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Is Zomato's Profitable Quarter A Flash In The Pan?

With a projected 40% YoY revenue growth for the next few years, Zomato's profitability milestone in Q124 underscores its dominion in the food delivery market. But will it be able to maintain this momentum?

Is Zomato's Profitable Quarter A Flash In The Pan?
Deepinder Goyal, CEO of Zomato
POSTED ON September 30, 2023 9:24 PM

A month ago, when Zomato announced its first-ever consolidated net profit in Q1FY24, many touted it as a breakthrough moment for the company. After all, the food delivery platform did take 15 long years since its inception to turn profitable.

Industry stakeholders and even politicians feted its profitability because the food-tech unicorn notched up these numbers three-quarters ahead of schedule. And that it achieved this feat despite ongoing headwinds like food inflation, reduced discretionary spending and operational challenges has bolstered market confidence in the brand.

Globally, consumer platforms like ecommerce, food delivery and ride-hailing require copious amounts of capital to scale up and achieve market leadership, build a robust infrastructure, acquire customers and establish a brand presence. The journey to profitability in the food tech sector is especially prolonged due to aspects like price differentiation and restaurant management, which oscillates between small and large establishments. 

Implementing an optimal business model necessitates strategic cash flow management, covering restaurant charges, determining food pricing on the platform, devising innovative customer satisfaction initiatives and streamlining delivery management. To become a successful and sustainable online food business, companies like Zomato must juggle these elements adeptly without dropping a single ball.

And this is easier said than done.


Many industry experts expected Zomato to turn profitable earlier. However, the market dynamics were distorted due to the massive amounts of capital poured into the start-up ecosystem, which meant that everything became expensive, be it customer acquisition, talent or infrastructure building. 

According to Sumir Verma, managing director of Merisis Advisors, the food tech's primary focus till a few quarters ago was market penetration, outpacing competition, and business model experimentation to gain a strong foothold in the market. After commanding a leadership position along with its competitor Swiggy, Zomato shifted its focus to profitability. 

Sumir Verma, managing director of Merisis Advisors
Sumir Verma, managing director of Merisis Advisors

Some steps it took in this direction included withdrawing from non-profitable markets in India and internationally. In its third-quarter financial earnings report, the company announced its decision to cease operations in 225 smaller cities since the performance of these places was 'not very encouraging'. Another cost optimisation initiative was to increase the commission charged to restaurant partners while reducing the fee paid to its delivery partners—both did not go well with these associates. 


Zomato has three primary revenue segments—food delivery, inventory and kitchen supplies (Hyperpure) and quick commerce (Blinkit). To turn profitable, its CEO Deepinder Goyal had pointed out earlier that the company only needed to do two things—"increase profits in food delivery and reduce losses in the quick commerce business." 

The start-up reported a 13.9 per cent YoY growth in gross order value (GOV) in its food delivery business in Q1FY24, which is still lower than its average increase of around 19 per cent YoY in the past three quarters. However, its monthly transacting users have remained in the same range as the previous year. Its AOV inched up only marginally, but the ordering frequency has increased substantially.

Karan Taurani, senior vice president of Elara Capital, pointed out that this growth was piggy-backed on the growing adoption of its 'Gold' membership programme, contributing 30 per cent to its GOV. 

"The company also displayed an improved demand environment coupled with good execution. This aided strong order volume growth, as its average order value (AOV) was marginally higher YoY," he added.

Karan Taurani, senior vice president of Elara Capital
Karan Taurani, senior vice president of Elara Capital

Verma added that Hyperpure's revenue grew 29 per cent QoQ due to an increase in minimum order value, resulting in a higher average order value. Margins improved significantly and the business is estimated to breakeven earlier than expected. 

"While Blinkit saw a decline in orders QoQ, its average order value increased, thereby leading to a slight growth in revenue overall. The unit economics of the business segment improved due to lower payouts to delivery partners, which also disrupted operations during the quarter," Verma added.


