
                                                             experience very convenient. This is fuelling growth of online food delivery
                                                             platforms across the globe.

                                                            Indian food delivery market at ~INR300bn (USD4.2bn) is only a fraction of the
                                                             INR4.2tn (USD67bn) out-of-home food eating out market. Restaurants in India
                                                             are highly fragmented with chain restaurants accounting for only 6.2% of the
                                                             value; standalone restaurants account for the rest of the pie.

                                                            Low penetration of online food delivery ordering in India offers a mouth-
                                                             watering opportunity.

                                                            Non-home cooked food or restaurant food is only ~10% of the overall USD670bn
                                                             food consumption market in India (54% in United States and 58% in China).
                                                             Changing consumer behaviour, reduced dependence on home-cooked food and
                                                             increasing disposable income are further expanding the addressable market.

                                                           Indian food delivery market: Long growth runway
                                                           Online food delivery platforms are at nascent stage in India with an industry size of
                                                           meagre USD4.2bn (USD21bn in US, USD90bn in China). It is, however, growing
                                                           rapidly. Food delivery grew at an eye-opening 147% CAGR over FY18–20. However,
                                                           with pandemic impacting the business, the industry had to swallow a 41% decline in
                                                           FY21. Even so, growth is phenomenal and driven by increasing adoption of food
                                                           delivery platforms, rising ordering frequency, and an expanding proportion of
                                                           restaurant food consumption versus home food.
                                                           Food Services defined as non-home cooked food or restaurant food currently
                                                           contributes only approximately 10% to the overall USD670bn food market. This is
                                                           starkly lower than global economies such as the United States and China with
                                                           respective figures of 54% and 58% (of the total food consumption).
                                                           According to RedSeer, the total addressable food services market opportunity of
                                                           USD65bn (INR4.6tn) would growing at 9% per annum to USD110bn (INR7.7tn) in
                                                           2025. It particularly notes highly under-penetrated restaurant food-eating
                                                           behaviour today. While Food Services in India is highly under-penetrated, it is likely
                                                           to grow steadily, eating into home-cooked food much like the trend in the past.
                                                           Growth will be driven by changing consumer behaviour, reduced dependence of
                                                           millennials on home-cooked food/kitchen set-up, increasing consumer disposable
                                                           income, and higher adoption among smaller cities.

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                                                                            Indian markets nascent; comparative snapshot of India, US and China

                                                              Source: Zomato DRHP

     India has only 45–55mn online food delivery              We believe adoption of food delivery platforms will be a function of user education,
     users compared with 740mn mobile                         availability and ease of payment options, and reach of platforms. Since India has only
     broadband subscribers                                    45–55mn online food delivery users compared with 740mn mobile broadband
                                                              connections, penetration of online food delivery platforms has a long runway for
                                                              growth in the country.

                                                              Ease of usage driving adoption
                                                              Online food delivery apps have fundamentally altered the food ordering experience.
                                                              Restaurant food ordering, pre-food delivery apps era, was cumbersome: i)
                                                              restaurant discovery was challenging as consumers had to have the restaurant
                                                              contact number and should have been aware of the menu for ordering food, which
                                                              limited the choice; ii) restaurant food delivery was subject to in-house fleet and thus
                                                              limited to a much smaller geography; iii) payment option was mostly restricted to
                                                              cash; and iv) there was no way to track food delivery progress.
                                                              Online food delivery platforms have solved all of these problems. These platforms
                                                              aggregate multiple restaurant menus with all the relevant details, including pricing,
                                                              and reviews, making ordering a seamless experience. They also provide a delivery
                                                              fleet to restaurants, thereby significantly widening their catchment area. In most
                                                              cases, consumers get real-time updates on the progress of their order, such as
                                                              whether the food has left the restaurant and contact details of the delivery person.
                                                              And there is a customer friendly helpdesk to check in case something goes wrong.

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                Zomato – Ease of usage

     Source: Company

                                                             We believe higher food tech platform usage can increase India’s eating out
                                                             frequency, which is much lower than comparable global peers. Even a comparison
                                                             of Zomato’s GOV by cohorts points to increasing frequency or usage/eating out.

                                                             Currently Zomato completes close to 30–35mn deliveries every month. Swiggy,
                                                             which operates on a similar scale, also does roughly the same number of deliveries.
                                                             For perspective, Meiutan, the largest food delivery company in the world, makes
                                                             850mn deliveries in a single month (65% market share). The largest company in the
                                                             US fulfils close to 70mn orders a month (55% market share).

