Will Amazon’s food delivery ambitions dampen Zomato’s Indian IPO plans?

Photo: Mint

“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 had said at 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 cited the example of the retailer’s acquisition of a grocery firm, which led to a collective drop of $40 billion in the market capitalisation 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 question is if Amazon’s entry in the food delivery space will play spoilsport as far as Zomato’s planned initial public offering (IPO) goes.

Of course, much depends on how long the buoyant mood in the primary market sustains. Investors may also give home-grown market leaders Zomato and Swiggy the benefit of doubt, given Amazon’s failure in the food delivery business in the US, under the Amazon Restaurants brand.

Also, while Amazon has taken its time growing this segment in the city of Bengaluru, domestic market leaders have gone ahead with large fundraising at higher valuations in recent months. 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 India. Its initial offers in Bengaluru are certainly appetising, with delivery charges being waived for Prime members, but restaurant options are limited. Note that the undoing of Amazon Restaurants was 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 higher 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 Zomato and Swiggy. Indeed, the food delivery service is currently housed within the Amazon app.

“Food is an impulse category, and choosing ‘Food’ under the regular Amazon App is somewhat cumbersome compared to peers,” said analysts at Jefferies India Pvt. Ltd. The incumbents clearly wouldn’t mind this approach, since 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 are lower even for non-Prime members. And given the firm’s aspirations in the payments business in India, discounts using the cashback mode is likely to be used as a strong feature to undercut competition.

“Increasing competition (in 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,” Motilal Oswal analysts 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”.

The article was first published on livemint.com.

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.