Since all verticals positively affected Zomato's overall revenues, helping it turn a profit, many believe this momentum is sustainable. Ashish Sharma, CEO of Innoven Capital, also noted that while Hyperpure and Blinkit are still in the red, both segments had a good quarter with lower losses while growing topline. 

"It's too early to judge whether this momentum can be sustained. But this quarter has definitely given confidence to the market that the management is executing well," he stated.  

While food delivery may be close to reaching the monthly transaction user ceiling, settling inflationary trends will lead to an uptick in the number of orders. Hyperpure will likely see continued growth momentum as restaurants shift to organised supply. 

While Blinkit has a more significant runway for growth ahead due to a large untapped food delivery user base, this will continue to cause a cash burn for the next few quarters due to rising competitive pressures. Further, introducing Zomato Gold and a platform fee per order will continue to be margin accretive.

Ashish Sharma, CEO of Innoven Capital
Ashish Sharma, CEO of Innoven Capital

However, Subhashis Kar, founder and CEO of Techbooze Consultancy Services, feels that sustaining this momentum can be challenging. He opined that Zomato must consistently introduce new initiatives that provide value to both customers and restaurants while upholding high standards across the board. 

"The competitive marketplace means customers and restaurants might switch to alternative platforms if offered better advantages. Thus, strategic planning and transparent communication with stakeholders are essential for ensuring Zomato's long-term success," Kar stated.


While Zomato's core food delivery business improved in Q1FY24, the company has been fielding several complaints from its restaurant partners, especially about its high commission, monopolistic policies and customer data masking. Now it is experimenting with the implementation of a Rs. 2 platform fee on customers to boost its profitability.

Could this have a further detrimental effect on customer satisfaction? Verma thinks not since this fee is less than 0.5% of FY23's AOV 23, which is minuscule. However, for the company, it can translate into a good revenue boost with around Rs. 35 crore revenues per quarter based on current estimates. 

"Complaints from restaurants are not new, and we believe that the restaurant partners, delivery partners, and the platform will tend to work things out in an advantageous manner. That being said, the market is a duopoly currently and will remain so till ONDC manages to make a mark; hence, restaurants have a high dependency on Zomato," he added. 

Zomato reported a 13.9 per cent YoY growth in gross order value (GOV) in its food delivery business in Q1FY24

Moreover, while Blinkit contributed Rs 803 crore to Zomato's FY23 overall operating revenue, the quick commerce division has been facing headwinds, with striking workers and a stagnating number of transacting users compared to the quarter ended March 2023. Could this mean that Zomato will rely heavily on food delivery profits to fuel its quick commerce vertical's revenue? 


Industry experts note that Blinkit's business disruptions in the last quarter notwithstanding, it witnessed a 5.5% QoQ jump in GOV. Its unit economics also improved mainly due to the higher AOV reaching around Rs 600.

Hence, Zomato will likely continue relying on food delivery accruals to fund the quick-commerce business, which may play out in the long term. Verma pointed out that Blinkit still has only 3.9 million monthly transacting users compared to food delivery's 17.5 million. 

"If Blinkit can grow the number of users while maintaining the AOV, it can become profitable soon," he stated. "While competition is growing in the quick commerce space, Zomato has the advantage of a captive user base and a backend supply integration through Hyperpure." 

Moreover, Blinkit provides Zomato an opportunity for non-linear growth, which explains why the company has invested heavily in building the quick commerce brand's infrastructure. Now, it is focused on reducing the cash burn by introducing operational efficiencies and scale.

"Zomato has indicated its plans to get Blinkit to EBITDA breakeven over the next year, and there has been credible progress on the path to profitability. Since the food delivery segment has finally turned profitable, the market will have higher confidence in the management's ability to also progress towards profitability in the other two segments," opined Sharma. 

While it has taken 15 years to reach profitability, Verma noted that Zomato has established a significant entry barrier in the market. He sees this in the larger ecosystem as a broader trend across the growth-stage companies his company has advised. 

It is now expected that the average time to profitability for growth-stage companies will be 10 to 15 years from the VC model that typically works on an 8-year lifecycle. Could this elevate the Indian start-up ecosystem as a whole?

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