No long-tail effect: Zomato banks on demand recovery in future, even as it shuts operations in 225 cities on poor performance

• Zomato has ceased operations in 225 smaller cities as their performance was ‘not very encouraging’ in the past few quarters.
• Analysts at ICICI Securities said that the exit in these cities “indicates disenchantment with a long tail of sub-scale operations.”
• The management said that although the demand environment remains challenging, they are seeing green shoots of demand coming back in the recent weeks.
• Analysts say that the relaunch of Zomato Gold in January will boost business.

Food delivery platform Zomato has ceased operations in 225 smaller cities as their performance was ‘not very encouraging’ in the past few quarters. This comes as the company reported a widening of losses in the October-December quarter.

These cities contributed 0.3% to Zomato’s gross order value (GOV) in Q3FY23. The company said that, “Performance of these cities was not very encouraging in the past few quarters and we did not feel the payback period on our investments in these cities was acceptable.”

Analysts at ICICI Securities said that the exit in these cities “indicates disenchantment with a long tail of sub-scale operations.”

While the new-age company disappointed investors with more losses this quarter, the management said that although the demand environment remains challenging, they are seeing green shoots of demand coming back in recent weeks. The company believes that the worst may be behind it.

“We believe that the long-term opportunity remains large and exciting. We think that the current slowdown is a result of a few temporary factors – a) macro slowdown for the mid-market segment, b) boom in dining out for the premium-end, and c) boom in travel at the premium-end,” said the company in an exchange filing.

Zomato posted a loss of ₹347 crore in Q3 FY23 as compared to ₹63 crore loss in the same quarter last year. However, consolidated revenue from operations for the quarter surged 75% on year to ₹1,948 crore.

Adding to it, this was the first quarter with consolidation of the grocery business Blinkit. The company informed exchanges that excluding the Blinkit business, Zomato turned positive at the EBITDA (earnings before interest, taxes, depreciation and amortisation) level in January even as the food delivery business witnessed a slowdown.

‘Relaunch of Zomato Gold to boost growth’
Zomato relaunched its membership programme, Zomato Gold in late January. This programme has been built on the lessons learned from the programme’s previous avatar and after taking in feedback from customers, restaurant partners, as well as investors.

Analysts at Nuvama Institutional Equities said that the prospects for Zomato’s business going ahead remain bright while it assigned a ‘Buy’ on the stocks. “We believe that Zomato Gold’s relaunch will be a big boost to growth. Adj. EBITDA of ₹230 million (vs. ₹20 million in Q2FY23) in food delivery, despite flattish QoQ GOV growth is a big plus and we remain confident of the company’s ability to generate cash,” said the brokerage firm in a report.

"We expect this programme to drive loyalty and higher frequency of ordering going forward, and in less than a month, the Zomato Gold programme has scaled to 900k+ members," said the company.

Most brokerage houses have maintained a ‘Buy’ rating on the company’s stock.

Analysts believe Zomato may clock profitability as soon as by the end of the current financial year.

“Zomato’s road to profitability has grown even more promising. Zomato (ex-quick commerce) clocked adj. EBITDA level profitability in the month of Jan-23. Depending on execution-related wins, the company (ex of quick commerce) may clock profitability in Q4FY23 itself, two quarters ahead of their guidance,” said a report by Nuvama Institutional Equities.

Further, Zomato is planning to remodel the Zomato Instant service to focus on offering customers home-style cooked meals at affordable prices (to be called Zomato Everyday). “We believe that this is a large opportunity in a market like India and is relatively untapped currently. We plan to launch this soon in the next few weeks,” said the company.

Shares of the company have dropped nearly 26% in the last three months. The stock price of Zomato was down 2.41% at ₹50.55 on February 14.


SEE ALSO: Nykaa’s stock plunges 4.2% after its Q3 net profit slips 70%
Startup that wants to give an EV twist to regular cycles seeks Sharks' time not money