Exclusive | Discounts core to our business, investors not in a hurry to see profits: Zomato

Food delivery platform Zomato's Rs 9,375 crore IPO opens next week, kicking off India's first big public listing from the consumer Internet space, and a crucial test case for other unicorns that plan to list later this year.

Zomato's much anticipated public listing comes at a time when the Indian startup ecosystem is witnessing a funding frenzy, with Indian startups raising $12.1 Billion in the first six months of 2021, according to data from Venture Intelligence.

Apart from Zomato, Policybazaar, Nykaa, and Delhivery are also firming up plans for a public listing, even as there is a buzz of Flipkart and Freshworks listing in the US.

Moneycontrol spoke to Zomato co-founder Gaurav Gupta and its CFO Akshant Goyal on the appetite from investors, its grocery play, the path to profitability, the upcoming Consumer Protection rules, its acquisition track record, and its tussle with restaurants.

Edited excerpts:

Q: The fact that you had to increase the size of the issue indicates demand. Can you take us through the response that you received from institutional investors, what kind of anchor investors are we going to see come in?

A: We have seen an overwhelming response as we met more than 300 investors in the last few weeks across the world. Most global investors understand the business well. What we were pleasantly surprised by is the knowledge that Indian investors had on this space, even the domestic mutual funds and life insurance companies, track the sector globally although there was not any comparable in India to invest in. Overall, net-net, it was very positive. You will see the names of the anchor investors next week when we announce them

Q: In terms of valuation, Zomato's price seems expensive compared to its peers globally. What did you bake into the pricing?

A: It was based on the feedback from investors and bankers advising us. Our business is a growth business and hence you need to look at forward-looking projections and where we will be 5 years down the line. Most of the investors had a 10-year view and gave a multiple based on that. Long-term investors were not concerned about the numbers we had in the last 2-3 years but were looking at it from a 5-10 year horizon, and in that context, the valuation is fairly justified.

Zomato to soon launch grocery section on its app; confirms investment in Grofers

Q: Why should retail investors put money in Zomato?

A: India retail investors are very savvy, and I think if they see value in this stock appreciating over time they will invest. So we will get to know next week when the book opens but we think there should be a fair bit of demand. The customer love we have should also help since we are a known brand.

Q: Has the ESOP allotment also gone up on a fully diluted basis?

A: We increased the ESOP pool prior to filing the DRHP and today that stands at 12 percent of the fully diluted share capital of the company

Q: This is also going to be your second attempt at grocery, you invested $100 mn in Grofers and will also have a separate grocery section on your app. What went wrong the last time, when you attempted a grocery foray- what are the learnings?

A: Last time it was a response to Covid because our customers needed groceries and not food delivery at that time so we leveraged our network. We learned a fundamental thing- that no one has figured out the right model for running an online grocery in the country. There are so many challenges to be solved in terms of fulfillment to make sure customers get what they want. This time it is not a response to Covid but something that we believe could be an opportunity for the future. We are going to put all those learnings to use to figure out what the right answer is. The investment in Grofers is just a financial investment at this point of time for a minority stake and we will launch our own marketplace model on the app soon.

Zomato IPO to open next week: 10 key things to know about the issue and the company

Q: But, there is a sense that this is the first step towards an eventual acquisition of Grofers? How would you use Grofers otherwise?

A: For us, it is an investment at this point in time. We get to learn and work together in better form and shape.

Q: In terms of the overall demand for food delivery, 2020 saw a hit because of the pandemic but how are you seeing the demand shape up now? The office crowd is still not back, the order values have gone up because you have people ordering home as a family. How have the dynamics of the business changed?

A: The first wave of Covid was hard because there was fear of surface transmission. As that went away if you see our Q3, Q4 for FY21, in terms of users or business that has come back quite well. We have delivered crores of users in the last 18 months and not a single case of transmission because of food delivery. They either order food either because they need it or since it is one of the sources of entertainment for them.

Q. Discounts also seem to be back, a departure from your stance earlier. But whenever your order volume goes up, the contribution margin comes down. How are you going to strike a balance here between growth and profitability?

