Zomato, the popular food delivery firm, has been forecasted to achieve a compound annual growth rate (CAGR) of 21% during FY23-27, according to a research note by brokerage firm JM Financial. This is a revised estimate, as the firm had previously predicted a higher CAGR of 25%.
According to a note dated April 6th, the company headed by Deepinder Goyal is shifting its focus from expanding its customer base of infrequent buyers to investing in customers who place orders frequently. This change in strategy is expected to improve profitability in the future, but it will likely impact short-term growth in monthly transacting users, which has resulted in the revision of the company’s earlier growth forecast.
To counter the decline in food delivery numbers, Zomato reintroduced its Gold loyalty program in January. As per the note, the recent re-pricing of the membership fee and the decision to close operations in 225 unprofitable cities are expected to contribute towards achieving profitability in the coming quarters.
Zomato and its competitor, Swiggy, have identified quick commerce as a key growth frontier, which offers a much larger total addressable market than food delivery. This is especially true as competitive intensity in the food delivery space slows down. As a result, both companies are shifting their focus towards making more incremental investments in quick commerce rather than food delivery as a long-term strategy.
According to the brokerage firm, Zomato has been consistently reporting robust sequential growth in gross order value, primarily fueled by volume. However, the average order volume is expected to decrease due to the company’s focus on improving customer experience and expanding its transacting base.
According to a report from Snackfax last month, Zomato has started to ask restaurants to increase their commission payments and marketing spend on the platform in order to improve its economics and take rates with restaurant partners. This move is expected to boost the firm’s margins and align its take-rates more closely with those of Swiggy, which currently have a higher average take-rate than Zomato by approximately 200 basis points. Zomato is aiming to reduce this difference by narrowing the gap between their take-rates.
Read More: Zomato to hike Restaurant Commissions in an attempt to increase revenue and attain Profitability
“We also expect both contribution margin and EBITDA margin to increase due to improvement in take-rates (because of better product commissions and ad income), slowing competitive intensity, and delivery partner-related cost efficiencies,” JM Financial said in the note.
Despite its plans to improve existing store profitability, Zomato is expected to continue to operate at a loss in terms of EBITDA in the near future. This is because the company intends to expand its dark-store count by approximately 30-40% over the next year. This expansion is aimed at partially offsetting the impact of improving profitability in its existing stores.
According to JM Financial, the brokerage firm continues to hold a positive outlook on Zomato’s long-term potential in the hyperlocal delivery sector. This is due to the company’s advantageous position to benefit from the industry’s favorable trends, such as increasing technology penetration and the growing income share of digitally native millennials and Gen Z.
An HSBC report from last month revealed that Zomato has begun to recapture some of its market share in the food delivery segment from its competitor, Swiggy. This development has been attributed to an increase in Gold membership signups. This indicates that Zomato is actively working towards enhancing its unit economics and profitability, as it contends with several challenges including a declining stock price, senior-level departures, backlash from restaurant partners, and fierce competition from Prosus-backed Swiggy.
