Zomato IPO
Zomato IPO
Hello brothers and sisters my name is gauhar ali today we will discuss about zomato ipo , zomato ipo is about to launch in india so lets dive deep into it.
On 14th of July 2021, Zomato will officially go pubic
With 9000cr about to be raised
this is by far one of the biggest and perhaps the most awaited IPO of 2021.
But as far the numbers of the company are concerned, Zomato seems to be in deep deep trouble!
From 2018 to 2020 while the revenue of the company went from just 65 million to 368 million dollars
during the same time losses exploded by 20 times
from just 15 million dollars to more than 300 million dollars.
and everytime zomato tried to become profitable
it has lead to nothing but outrage!
They first tried launching Zomato gold to lock in the customers from going to Swiggy
but that lead to massive losses to restaurants
which forced them to shut the service down.
then they tried increasing the prices of their dishes
but that ended up making the customers unhappy!
So from the outside, it almost looks like the company is stuck in a vicious cycle of cash drain
which is leading to nothing but more and more losses
And this is what every single expert and fundamental analyst, more or less, has to say.
But you know what?
there is one very very important factor that very few people are taking into consideration
and this factor could turn Zomato into a gold mine
and if you only understand this factor
you can go on to make the most strategic investments into foodtech space
in the next 5 years.
The question is
What exactly is this X factor and how can Zomato or Swiggy turn into a goldmine investment/
The answer to this question lies in a peculiar case of a Silicon Valley start up called June.
This is a story that dates back to 2013 when June became
one of the pioneers to develop something called a smart oven.
The oven was so amazing that it back in 2013 itself it had a screen for viewing recipes,
could be controlled over Wi-Fi
and it was also Alexa-compatible
which allowed voice command control back in 2013 itself!
The company was doing so well that it was able to raise a series of funding from heavyweight investors.
And in 2018
June also secured an investment from Amazon Alexa Fund.
and the company grew rapidly from 2015- 2019
And just when everything looked perfect
something crazy happened.
Just a year later, Amazon launched their own smart oven
which had exactly the same features as that of June including
Wi-Fi connectivity and Alexa integration.
But the highlight over here was that
Amazon Smart Oven were priced at half the price of June Ovens.
While June was selling its oven for about $499-$699
Amazon’s oven would have costed you only $250 back then
And that is how this rising startup became a competitor of its prime investor
and amazon started eating into profits of its own best seller.
Now the story of June is not the only incident.
Every year, Amazon unveils hundreds of products
and they have developed an intricate playbook
to put every competitor out of business.
And if you look at the procedure as to how exactly this is done,
it’s pretty straightforward.
Step 1, they find a best selling product.
Use the data from the seller’s profile and make a list of all the specifications
that makes that product a best selling product.
Step 2, read through the reviews and find out
what exactly customers love about that product.
And then, they buy a manufacturing unit
to get them to make the exact some product
and then they aggressively price it at
30–40% lesser than the best selling product.
And this is how without trial and error
Amazon takes a cake walk to make millions of dollars
by selling products from all categories
by successfully eliminating the seller himself.
And all of this is being done because
Amazon has 3 incredible superpowers.
Number one, it has the consumer data. So, Amazon knows exactly
how much the customer can afford and what kind of products the customer wants to buy.
Number two, it has the data of every seller. So they know
what features make a product a best selling product.
And last and most importantly
Amazon has the super power of digital real estate by which
it can give special preference
and rank its products at number 1 position
and make million dollar sales.
This is what makes consumer and seller data
practically a GOLD MINE for Amazon!
And guess what?
This is exactly the case with zomato!
In this case
Zomato has all the data about thousands of restaurants
and millions of consumers
who have used Zomato to order food.
Zomato knows exactly which dishes are in high demand which area.
And on top of that Zomato also knows
what is the optimum price for a particular dish.
In fact, they even know what is the best time to sell a particular dish.
For example zomato knows that in Hinjewadi Pune
Biriyani priced at 150rs will go on to become best seller
and the best season for biriyani is from November to December.
So this way, Zomato and Swiggy are practically sitting on a data gold mine
and they can use it very easily to launch their own food chain
evetually undercutting the existing food chains
to make millions of dollars of in profits.
And this can turn Zomato and Swiggy both
into super profitable businesses in no time.
