There are two parts of this story first why did Uber Eats need to get acquired and second, was acquiring it a right decision from Zomato’s end?
India is a highly price-sensitive market, and food delivery is no exception. Uber got lured by the possible growth in Indian food segment and saw an opportunity in delivering food in India.
A reason for Uber Eats to work internationally is that outside India it can deliver food in its fleet of cars, while in India cars were not possible considering the traffic congestion and regulations pertaining food delivery in four-wheelers.
Let’s understand one thing transporting people in cars and delivering food in two-wheelers is not the same thing!
For starters, the original business of Uber has two variables — the transporting vehicle(car) and the people to be transferred. While the food delivery has three variables -the transporting vehicle(two-wheeler), the food and the restaurant.
Plus entering into two-wheeler segment with the expertise of four-wheeler, in a price-sensitive country was always going to be difficult.
Now, the above parameters cannot be changed at all. So next we come to strategy. How do you acquire customers when Zomato and Swiggy are working just fine.
Here Uber Eats relied on heavy discounting (the upper cap is 50–60% discounts). A very fundamental issue with heavy discounting is that though it gives you initial traction, most of these users are never loyal to one platform, so they switch the minute another app offers a better discount for any meal/restaurant. Which resulted in Uber Eats India, dragging down average net revenue(ANR) of Uber by 0.4%.
And when Uber IPO did not have a fairy tale ending, it was time to cut loss and get rid of the poor businesses. Plus after IPO companies come under hard scrutiny, even small mistakes are paid by heavy discounting in stock prices.
Before Zomato though, Uber knocked the door of Swiggy for a merger/acquisition but the talks never came to a possible agreement, or rather Swiggy did not see enough “value” in the deal.
Now came Zomato. In India, Zomato lags slightly behind Swiggy around ~5 million orders per month.
But before analysing the decision itself, let us look at the possible advantages for Zomato from this deal.
- Elimination of a rival and establishment of a duopoly — though it sounds good, however considering the lousy run of Uber Eats, the future of duopoly was unalterable.
- Getting restaurants and delivery agents — This is probably the biggest lure Uber could give to Zomato since on-boarding restaurants and delivery agents is a time consuming and competitive task. But from this deal, Zomato strives to get the much-needed edge to advance ahead of Swiggy.
- Getting all of Uber Eats users in whole India — now this is interesting, here we are talking about all users of Uber Eats. The problem being all those users who flocked to Uber Eats from Zomato/Swiggy were looking for massive discounts, their agenda was simple to get the food delivered at the cheapest rate possible, and so they ditched Zomato/Swiggy. However, to make profits in the delivery business, you need to increase prices ultimately, and as you do that these discount hunting users will switch to other platforms. So you might see a good number of active users, but in reality, only a fraction of those are loyal rest are purely hunting for discounts. Meaning, even if Zomato does redirect all users from Uber Eats to its platform, a good percentage of them may still not order from Zomato.
- Investment — after the disastrous output of WeWork, investors no longer entertain “growth at all costs”, investors now look for a business which has low unit economics, or which can scale while making significant revenue, no matter how good a company may look. This ultimately put pressure even on the most prominent players in the world, meaning now your chances for funding without the signs of significant revenue are thin. Considering the last round of funding in Zomato ($150mn which is a part of $600mn) and the way Zomato burns money ~$18–20mn per month. Hence, convincing investors to invest money further could be highly difficult and so to get new funding, Zomato needs to sell a new story, a new beginning, or maybe a new deal. With an acquisition, it makes investor look at Zomato from a different perspective, and perhaps a unique opportunity for higher ROI.
In conclusion:
This deal is rather tricky to assess especially the number of users gained by Zomato for example, let’s say Uber Eats had “X” number of MAU(monthly active users) however if only “X/2” of these are loyal then Zomato ultimately ended up paying for these “X/2” users, and the rest would still hunt for discounts as they previously did.
While the fleet of restaurants and delivery agents gained would always be an advantage for Zomato.
In the end, the deal saw fruition due to two main factor, the desperation of Uber Eats India to sell its business and the insecurity of Zomato from Swiggy.
What is your take on the much-hyped “number of users gained by Zomato”?