A: There are two parts of the business- there is a business where there are repeat customers because of the customer service they see and the habit that they form for food delivery. And then there is a new set of customers who order food. There are so many users who have never eaten at a restaurant who are ordering food for the first time. If you look at global markets, a lot of dine-in traffic converted to delivery but in India you have home-cooked food getting converted to food delivery. When you have to induct new customers to this behavior, you have to give them incentives, discounts serve as a trigger for those customers. The moment we are able to find more new customers to bring into the category for future growth, you will see it will have an impact on our contribution margin. And this is Zomato's anniversary month. We are doing something special for that as well.

IPO-bound Zomato invests $120 million in Grofers

Q: You also mentioned that IPO proceeds will be used to acquire customers. Will you continue to rely on discounts for this going forward?

A: We have not stopped acquiring new customers. Once you start ordering 3-4 times, it becomes a habit for you and you have to have enough triggers for those first 3-4 orders. Once you get into the habit, it becomes a part of your life and you start missing it. It will not go away.

Q: Give us a sense of your path to profitability?

A: For internet businesses, aggregate profitability is not that important. In our business, the CAPEX is what we spend on acquiring new customers. Discounts are not bad as long as you use it the right way, it is pretty core to our business and we will continue to spend that money to acquire new customers. The more customers we get, they will become profitable. I think part of our business is profitable and will continue to invest in new areas in food delivery as well as outside of that because of which aggregate profitability might take time but that does not mean that the business is not sustainable and investors understand that. No one is in a hurry to see profits unlike what some of you are alluding to. You should invest in areas of growth which will result in long-term market share gains for our business as well as long-term profitability.

Q. In terms of acquisitions, Zomato would have done 14-15 acquisitions in the last decade. Some have worked out some have not. For example, TechEagle did not work out, Fitso seems to be an unrelated area. So when you look at acquisitions going forward will you tread more carefully? What kind of areas would you look at based on the track record you have had so far?

A: We think most of our acquisitions have actually worked out. Fitso is an area we are working on. As we look towards the future we will have to take some important bets. Whether you take those bets by building those businesses in-house by hiring folks or you acquire smaller businesses and as long as we find like-minded founders, we would take those calls in terms of backing those founders and then integrating them with us. Fitso is within the same framework. Similarly, we acquired Runnr a few years ago which has actually helped us have our own delivery which would have taken us a year if we had done it on our own. Uber Eats was again a very successful acquisition for us.

Q. The IPO is happening at a time when there is an upheaval on the policy front. The government has come up with a draft Consumer Protection Rules. These rules state that marketplaces cannot fund discounts or have private labels. While Zomato does not have a private label with its food business, you started a nutraceutical business with a whole range of private label products. How are you going to address these issues?

A: It is too early to comment on this. This is still a draft as you mentioned and has not become a law yet. It is an evolving regulatory landscape not just on this front but even on the customer data side. Good thing is that Indian regulators are forward-thinking in terms of thinking of these topics and the other good thing is that all of these are consultative processes where they talk to industry participants and stakeholders, associations, and even directly with companies. We have not in India so far in the last five-ten years seen anything which has been too detrimental to the customers or the internet businesses. I would like to avoid a specific discussion on these roles right now because they are in draft stages and there is a consultative process going on and maybe once it becomes a law we will see how it impacts the business.

Q. On the discount part if you could please clarify... Who funds the discount? Is it the marketplace or the restaurant owners?

A: It is both right now on our platform. The majority of the discounts today are funded by the restaurants, we only spend on user acquisitions. It is important to understand the context of this. So over the last three-four years as food delivery has become more of a norm and customers have understood it and restaurant partners have understood it better. Now restaurant partners are able to use these as tools to grow their business really well.

