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Business News/ Markets / Mark To Market/  Uber Eats’ retreat from India has lessons for Zomato and Swiggy

Uber Eats’ retreat from India has lessons for Zomato and Swiggy

Uber, the clear winner in the Zomato deal, gets a 10% stake in the market leader
  • For Zomato, the deal will make sense if the consolidation in the industry helps reduce cash burn
  • The sale of the business to Zomato gives Uber a stake worth $300 million in the merged businessPremium
    The sale of the business to Zomato gives Uber a stake worth $300 million in the merged business

    Some battles are won by retreating. Uber Technologies Inc.’s exit from its food delivery business, Uber Eats, in India falls in that category. The exit from the business can result in annualized savings of nearly $750 million, numbers from a regulatory filing last year suggest.

    What’s more, Uber gets close to a 10% stake in Zomato, which is now expected to be the market leader and is valued at $3 billion.

    Naspers-backed Swiggy, which may be relegated to the second position in market share terms, ends up gaining as well. It will reap some of the benefits of the consolidation in the industry without having to pay anything for it.

    Has Zomato, then, ended up with the so-called winner’s curse by paying far more than what Uber Eats deserved? “There is no guarantee all Uber Eats customers will shift to Zomato; some of them will end up at Swiggy too. So it isn’t clear why it paid this fairly high price for the acquisition. But someone had to pick up the tab for the consolidation in the industry," says an analyst at a multinational brokerage requesting anonymity.

    For Zomato to gain, the consolidation in the industry should result in meaningfully lower losses and cash burn.

    But consolidation is no guarantee of lower discounting and cash burn, as the experience in the travel industry shows.

    Losses of companies such as MakeMyTrip have been high despite consolidation, simply because of the elasticity of demand. As soon as discounts are reduced, volumes take a beating. As such, some level of discounting can be expected to continue in the food delivery business as well.

    “It all depends on the funding strategy private equity investors in these firms want to follow," says the head of research at a domestic institutional brokerage requesting anonymity.

    With Softbank’s recent setbacks, investors are expected to exercise more prudence while funding internet companies. News reports last year suggested Zomato was all set to raise $600 million by this month, but the company has announced funding worth only $150 million thus far. Even at its reduced monthly cash burn rate of $20 million, this funding will last for only 6-7 months.

    If investors choose a cautious approach, Zomato and Swiggy will need to scale down on aggressive growth targets and instead work harder towards revenue and cost optimization. The exit of Uber Eats will help to the extent that there will less competition for food delivery agents, and the bargaining power of restaurants will also reduce.

    But the path to profits will depend entirely on the strategy adopted by the Naspers and Ant Financials of the world that back India’s food delivery industry. Like Uber Eats, Zomato and Swiggy’s backers may need to do some retreating as well for better discipline in this market.

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    Updated: 21 Jan 2020, 04:58 PM IST
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