Fun fact:
both zomato and swiggy have already ventured into it using something called
the concept of “Cloud Kitchen”.
I had wrote a detailed article on cloud kitchen
And there are 2 zomato services that very few people are talking about.
And those are: Zomato Kitchen and Zomato Hyperpure.
To understand the depth of this you first need to understand what is a cloud kitchen.
In simple words, cloud kitchen is nothing but a super efficient restaurant
which only gives out take-way orders and has no dining space.
It’s basically just the kitchen of the restaurant that takes online orders
and gives it out to delivery.
A simple example of the same is Behrouz biriyani.
Its got no outlets but has got a fantastic digital presence.
And this concept of cloud kitchen ladies and gentlemen
is a revolution in the making.
Why?
because it’s got some game changing cost benefits over a conventional restaurant.
Now, just to put that on paper with standard assumptions and costing
here’s what the comparison with the conventional restaurant looks like.
If you take a conventional 50 seater restaurant
it would require 6 lakhs of rental cost
considering that you would need 200 sqft of area.
20 Lakhs in rental deposit,
8–10 Lakhs for licenses,
8–15 Lakhs for equipment,
working capital which includes inventory, salary and light bill
will require about 20 lakhs.
And most importantly, the monthly revenue needed
to break even in 2 years
is abut 20 lakhs.
On the contrary, if you look at a cloud kitchen
the space needed would reduce significantly and would cost just about
50,000 to 1 lakh in rent.
Apart from that, you just have to pay 1 lakh in rental deposit
licenses would cost you the same, equipment would cost you the same
but the working capital needed to operate a cloud kitchen
will go down by 50% as compared to a restaurant
to just 10 lakhs and most importantly
the revenue needed to break even in 2 years also goes down by 50% again
to just 8-10 lakhs.
And the benefits? Well
you’re looking at saving of 5 lakhs in rent per month.
You save 19 lakhs in rental deposits,
10 lakhs in working capital
which results into the best part that is
10 lakh rupees less is needed as a monthly revenue
to break even in 2 years.
And this is the insane cost benefit
that a cloud kitchen has over a conventional restaurant.
And here’s where
most people underestimate the power of digital marketing.
People, instead of investing into infrastructure heavily
even if a fraction of the money, in this case,
even if 1 lakh rupees is rotated in marketing
it is more than enough to drive insane amount of traffic to the cloud kitchen
and on paper what looks like 2 years
can even be acheived in 1 year.
A standing example of the same is Rebel Foods.
Now, this is the companythat owns Faasos and Behrouz Biryani.
And you know what?
Both these brands, individually, bring in about
16-17 Crores of business per month!
And they have about 300 cloud kitchens across 35 cities in the country.
Best part all of this was done in less than 10 years from 2011 from 2020.
and here’s where Zomato Kitchens come in
And all these brands like Fasoos, behrouz, good bowl, box8
they are all using Zomato to sell their dishes, right?
Well, in that case, if you see
Faasos and Zomato, Behrouz and Zomato
share the exact same relationship as June oven and Amazon.
So just like amazon had sellers data
and knew everything about what worked for June and what did not.
Zomato knows exactly which Behrouz cloud kitchen is doing well and which is not.
Just like Amazon had customer data and knew exactly what is the purchase power of the audience
and who wants to buy and oven.
Zomato knows exactly who is more inclined to buy sandwhich
who is more inclined to buy a roll and who is more inclined to buy a biryani.
And most importantly
just like Amazon had the super power of digital real estate
to enlist its products on top
Zomato can particularly open up its own cloud kitchen
and list its products at the top with agressive pricing model
and under cut its own best sellers like Behrouz and Fassos
And the best part is instead of being so evil
Zomato and Swiggy are doing it more ethically now
which is where ventures like Zomato Kitchens and Swiggy Access come into play.
Zomato kitchen is this wonderful partnership between Zomato and a bunch of hand picked brands across the country.
wherein
Zomato uses its superpower of data
and chooses the most profitable location in a particular area.
And then based on what works best in that location
certain brands are chosen.
And Zomato will provide them with everything starting from raw material
to kitchen infrastrture.
And this kitchen will have multiple sellers from specific categories
and this space will be shared by all the cloud kitchens together
which will maximise their profits and optimise their cost.
