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An Inconvenient Truth?



I’m no investment banker. I happen to be married to one, but that doesn’t change the fact that my knowledge of IPOs is average at best.

The major industry news last week was Zomato (the jury is still out on if it’s pronounced zoh-mah-toe or zoh-may-toe), announcing their plans to IPO next year. My limited knowledge of finance made me ask: shouldn’t a company be profitable before an IPO? Zomato publishes annual reports and periodic reviews of their numbers. The simple fact is they do not make money.

But let’s keep the profitability a bit aside. That is for SEBI and financial analysts to figure.

The timing of the announcement left me bemused. The restaurant industry that Zomato is centred on is taking wholesale strides towards independence from the platform. So I wondered – can you run a business while antagonizing or alienating a chunk of the ecosystem that said business is dependent on?

Here’s some context for those of you who are new to this uneasy relationship.

Zomato started off as a restaurant discovery platform. Restaurants could pay for hyperlocal advertising that was unavailable before Zomato. It was a mutually beneficial relationship and, for the most part, a good proposition. Zomato made money, restaurants got targeted advertising. So far so good.

Then came the deep-discounting malaise. First, the ill-fated Gold program. Zomato found a brilliant way to make money by charging customers for a product that restaurants had to pay for. Happy days for Zomato, massive losses for restaurants. Next came the “infinity dining” program. Customers could order unlimited amounts of food and beverages for peanuts. Zomato racked up revenue and subscriptions, while restaurants had to pick up the bills and continued to bleed.

Emboldened by the “success” from customers signing up for these schemes, Zomato grew its own valuation at the expense of the ecosystem. With this came the hubris of thinking the industry needed Zomato, and not the other way around.

Restaurants disagreed. And it was proved last year. On August 15, 2019, an agitation that began in Gurgaon (ironically Zomato’s backyard) was the spark that lit a nation-wide protest which eventually ended in the death of Zomato Gold. The industry rid itself of a middleman that thrived on deep discounting while restaurants footed the bill.

Knowing fully well that Zomato lost the trust and confidence of a sizable part of the industry, one would have thought there would have been a serious attempt at reconciliation. Instead, they have renamed Gold “Zomato Pro” to shed the baggage. The smarter restaurateurs have recognized that this is merely old milk in a new bottle. The product is sour. If that is supposed to be one of the major drivers of their valuation, good luck to their investors.

On the delivery front, some in the industry are at constant loggerheads with Zomato over usurious commissions (north of 25%), arbitrary charges/penalties that they levy, and the forced use of their delivery services as a prerequisite to be on their platform. Zomato did attempt to run their own cloud kitchen based on the delivery data collected from restaurants on their platform (Zomato collects the data but never shares this information with the restaurants who ought to have access). They have since beaten a hasty retreat there as well, after realizing that running a kitchen isn’t a walk in the park. Poetic justice?

There is disruptive, and there is destructive technology. While Zomato was at its disruptive best with discovery, it is at its destructive worst with poorly conceived schemes that were onerous to restaurants. And that rift does not look like it can be healed anytime soon, let alone before the planned IPO.

So, to a non-finance-y person like me, it seems that Zomato are able to rack up funding while losses continue to climb. Zomato are so unconcerned when it comes to losses, that they cannot fathom why restaurants are agitating against the loss caused by Zomato’s schemes.

I will give them credit for one thing though. They did what no one could previously do – Zomato united an otherwise fragmented and competitive industry towards one common goal: Independence from Deep Discounting.

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