Untapped advertising revenue streams to boost Zomato’s profitability: Elara Capital

Brokerage firm Elara Capital believes that Zomato may consistently hike the commissions from new restaurants as ordering platforms and ONDC haven’t been able to scale.

Untapped advertising revenue streams to boost Zomato’s profitability: Elara Capital

Thursday October 19, 2023,

3 min Read

Restaurants, quick-service chains, and cloud kitchens rely heavily on aggregator platforms, which take commissions in exchange for marketing, visibility, and convenience. For delivery platform Zomato, the system will continue to be a bright spot, likely to benefit from untapped advertising forms like video and display, brokerage firm Elara Capital said.

Advertising revenue generated by foodtech companies is generally low as there is only one advertiser on these platforms—restaurants. However, the segment is expected to see a healthy CAGR of over 40% led by ecommerce advertising adoption, Elara Capital said in a note to investors on Thursday.

The ongoing Cricket World Cup 2023 will also offer a boost to food aggregators' delivery volumes, which will propel better growth rates over the medium term. “We reiterate BUY on Zomato, with a raised target price of Rs 140 (from Rs 130 earlier),” the note said.

The number of brands and choices available in the quick-service market has increased significantly, particularly in the burger and pizza categories, where it's easier to open stores, making them conducive for expansion, the firm added.

Companies are introducing gourmet options and expanding their product range to cater to various consumer segments. It added that the premiumisation strategy serves two purposes: It increases the average order value (AOV) and attracts more customers with innovative products.

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The online food delivery space has witnessed an increase in take rates from 5.5% in 2015 to about 24-25% in the context of cloud kitchens, which Elara said, "are not necessarily linked to the AOV."

"Established players in the industry tend to have lower take rates. Newcomers often face challenges, and the odds may be stacked against them on commission,” it added.

Going forward, Elara Capital said, new restaurants, smaller chains and cloud operators are likely to see a consistent increase in take rates as direct ordering platforms and ONDC haven’t been able to scale.

Moreover, optimised delivery strategies and advertising and promotional expenses will drive improvement in the unit economics of food aggregators like Zomato and Swiggy.

Deepinder Goyal-led Zomato recorded a first-time profit of Rs 2 crore in the April-June quarter of FY24. In August, CFO Akshant Goyal attributed the achievement to "some critical parts of the team" which out-performed the company's expectations, while some of its initiatives delivered better outcomes than the company had envisioned.

Traditionally, the dine-in experience has had a higher price point to account for factors such as restaurant rent and staff costs. In contrast, delivery is expected to be cheaper due to lower operational costs.

However, as additional expenses—logistics, marketing, and commissions to aggregators became part of the cost structure—the economics of dine-in and delivery started to converge. Aggregators are now challenged to balance these factors and maintain competitive pricing for delivery while ensuring the business is profitable for both restaurants and delivery platforms, the note highlighted.

Elara Capital said the move by Swiggy and Zomato to introduce a platform fee of Rs 3 per order will help to create “a new source of revenue for them to boost overall profitability.”

In a bid to diversify revenue streams, Zomato recently ventured into logistics with the launch of Zomato Xtreme, which will allow merchants to send packages starting at Rs 35.

Edited by Suman Singh