Food Delivery Slowdown Weighs On Zomato Q3; recovery to be seen

The company saw a slowdown in the food delivery business post Diwali and growth in key metrics was subdued. Gross order value in the Food business was up only 0.7% sequentially. This compares to roughly 3% and 10% sequential growth in Q1 and Q2, respectively. In addition, growth in average monthly transacting customers was flat sequentially in the third quarter at 17.4 million.

“We feel the current slowdown is a result of some temporary factors – a) macro slowdown for the mid-market segment, b) boom in food for the premium-end, and c) boom in travel at the premium-end,” the company said. announced its third quarter earnings.

But there were also some bright spots. Contribution margin as a percentage of gross order value was at a multi-quarter high of 5.1%, helped by cost efficiencies.

Overall, the instant commerce business, Blinkit, saw its adjusted EBITDA (earnings before interest, tax, depreciation and amortization) loss widen to Rs.266 crore in Q3 from a loss of Rs.192 crore in Q2. Note that Q3 is the first full quarter of consolidation for Blinkit financials. Excluding Blinkit, loss at Adjusted EBITDA level was lower at Rs.38 crore vs. 60 crores in Q2. While it is heartening that the quick commerce arm continues to see improvement in key metrics such as orders and transacted customers, Zomato is still in the red at the adjusted EBITDA level.

Despite the slowdown, Zomato has maintained its guidance of becoming adjusted EBITDA break-even by Q2FY24, surpassing Blinkit. In January, the company was break-even at the adjusted EBITDA level and notes it is likely to achieve this in Q4FY23 but hinges on proper execution of its plans.

Note that the company launched Zomato Gold in late January, which will be a headwind, at least in the near term, given the free delivery benefits it offers to customers.

“The relaunch of the gold loyalty program is likely to delay the sustained recovery in contribution margin from growth revival,” analysts at Nomura Financial Advisory & Securities (India) said in a report on February 10.

To be sure, meeting the guidance will be a major catalyst for the stock, which is down nearly 30% from its issue price of Rs 76. Zomato believes that the worst is behind it as “we are seeing a recovery in demand in recent weeks”.