And what most people do not know is that
this concept is profit machine
because this system will give rise to something called super cloud kitchen
which will be so efficient (2X)
that in just 2000 sqft space, that is, in the space of just one restaurant
a cloud kitchen can accomodate more than 50 brands.
And process more than 3000 orders a day.
A standing example of the same is the Dubai based start up called KITOPI
which has these super cloud kitchens that can accomodate about 40–70 brands
in just 2000 sqft and can process
3000+ orders in a day.
Cherry on the cake, KITOPI plans to go fully automated
and will run these super cloud kitchens
without human any intervention by next year.
If this is very very clear to you, now lets have a look at the economics of the cloud kitchen in India
and see where does Zomato have its gold mine.
This is what the economics of a conventional cloud kitchen in India, today, looks like
We’ve got 3 kinds of costs
Raw material is about 40%
commissions to the aggregator, that is, Zomato
plus logistics is about 25%.
Fixed cost like wages and energy is about 25%
and profit is very less at about 10%.
And most people look at this thin margin of just about 10%
and then jump to the conclusion that it is not profitable enough
and the fact that it is not viable enough for Zomato.
Well, that’s because they don’t realise
that this is a super inefficient model
because cloud kitchen is still at the baby stage in India.
And just 3–4 years down the line this is what it is going to look like.
Even if I use Kitopi’s tragectory
and use that as a reference for what it has achieved by January 2019.
Here’s what the figures look like
raw material expenses is just about 20%,
fixed costs which includes labour cost, order processing
production overhead and sales discount accounts for about 21%,
brand royalty is about 7%
comission to aggregator is about 28%
and this makes the profits stand at 16%.
And here’s where the X factor comes in
because the fun fact is
Kitopi is also a middlemen
which is why in case of Zomato, the profits will shoot up.
Why?
Because Zomato does not have to pay aggregator commission
because zomato is the aggregator.
and in case of raw materials
Zomato is already building a robust supply with something called Hyper pure.
And this is a supply chain that will connect the cloud kitchen directly with the source
which will bring down the cost of the raw material further
from 28% to even less than 25%.
And now if you look at the figures, you will see that
Zomato’s commission alone stands at 44%
even if you neglect the margins from hyperpure.
and with a healthy 10% commission on delivery
we are still looking at 34% profit.
And if you follow Kitopi’s trajectory
this profit margin could easily go above 50% in the next 10 years.
So in short by 2025, looking at Kitopi’s numbers
the same ₹200 roll where zomato is incurring a loss of ₹20-₹30
will eventually go on to give a profit of ₹50–₹100.
This point is where Zomato and Swiggy both will go on to become
uper profitable businesses
with super profitable cloud kitchen across the country.
And my sense is
Zomato is raising 1 billion dollars to transition to this next curve of cloud kitchen.
So now the question is- Should you invest into Zomato or not?
Well, I dont want to say anything specifically, about the IPO
but whenever you look forward to investing into Zomato or similar companies
please, remember these important lessons.
Lesson 1, always remember
as much as people are obsessed with the numbers and the math
it is important for you to understand
that more than the numbers its the story behind those numbers that is important.
In this case, there are so many people out there on the Internet itself
who are so engrossed into the fundamental analysis and the present numbers of the company
that they have completely lost sight of the fact that
we are living in the 21st century wherein
the next disruption is less than 3 years away.
And we as ordinary people are looking the present and the next 2 years of the company
the investors like the Sequoia Capital are looking at a 10 year tragectory.
And as soon as we start putting ourselves in their shoes and look at a 10 year tragectory
it will help us better understand these companies
eventually, it will give us more clarity for our investment.
Lesson 2,
if you want to find these tragectories, the best way
would be to do some extensive research about companies all across the world
and find out companies that are already in the next curve.
In this case if you see,
an understanding of how Kitopi is operating
gave us a very good understanding of how Zomato will be operating.
And that is how
you can derive some very valuable insights about what’s gonna happen in the future.
And last and most importantly
keep a close eye on how Zomato and Swiggy keep pivoting to the next curve because
these kind of transition periods have got some very very valuable business lessons for each one of us.
And always remember, once a great man said, Innovation always happens in the next curve
and those look for it will end up owning the future.
In this case
it is the rise of the next generation food-tech startups
and Zomato’s IPO will mark the beginning of this revolution in India.
Read financial report of zomato
Just for you article read this also
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