A small fee for users, a big move for Zomato?

Zomato reported 2.7 million high-frequency customers in 2022 that had an annual ordering frequency of more than 50. (NurPhoto)
Zomato reported 2.7 million high-frequency customers in 2022 that had an annual ordering frequency of more than 50. (NurPhoto)

Summary

Lately, the online food delivery company has started levying a platform fee of 2-3 per order on its app on a pilot basis

Zomato Ltd’s efforts to improve its profitability have yielded results in the recent quarters. But the fight to meet its goals is on. Lately, the online food delivery company has started levying a platform fee of 2-3 per order on its app on a pilot basis. The “small fee" has been introduced to “help us pay the bills so that we can keep Zomato running," the food delivery app’s order section shows. According to the company, the platform fee will be applicable for all its customers. “We are still in experiment stage, and are gradually rolling it out across India," said the company.

Prima facie, this is encouraging as it can potentially benefit margins. Remember that it was just in the June quarter (Q1FY24) when Zomato clocked a consolidated net profit for the first-time ever.

Graphic: Mint
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Graphic: Mint

Near-term gains may not be significant, though. “It is expected that Zomato would implement the platform fees across cities and gradually evaluate if there is any impact on demand. There is also a possibility that the platform fee may increase in the future," said Nikhil Choudhary, assistant vice president-equity research, Nuvama Institutional Equities.

The fee should improve Zomato’s customer delivery take rate. The company charges a fee from restaurants and customers for facilitating an order. Broadly, when this fee is expressed as a percentage of gross order value (GOV), it is known as take rate. Over the past few quarters, Zomato’s restaurant take rate has risen whereas the delivery take rate has fallen (see chart alongside). Eventually, better take rates aid margin.

Recall that Zomato reported 2.7 million high-frequency customers in 2022 that had an annual ordering frequency of more than 50. Assuming these customers transact 75 times a year on an average, a 2/order platform fee on all orders by such customers can result in 40.5 crore of incremental contribution profit/Ebitda, said analysts from Kotak Institutional Equities in a report on 4 September. “It will also imply contribution margin increase of about 16 basis points and can be a step toward Zomato’s targeted 8% contribution margin (as a percentage of GOV) over the medium term," they added. In Q1, Zomato reported a contribution margin of 6.4%.

Meanwhile, Zomato’s quick commerce business, Blinkit, is still in the red. Losses are narrowing, though. The segment’s adjusted Ebitda margin stood at negative 6.2% in Q1 versus negative 27.8% in Q1FY23. Investors are ascribing low-to-nil value to Blinkit as of now, said Choudhary. “But once the segment turns profitable, it could attract higher multiples as it is easier to value the business then. Given Zomato’s execution capability in the food delivery business, there is a likelihood that Blinkit would turn profitable at the adjusted Ebitda level within the stipulated time," said Choudhary.

Zomato aims for Blinkit to break even at this level in the next four quarters. Also, the recent fund raise by Zepto gives confidence on the prospects of the quick commerce sector.

To be sure, investors seem to be capturing the brighter picture adequately. After all, Zomato’s shares have seen a stellar recovery in 2023, rising as much as 66% so far. This comes on the back of a sharp 57% drop seen in 2022. Overall, Zomato targets to see 40% year-on-year growth in its adjusted revenue for at least the next couple of years. Some analysts are cautious on higher growth rates sustaining for a long time. Thus, progress on this front and improving margin performance would be critical for the stock’s performance.

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