So, whether to actually discount, use our loyalty program, advertising on the platform they have all these choices available to them and they are able to leverage them well because at the end of the day they are all very smart entrepreneurs. They know exactly what works for the business and what does not. It might take some time but they will learn that they make these choices. Today you might think that there are so many discounts that restaurants are doing for customers who come to the platform anyways. But we need to understand that a lot of customers that come to repeat on the platform are actually new to the restaurants and it makes a lot of sense for the restaurants to give offers to those customers to get new customers on the platform.

Q. What are your international expansion plans? A few years ago you had scaled down your presence in some of these overseas markets saying that the focus was going to be on India. So how will you look at those ambitions again?

A: We are very focused on India right now. The opportunity is massive in front of us and we will continue to build that. We have our search and discovery platform live in other countries that we were present in earlier.

Q. Will Ant Financial look at diluting its stake? Government FDI rules will also prevent them from participating in a rights issue in the future. How are you going to manage them on your cap table? And my second question is do you use Alibaba cloud to store data. Will you look at migrating again to AWS which you were using before?

A: We will always be on AWS largely. We never migrated to Alibaba.

Q. We saw documents that said you had a relationship with Alibaba cloud.

A: A very very small portion of our business is with them. The main platform that we use is AWS.

On the first question (Alibaba investment) see most companies in India have some Chinese ownership and it is not that in our case it is substantial. Ant Financial after the IPO will be less than 15 percent. It is not a big concern, we are not dependent on them for fundraising .. we do not expect to have any rights issues or bonus issues anytime in the near future. So I think the theoretical question ... not something that is going to worry us right now. Worst case if you want to do a rights issue they can always decline their share of that and it can go to everyone else. I think we will find ways around it and there is some certainty on this topic that might resolve itself as time goes by.

In India, the opportunity is massive in front of us, we will continue to build that.

- Zomato

A: We continue to work with thousands of restaurant partners on a daily basis, continue to listen to them, and take feedback. There are of course some issues that have been highlighted in that and we believe they are misplaced. But I think it is our duty as well to make sure that we continue to talk to NRAI and the members, make them understand what is the best way to look at it, and also resolve these so that we can continue to work better together to serve our customers.

Q. But has there been a communication from the CCI to you so far following the complaint?

A: No, we have not heard anything.

Q. The restaurant owners have repeatedly been asking for unbundling of services besides reducing the commissions among other things. Do you think there is a scope for accommodating any of these demands?

A: We work with thousands of partners and we do not get that request. From a large industry perspective we need to understand today we provide customer support and tech support, logistics support, we actually deliver orders within 30 minutes for most restaurants and we also help acquire new customers much more than any other platform can do and in a more cost-effective manner than any other platform can do. Given all these things most of the restaurant partners actually understand the value that we add. When the restaurant goes for unbundling of services it will actually be more expensive for them because nobody operates at the kind of scale that we operate.

Q. Restaurant owners are also demanding customer data. A lot of restaurant owners that we speak to tell us that they do not know who they are serving or who their target audiences are.

A: Customers make a choice to come to a platform not because of that but because of the choice they get and the customer service they get. Everything is not just about customer data. Secondly, we have to respect the privacy of data for our customers because we have to make sure that they do not get spammed. On the other side, we have to enable our restaurants to deliver the food or service properly. So we have actually designed a system where maintaining the privacy of data for a customer is so paramount. We are able to enable restaurants to deliver the service that they have and technology enables all of that. I do not think that is required today and we are actually trying to do the right thing here for customers and restaurants.

Q. You've also incorporated a wholly owned subsidiary to apply for a payment aggregator license. What ambitions do you have here?

A: If you are referring to the disclosures that we have made, it is pursuant to the new RBI directive which requires us to apply for the license for doing what we do today on the payment side so nothing new. As a platform where payment is happening there is a role that we play there and for doing that RBI wants us to get that license.

Q. What is the mood like at Zomato ahead of the IPO? What is the buzz among employees and why are not we seeing Deepinder Goyal?

A: We are all excited about this. But for us getting back to work is very very important. We have come here because of the work we have put in. We need to continue to execute better from where we are and we just get back to that very very quickly. One or two of us can take care of all that we have.