Why is Zomato’s road to profitability rocky?

“Zomato should see strong revenue growth of 70% on a year-on-year basis (5% Q-o-Q) in the March quarter led by Blinkit integration. However, net loss is likely to widen sequentially due to expansion-based costs in the quick commerce business,” said Rahul Jain, analyst at Daulat Capital Markets.

In the December quarter, which is the first full quarter since Blinkit’s consolidation, Zomato reported a net loss 347 crores. However, it helps that Blinkit’s adjusted EBITDA loss narrowed Q3 sequentially.

Over the past few days, news reports have surfaced stating that Blinkit’s delivery executives in the National Capital Region (NCR) are on strike due to a change in pricing structure. Nearly half of Blinkit’s dark stores in the NCR were closed due to these strikes. Report suggests Blinkit aims to move beyond fixed fee model 25 per delivery for a hybrid pricing structure 15 per delivery, plus an additional incentive based on the distance travelled. The delivery agents were dismayed by this development.

According to an ICICI Securities report dated April 17, “Considering that at least 3-4 days of sales have already been lost, this implies a shortfall of about 1% in revenue from Blinkit and a loss of Rs. About 0.15% – already.” “The change in delivery fee structure reflects Zomato’s focus on cost control,” said analysts at ICICI Securities. “In our view, this will allow Blinkit to increase the delivery radius for its existing dark stores and thus with limited capex expenditure.” Will improve your network coverage.”

Meanwhile, on the other hand, the operating metrics of Zomato’s core business, food delivery, is an important one to watch. A strong recovery is unlikely due to the slump in demand seen post Diwali. Thus, gross order value is likely to be lower in the March quarter. This is despite the positive impact of Zomato Gold. On the back of this, it remains to be seen whether the contribution margin improvement continues. Recall that contribution profit as a percentage of gross order value was reported to have increased for the fourth time in a row in the December quarter. To be sure, analysts believe cash generation is still a few years away.

“While we believe the Zomato Gold loyalty program will help drive a rapid increase in delivery volumes, the average order value is likely to fall to its medium to long-term average over the next few quarters,” Jain said.

Note that the online food delivery market is a monopoly with Zomato’s market share at 55% in the half year ended September. Analysts at Motilal Oswal Financial Services said while Zomato will grow, monopoly may delay gains at scale. “We see the limited interoperability between Zomato and Swiggy’s offerings—both include food delivery, dine-in and instant commerce—as a concern. The Motilal Oswal report states that a segmented market without a clear leader will impact margins due to the absence of efficiency gains from order bunching. ,

All said, an acceleration in consumer demand is critical to driving meaningful improvements in the operating metrics of the food delivery business. Moreover, Zomato’s progress towards its target of meeting its target of break-even at the adjusted EBITDA level, excluding Blinkit, by Q2 FY2024 could boost investor sentiment.