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Call for celebration: Zomato’s Q1 profit sparks cautious optimism about foodtech’s big break

Zomato’s surprise Rs 2 crore profit in the June quarter—achieved much ahead of its previous forecast—has spawned optimism that foodtech’s big break has, perhaps, arrived.

Call for celebration: Zomato’s Q1 profit sparks cautious optimism about foodtech’s big break

Friday August 04, 2023 , 4 min Read

Food delivery firm Zomato’s first-ever profitable quarter brought some much-needed cheer to its investors and the bourses, with several industry insiders saying the positive fallout from Thursday’s news is likely to be much wider. 

Many founders and investors that YourStory spoke to are convinced that Zomato’s stellar numbers will change the lens through which foodtech and quick delivery startups are viewed and convince more VCs to back them.

A quick commerce executive called Zomato’s results “unexpectedly delightful” and “relieving”.

Hitesh Ahuja, Founder of QSR chain Yumlane Pizza, says foodtech startup founders are thrilled because Zomato is one of the very few listed companies in the space, and its growth bodes well for all related members including cloud kitchens, brands, and the gig economy. 

“From a loss of Rs 189 crore last financial year to a profit of Rs 2 crore last quarter, Zomato’s achievement is incredibly powerful because it shows the management’s confidence to maintain positive cash flows and sustain business,” says Akshaye Jalan, Founder and CEO of Xume.

Launched recently, Xume is a grocery and food recommendation platform that uses artificial intelligence to give suggestions to users based on their health goals.

Zomato delivered a surprise profit on Thursday, helped by a whopping 71% rise in operating revenue. The Deepinder Goyal-led company saw a marginal increase in food delivery gross order value at Rs 7,318 crore, driven by robust growth in the number of orders as well as a modest uptick in average order value (thanks to Zomato Gold). 

The company's quick commerce business Blinkit and restaurant supplies business Hyperpure too did well, with the aim of sustained business growth on the charts.

In fact, Zomato CFO Akshant Goyal said during the earnings call on Thursday that ad revenue from restaurants was sustained last quarter amid a subdued demand environment.

“It seems like the company has picked up some sectors for growth (Hyperpure) and different ones for profitability (food delivery and Blinkit). This is a valuable business lesson for foodtech firms,” Ahuja notes.

It’s not just the profit that has caught the industry’s attention.

Zomato made three stark forward-looking remarks:

  1. It will continue to remain profitable going forward with a 40%+ year-on-year topline for the next several years.
  2. Blinkit will hit adjusted EBITDA breakeven in the next four quarters with net addition of 100 stores in FY24.
  3. A likely new app to boost dining out and live events will be the fourth-largest business.

“Another glimmer of hope is in the fact that revenue is now scaling faster than delivery and acquisition cost, which means Zomato is finally breaking the conception that food brands can rarely cut down burn,” says Xume’s Jalan.

A partner at a global early-stage venture capital fund, who does not want to be identified, tells YourStory that Zomato's latest results prove that consumer internet businesses can become sustainable public companies.

The firm’s clarity on revenue growth also indicates its commitment to deliver, according to Nikhil Choudhary, research analyst at Nuvama Institutional Equities.

Investors’ optimism reflected in Zomato’s share price, which surged 11% to reach a one-year-high of Rs 96 apiece.

zomato
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Under watchful eyes

However, onlookers also remain cautious about Zomato’s numbers.

Although investor interest in the foodtech space was high all this while, Zomato’s achievement doesn’t necessarily mean funding will swell, according to another early-stage investor who did not want to be named.

While early-stage investments are still active, growth-stage capital is still experiencing a winter.

“The big cheque-writers (Tiger Global, SoftBank, etc) haven't returned to India yet,” says the VC fund partner quoted earlier, which means that fuelling late-stage food tech startups based on Zomato’s trajectory remains a tall ask.

Moreover, the tough economics of the food industry will still remain a challenge.

“Zomato is a standalone situation. There still are several companies in the foodtech space running unsustainable models without product-market fit,” the partner says.

Yumlane’s Ahuja agrees with this view, noting that food brands will need to take a nuanced approach going forward by focusing on the omnichannel approach and finding ways to cut cash burn. 

“It’s easy to scale mindlessly without eyes on the bottom-line. Zomato has taught us that with prudence, it is possible to grow and be profitable without compromising one for the other,” he adds.

Zomato’s profitability is likely to put more pressure on Swiggy to deliver equally good numbers.

“The name of the game will change once the top two players become sustainably profitable," says the early-stage investor.


Edited by Jarshad NK