                                                             While we do expect the user base to grow significantly, it would be incorrect to
                                                             assume the orders at similar levels of these countries without taking into account
                                                             the difference in demographics of the aforesaid countries. India has a much larger
                                                             population and relatively low penetration, but it is unlikely to scale up to the levels
                                                             of other countries, considering India’s huge rural population. Nevertheless, we
                                                             expect Zomato’s total orders to grow strongly north of 30% for the next four–five
                                                             years to about 130mn orders a month.

                                                             Globally, the online food delivery industry has grown rapidly over the last few years.
                                                             The Chinese market has been at the forefront clocking a 40% CAGR over 2015–20 to
                                                             RMB664.4bn largely driven by increased penetration as more consumers moved
                                                             online en masse. Developed markets of Europe have also grown at a brisk pace over
                                                             the last few years. OC&C (Strategy Consultants) reckons a 19% CAGR for the online
                                                             home delivery segment from 2017–19.

                                                             The pandemic has also significantly catalysed online deliveries. In South Asia, GMV
                                                             of food delivery surged by 183% in FY20 to USD11.9bn. As highlighted earlier, this
                                                             rapid growth has been driven by increased penetration and higher number of
                                                             transactions per user.

                                                             In the past year, both Zomato and Swiggy have outgrown all major global companies
                                                             (except DoorDash) as more users have logged onto food aggregators. However, on
                                                             an absolute basis, the GMV of both Zomato and Swiggy remains well below these
                                                             global companies.

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                                                                               Comparison of food delivery companies’ GOV and GOV growth

                                                                          80                                                                                         250

                                                                          64                                                                                         200

                                                               (USD bn)
                                                                          48                                                                                         150

                                                                                                                                                                           (%)
                                                                          32                                                                                         100

                                                                          16                                                                                         50

                                                                          0                                                                                          0

                                                                                                          JET
                                                                               Meituan

                                                                                         Doordash

                                                                                                                Delivery Hero

                                                                                                                                Grubhub

                                                                                                                                                GrabFood

                                                                                                                                                            Zomato
                                                                                                    GOV                                     % Growth

                                                              Source: Company, Edelweiss Research

                                                              GMV for both Zomato and Swiggy has soared over the last few years. Zomato’s GMV
                                                              more than doubled from USD0.7bn to USD1.5bn over FY19 to FY20. Swiggy has also
                                                              seen equally strong performance over the last couple of years with order growth of
                                                              320% and 145% in FY19 and FY20, respectively.

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                                                             QSRs: Beneficiaries with a caveat
                                                              Zomato’s public filings throws up some interesting trends from the
                                                               restaurant/QSR perspective. We deduce: i) JFL’s recovery has been similar to
                                                               Zomato’s GOV, corroborating the strength of its delivery-based model. ii) Fall in
                                                               active competition is not as intense as believed initially. iii) Platforms are a long-
                                                               term enabler for the sector. iv) Take rates in the industry remain high, even in
                                                               context of a global comparison.

                                                              We also evaluate profitability of online channel versus dine-in —this remains a
                                                               lower-margin channel and incremental business drives profit, but cannibalization
                                                               impacts negatively.

                                                              While JFL and Zomato are fundamentally different business models, we compare
                                                               the two on certain key parameters.

                                                             JFL’s recovery has been in sync with Zomato; other have lagged
                                                             A comparison of Zomato’s GOV and sales of the three major Indian QSRs shows that
                                                             JFL managed to report recovery similar to Zomato on the back of its delivery
                                                             excellence. While recovery for burger QSRs has been higher than the industry, it has
                                                             lagged Zomato’s given the higher dine-in share.
                                                                           Sales recovery comparison

                                                               125

                                                               100

                                                                75

                                                                50

                                                                25

                                                                 0
                                                                          Q3FY20           Q4FY20            Q1FY21          Q2FY21          Q3FY21

                                                                        Zomato (GOV)               JFL           WDL           BKI           FS Industry

                                                             Source: Zomato DRHP, Company, Edelweiss Research
                                                             Note: For Zomato, considered its GOV, for JFL, WDL and BKI considered their reported sales.

                                                             Industry competition is nearly back to pre-covid levels

     Our business is built around the core idea
                                                             In its report on the restaurant industry in August 2020 (Link), Zomato mentions that
     that, over time, people in India are going out          it expects ~40% of restaurants to shut down. While this was based on a survey by
     to eat at restaurants more than they cook at            the company (~15,000 restaurants), looking at the bounce back in restaurants on its
     home.”                                                  platform points to majority of the network bouncing back.

