As Zomato works on its share sale, will Amazon play the party pooper?
- Had Zomato been listed, we would’ve seen some value destruction due to Amazon’s expansion
- Investors aren’t worried about the impact of Amazon scaling up delivery biz on Zomato’s IPO
Whatever business you’re in, every night get down on your knees and say, ‘Please God, don’t let Amazon come into my business’”, Aswath Damodaran, professor of finance at the Stern School of Business said in a Nordic Business Forum about two years ago. “Because whether Amazon makes money or not, I will guarantee you every other business in that industry will lose money,” he explained.
Damodaran gave the example of the retailer’s acquisition of a grocery firm, which led to a collective drop of $40 billion in the market capitalization of other listed grocery companies.
If Zomato India Ltd were a listed company, some of this value destruction may have been visible in its stock, given that Amazon India has begun expanding its food delivery services in the country. “Rapid sales growth, along with profitability, is hard if you have Amazon entering the market,” says Vivekanand Subbaraman, analyst, Ambit Capital Pvt. Ltd. Zomato’s current high valuations in the private market, of course, assume high growth and better unit economics.
A moot point is if Amazon’s entry in the food delivery space will play spoilsport as far as Zomato’s planned initial public offering (IPO) goes. In the past year, while Amazon has been gradually building this service in Bengaluru, Zomato has gone ahead with large fund-raising at higher valuations. Investors don’t seem particularly worried at this point.
It all depends on the extent to which Amazon scales up its food delivery business in the country. Its initial offers in Bengaluru are certainly appetizing, with delivery charges being waived for Prime members. However, restaurant options are limited.
Note that the Amazon Restaurants venture in the US had failed due to the lack of options for customers. Data from Thinknum showed that in New York, the food-delivery capital of America, Amazon Restaurants delivered for 485 restaurants. The others—DoorDash, UberEats, Grubhub, and Postmates—delivered for 22,062 restaurants, back in June 2019, just before Amazon exited the business.
Scaling up the food delivery business would obviously mean high cash burn for both Amazon and the incumbents. But it’s likely that the e-commerce giant offers food delivery as one among its many benefits for Prime customers, rather than a standalone service that competes at the scale of with Zomato and Swiggy.
Indeed, the food delivery service is currently housed within the Amazon app. The incumbents clearly wouldn’t mind this approach, their much wider menu and standalone app will continue to drive traffic.
But where Amazon’s entry can hurt is with regards to profitability and cash flow. News reports suggest Amazon is working on about half the margins with restaurant partners, and its delivery charges lower even for non-Prime members. And given the firm’s aspirations for the payments business in India, discounts using the cashback mode is likely to be used heavily to undercut competition.
“Increasing competition (in the case of an Amazon expansion) can lead to another prolonged period of cash burn in the industry. Amazon’s expansion can pose a risk to Zomato’s road to profitability,” analysts at Motilal Oswal Financial Services point out.
To rephrase Damodaran, perhaps Zomato and Swiggy should start praying, “‘Please God, don’t let Amazon scale up its food delivery business in India.”
Catch all the Business News , Market News , Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
- Top Gainers
- Top Losers
- 52 Week High