Zomato’s Cost Control Measures Impact Delivery Partners

Zomato’s recent initiatives to rein in costs and strive for breakeven have stirred up controversy, particularly concerning its adjustments to commission rates for restaurants and fees for delivery partners. The alteration in fee structures, notably reducing the payment to delivery partners, has triggered a strike among Zomato’s delivery partners in the Delhi-NCR region, ongoing for the past week.

ICICI Securities reported that approximately 25% of Blinkit’s dark stores experienced a temporary shutdown, resulting in a revenue decline of nearly 1%. Zomato introduced a new fixed-cum-variable fee structure of ₹15 per delivery, supplemented by distance-based incentives, replacing the previous fixed fee of ₹25 per delivery. However, this move has faced resistance from delivery partners demanding a reversion to the original structure.

In response to the strike, Zomato clarified through an exchange filing that it temporarily closed some stores to ensure the safety of its employees and delivery partners, with most stores now operational.

Unusual Nature of Current Strikes

While strikes by restaurant and delivery partners are not uncommon for Zomato or its rival Swiggy, the current protest in Delhi-NCR has garnered national and political attention. Analysts at ICICI Securities stress the need for swift resolution through transparent communication regarding earnings changes for delivery executives or concessions on delivery fees.

Trimming delivery costs could enable Zomato to expand delivery coverage and manage capital expenditure more effectively.

Monitorable Recovery in Food Delivery

Zomato’s core food delivery business has experienced a slowdown post-Diwali, remaining a key area of scrutiny. Analysts anticipate subdued gross order value in the March quarter, with potential improvements driven by volume rather than value. Efforts to boost revenue through increased take rates from restaurants and higher advertisement charges aim to counterbalance the impact of free delivery to Zomato Gold subscribers.

Quick Commerce as a Growth Avenue

Despite challenges faced in the quick commerce segment, analysts remain optimistic about its growth potential, particularly considering the vast untapped market. With the current market valued at $5.5 billion against an estimated addressable market of $45 billion, quick commerce presents substantial growth opportunities for Zomato and its competitors.

Breakeven Outlook

Analysts project Zomato to achieve breakeven by FY25, although the management targets Q2 FY24 for this milestone. City-level competition between Zomato and Swiggy may impede profitability, potentially delaying gains from expanding the customer base.

While the Blinkit acquisition offers avenues for accelerated business growth amid subdued food delivery projections, it also introduces additional risks. Concerns over high attrition rates among senior management remain, according to brokerage reports.

Long-Term Prospects

Despite near-term challenges, analysts maintain a bullish outlook on Zomato’s long-term prospects, citing favorable industry dynamics such as increasing technology penetration and rising incomes. The nascent stages of food delivery and quick commerce in India present ample opportunities for growth, supporting optimism about Zomato’s trajectory.