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Decoded: Why Zomato's record 2.5 million orders on Dec 31 may not be as great as it looks

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Decoded: Why Zomato's record 2.5 million orders on Dec 31 may not be as great as it looks

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Zomato served a record 2.5 million orders on December 31, 2021, according to a tweet by the company's CEO Deepinder Goyal. While at the first look, the number sounds impressive, but its average order value (AOV) has declined. It is about 12 percent lower than last year on New Year's Eve. At the same time, the cost of delivery and manpower has increased over last year.

Decoded: Why Zomato's record 2.5 million orders on Dec 31 may not be as great as it looks
Zomato served a record 2.5 million orders on December 31, 2021, according to a tweet by the company's CEO Deepinder Goyal. The number sounds impressive, but how much of a difference does it make to the company's bottomline? Let’s take a closer look at the key metrics of profitability.
What was the total revenue from these 2.5 million orders and also the average order size?
We don't know the total revenue from these 2.5 million orders, but we can extrapolate them from what CEO Deepinder Goyal tweeted.
  • At 9:08 PM on December 31st, he tweeted, "OMG! 2 million orders! First time in a single day. Three more hours to go..."
  • "All this food was worth Rs 91 crore."
  • And at the end of the night, he tweeted, "2.5m"
  • Assuming the additional 0.5 million orders were of the same size as the first 2 million, the total revenue for the night could be between Rs 110-120 crore.
    The Average Order Value, again, as per the CEO's tweet was Rs 455 per order (Rs 91 crore divided by 2 million orders).
    How does this compare with last year?
    Last year, Goyal had tweeted the Average Order Value (AOV) for various nights in December:
    AOV in Dec 2020
    17-DecRs 361.6
    24-DecRs 393.17
    25-DecRs 427.02
    27-DecRs 387.07
    31-DecRs 515.2
    #Source: Deepinder Goyal’s tweet last year
    Average order values are skyrocketing as well. https://t.co/U7L5FCaW7n pic.twitter.com/xEX4nVOHEj
    So based on this year's calculation and last year's tweet – the AOV is about 12 percent lower than last year on New Year's Eve.
    At the same time, the cost of delivery and manpower has increased over last year. In the Q2 earnings release, the company said the cost of delivery had increased by Rs 5 per order. So there's likely to be compression from both ends – shrinking revenue line and inflating costs.
    OK, why does AOV matter?
    The entire basis of Zomato's unit economics depends on the AOV. Here's why:
    Zomato’s recognised revenue is a percentage of the total value size of every order. This is known as the "Take Rate". It is the commission Zomato charges from the restaurants, which then allows the company to spend on manpower, marketing, expansion, strengthening platforms, offering discounts, and paying for excess delivery expenses over and above the delivery fees they charge from customers.
    The understanding is, Zomato's costs per order are constant, whereas the revenue is a function of order size. For instance, the cost of delivering a Rs 100 sandwich will be the same as a Rs 500 Pizza. However, the revenue earned by Zomato from a Pizza would be 5X of the sandwich assuming the commission is constant.
    What has been the broad AOV trend been for Zomato over the past few quarters?
    Zomato's AOV until Q4FY21:
    Q1FY20Rs 264.6
    Q2FY20 Rs 272.7
    Q3FY20 Rs 291.7
    Q4FY20 Rs 286.9
    Q1FY21 Rs 378.4
    Q2FY21 Rs 394.2
    Q3FY21 Rs 407.8
    Q4FY21 Rs 385.4
    The reason for the jump from Q4FY20 to Q1FY21 and sustained rise was because of pandemic-related restrictions. More people ordered and that helped the AOV. However, as the lockdowns began easing from Q3 to Q4 before the second wave kicked in – the AOV dipped as people started eating out at restaurants.
    The company hasn't given us a quarterly average order value since listing. However, my sense is, it would trend lower in a post-pandemic world.
    Why so?
    There are multiple factors that affect AOV. More people are
    • eating out,
    • ordering from restaurants directly (as it’s turning out to be cheaper minus the Zomato discounts),
    • More orders from Tier 2 and 3 towns, which anecdotally have a lower order value than the metros.
    • The first two factors have a major bearing on Zomato’s bottomline,
      1) People beginning to dine out have put a cap on AOV as expensive meals are not just for the food but also the overall experience of eating out at a fine dining restaurant. Also, more socialising outside of homes means lesser parties at home and lower order sizes.
      2) The price differential between ordering on Zomato and the restaurants directly. Indians are extremely value-conscious and we have seen multiple instances of Zomato commissions (or take rates) squeezing the restaurants of their margins. There's also an ongoing case in the Competition Commission of India (CCI) against this. To make up for these margins, the prices of the same dish on Zomato from the same restaurant could be higher versus the printed price on that restaurant’s menu card. Restaurants, therefore, urge people to order directly or through other platforms like Thrive, etc that provide better terms to them.
      They say platforms like Zomato and Swiggy offer discoverability while the restaurants' own apps promote loyalty. If you know what you want, you are better off ordering directly with the restaurant.
      This was seen in Swiggy’s annual ordering trend (top orders per city) where there was no mention of pizza as the top ordered food in any city in the country. Obviously, it doesn’t mean people didn’t eat pizza, it just meant, they ordered it on the native apps of pizza companies. We have seen this in the quantum jump in Dominos Pizza app downloads in Q2FY22.
      Dominos app downloads/quarter
      Q1FY21+4.4 million
      Q2FY21+6.3 million
      Q3FY21+7.4 million
      Q4FY21+6.1 million
      Q1FY22+6.8 million
      Q2FY22+27.5 million
      Given the various forces at play, what is the outlook for Zomato's business model?
      The only two numbers to watch in Zomato's financial performance going forward
      - Average monthly orders
      - Average order value
      If either comes at the cost of the other, it's going to impact all the other variables.
      All other factors such as penetration, direct orders and every other theory may go out the window if more people aren't ordering more. That is a must for economies of scale to be achieved.
      Will Zomato be able to grow its AOV consistently?
      I have a few reservations on AOV sustaining at higher levels and growing further:
      • Higher AOV during pandemic has been due to lack of dining out options
      • Once the diner starts to visit restaurants, ordering in maybe a less frequent affair
      • Many premium restaurants (with ultra-high AOV) have almost exclusively moved to other platforms like Thrive etc, or their own platforms
      • Expansion/penetration in Tier 2 and 3 towns may come at lower AOV, higher discounts.
      • What can change for Zomato, for the better, or for the worse?
        Higher than expected monthly orders and higher AOV with constant costs per order. And higher incremental market share than the largest competitor Swiggy would be a boon for Zomato.
        Intense competition from Swiggy and the entry of a possible third player could impact their business a lot more than expected. People ordering from restaurants through Thrive or their native apps (Dominos, McDonald's etc) could put a cap on the expected growth in orders and sales for Zomato.
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