     Zomato DRHP

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                                                                              Active food delivery restaurants

                                                                     150000                                                  1,43,089
                                                                                                                                                   1,32,769

                                                                     120000
                                                                                                         94,286
                                                                     90000

                                                               (#)
                                                                     60000
                                                                                   33,192
                                                                     30000

                                                                         0
                                                                                    FY18                  FY19                 FY20                9MFY21

                                                              Source: Zomato DRHP

                                                              Zomato’s customer evolution points to expanding eating frequency
                                                              Overall though, online partnerships have been a boon for restaurants as they have
                                                              helped increase overall top line by ~30% via a larger consumer base. With improved
                                                              kitchen utilisation, online partnerships have also enabled restaurants to improve
                                                              their bottom lines, considering the bulk of their costs are fixed (with only 25% of
                                                              restaurant costs being food related, i.e. variable).

                    75% of restaurants costs are non-food/ fixed                                   Ordering online drives a sharp improvement
                                EBIT
                               Margin, 5
                  D&A, 5
                                                           Food, 25
                                                                                      Post-Online                 70            20 10         30
            Other
           costs, 20

                                                                                       Pre-Online                 70            20 10
          Marketing,
              5
                                                           Labour, 25
                       Rent, 15                                                                     0                  50               100             150
                                                                                         Dine in        Phone based         Take away         Online ordering

      Source: Prosus, Edelweiss Research                                            Source: Company, Edelweiss Research

                                                              Online aggregators also influence consumption behaviour and lead to a significant
                                                              increase in ordering.

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                                                                           Evolution of customer using apps

                                                             Source: RedSeer Consulting

                                                             We believe higher food tech platform usage, can increase India’s eating out
                                                             frequency, which is much lower than comparable global peers. Even a comparison
                                                             of Zomato’s GOV by cohort shows increased frequency or usage/eating out.

                GOV retention by cohort

     Source: Zomato DRHP

                                                                           Per capita spend on food services
                                                             Country                                                         CY15              CY20
                                                             USA                                                             1,735            2,239
                                                             China                                                            659               684
                                                             Saudi                                                            665               769
                                                             Brazil                                                           634               707
                                                             South                                                            170               282
                                                             Indonesia                                                        219               253
                                                             Turkey                                                           124               181
                                                             India                                                             94               122
                                                             Source: Burger Kind India DRHP, Edelweiss Research

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                                                              Take rates/commissions: Limited scope to increase
                                                              Zomato follows a varied commission structure based on restaurant’s presence.
                                                              While non-chain restaurants pay a much higher commission, outlets that are part of
                                                              a chain, shell out lower. At present, commission rates vary anywhere between 18–
                                                              40% of the order value. The amount depends on parameters such as the size of the
                                                              order and restaurant type. Companies such as JFL, which only use the app for
                                                              origination (and not delivery), only pay commission.

                                                              One of the key concerns in the industry has been the potential to further increase
                                                              take rates of food platforms, which will dent restaurants’ margins. However, a
                                                              comparison of Zomato’s historical take rate trends and its comparison with global
                                                              peers, not to mention Amazon’s potential entry in this segment (pilot on in
                                                              Bangalore), indicates the current levels are more or less the ceiling for take
                                                              rates/commissions.

                                                                              Estimated commission rates

                                                                        30
                                                                                                                                             24-26
                                                                        24

                                                                        18
                                                                                                                    14-16
                                                                  (%)

                                                                        12
                                                                                        6-8
                                                                        6

                                                                        0
                                                                             Only Listing/Self Delivery       Large Chains          Non Chain Restaurants

                                                              Source: Edelweiss Research

                                                              One of the key concerns in the industry has been the potential to further increase
                                                              take rates of food platforms, which will dent restaurants’ margins. The focus on
                                                              commission/take rates has increased recently, especially in the backdrop of higher
                                                              sales from these platforms, post covid.

                                                              As highlighted above, Zomato’s take rates are among the highest globally and imply
                                                              limited scope for further expansion. Also, while pick-up in the Direct Delivery model
                                                              remains a debate, it will definitely be an added factor in keeping any further addition
                                                              in take rates under check
                                                              Foodtech platforms: An incremental business driver, but still lower margin
                                                              FoodTech delivery players have been able to provide value to partner restaurants.
                                                              Even after factoring in platform commissions (~20%), the incremental business
                                                              drives up restaurant profitability. However, business generated from food tech
                                                              players is naturally lower margin. If any outlet is generating incremental business,
                                                              then food tech is a profitable channel, but substitution of the same customer online
                                                              dents margins (refer to Exhibit 34).

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