Gold Mine in the oven — Zomato

A long shot and one of the greatest and maybe the most anticipated IPO of 2021

On 14th of July 2021, Zomato will authoritatively open up to the world. Raising about 9000cr, a long shot and one of the greatest and maybe the most anticipated IPO of 2021. In any case, to the extent that the quantities of the organization are concerned, Zomato is by all accounts in a profound major dilemma! From 2018 to 2020 while the income of the company went from only 65 million to 368 million dollars during a similar time, the misfortunes detonated by multiple times from only 15 million dollars to in excess of 300 million dollars. Furthermore, every time Zomato attempted to become productive it has prompted only shock. Previously with the Zomato Gold launch the company tried to secure in the customers from going to Swiggy yet that led to gigantic misfortunes to eateries which constrained them to close the help down. Then, at that point they took a stab at increasing the costs of their dishes however that wound up making a miserable impact on the customer! So from an external perspective, it nearly appears as though the company is stuck in a vicious cycle of cash drain which is prompting only an ever increasing number of losses.

There is another significant factor that many people are contemplating and this factor could transform Zomato into a gold mine and can make it your most successful investments in the following 5 years in the food-tech space. The question is “What exactly is this X factor and how can Zomato or Swiggy turn into a goldmine investment”. And this lies in a peculiar case of a Silicon Valley startup called June. This is a story that traces all the way back to 2013 when ‘June’ became one of the pioneers to foster something many refer to as the smart oven. This oven was so amazing, back in 2013 itself it had a screen for viewing recipes, could be controlled over Wi-Fi and it was also Alexa-compatible which allowed voice command control back in 2013 itself! The company was doing so well that it was able to raise a series of funding from heavyweight investors. And in 2018 June also secured an investment from Amazon Alexa Fund and the company grew rapidly from 2015–2019.

Just when everything looked perfect something crazy happened. Just a year before time Amazon dispatched their smart oven which had the very highlights of June including Wi-Fi availability and Alexa combination. Yet, the feature here was that Amazon Smart Oven was valued at a large portion of the cost of June Ovens. While June was selling its oven for about $499-$699 Amazon’s smart oven would have cost you just $250 in those days. And that is how this rising startup became a competitor of its own prime investor and amazon started eating into profits of its own best seller.

And all this is possible with the 3 inconceivable superpowers Amazon has. consumer data, seller data most importantly the super power of digital real estate by which it can give special preference and rank its products at first position and make million dollar sales. The data is practically a GOLD MINE for Amazon!

Guess what! This is the exact situation with Zomato! For this situation, Zomato has all the data about thousands of restaurants and millions of consumers who have used Zomato to order food. Zomato knows precisely which dishes are popular in which region. So this way, Zomato and Swiggy are practically sitting on a data gold mine too! And this can turn Zomato and Swiggy both into super profitable businesses in no time.

Both Zomato and Swiggy have already ventured into it using something called the concept of “Cloud Kitchen”. To understand the depth of this you first need to understand what a cloud kitchen is. In simple words, a cloud kitchen is nothing but a super efficient restaurant which only gives out take-away orders and has no dining space. It’s basically just the kitchen of the restaurant that takes online orders and gives it out to delivery. A simple example of the same is Behrouz biryani. It has no outlets but has got a fantastic digital presence. And this concept of cloud kitchen ladies and gentlemen is a revolution in the making.

How?? A conventional 50 seater restaurant would require 50 lakhs of approximate cost. And most importantly, the monthly revenue needed to break even in 2 years is about 20 lakhs. If you look at a cloud kitchen the space needed would reduce significantly and would cost you about 30 lakhs. The monthly revenue needed to break even in 2 years is about 20 lakhs. Most importantly, the revenue needed to break even in 2 years also goes down by 50% again to just 8–10 lakhs. And the benefits? Well you’re looking at saving 5 lakhs in rent per month. You save 19 lakhs in rental deposits,10 lakhs in working capital which results in the best part that is10 lakh rupees less is needed as a monthly revenue to break even in 2 years.

A standing example of the same is Rebel Foods. Now, this is the company that owns Faasos and Behrouz Biryani. And you know what? Both these brands, individually, bring in about 16–17 crores worth of business per month! Here’s where Zomato Kitchens come in. And all these brands like Faasos, Behrouz, Good Bowl, Box8 are all using Zomato or Swiggy to sell their dishes, right? Well, in that case, if you see Faasos and Zomato, Behrouz and Zomato share the exact same relationship as June oven and Amazon.

So just like Amazon had sellers data and knew everything about what worked for June and what not, Zomato knows exactly which Behrouz cloud kitchen is doing well and which is not. Just like Amazon had customer data and knew exactly what is the purchase power of the audience and who wants to buy an oven. Zomato knows exactly who is more inclined to buy a sandwich, who is more inclined to buy a roll and who is more inclined to buy a biryani. And most importantly just like Amazon had the super power of digital real estate to enlist its products on top Zomato can particularly open up its own cloud kitchen and list its products at the top with aggressive pricing model and undercut its own best sellers like Behrouz and Fassos And the best part is instead of being so evil Zomato and Swiggy are doing it more ethically now which is where ventures like Zomato Kitchens and Swiggy Access come into play. Zomato kitchen is this wonderful partnership between Zomato and a bunch of hand picked brands across the country where in Zomato uses its superpower of data and chooses the most profitable location in a particular area. And then based on what works best in that location certain brands are chosen.

And this kitchen will have multiple sellers from specific categories and this space will be shared by all the cloud kitchens together which will maximize their profits and optimize their cost. Also, Zomato will provide them with everything starting from raw material to kitchen infrastructure

This point is where Zomato and Swiggy both will go on to become super profitable businesses with super profitable cloud kitchens across the country. And my sense is Zomato is raising these 1 billion dollars to transition to this next curve of cloud kitchen. So now the question is- Should you invest in Zomato or not? Whenever you look forward to investing into Zomato or similar companies please, remember these important lessons.

Lesson 1, always remember as much as people are obsessed with the numbers and the math it is important for you to understand that more than the numbers it’s the story behind those numbers that is important. In this case, there are so many people out there on the Internet itself who are so engrossed into the fundamental analysis and the present numbers of the company that they have completely lost sight of the fact that we are living in the 21st century wherein the next disruption is less than 3 years away. And we as ordinary people are looking at the present and the next 2 years of the company. The investors like Sequoia Capital are looking at a 10 year trajectory. And as soon as we start putting ourselves in their shoes and look at a 10 year trajectory it will help us better understand these companies eventually, it will give us more clarity for our investment.

Lesson 2, if you want to find these trajectories, the best way would be to do some extensive research about companies all across the world and find out those companies which are already in the next curve. In this case if you see, an understanding of how Kitopi is operating gives us a very good understanding of how Zomato will be operating. And that is how you can derive some very valuable insights about what’s gonna happen in the future.

Lastly and most importantly, keep a close eye on how Zomato and Swiggy keep pivoting to the next curve because these kinds of transition periods have got some very very valuable business lessons for each one of us. And always remember, once a great man said, Innovation always happens in the next curve and those who look for it will end up owning the future. In this case it is the rise of the next generation food-tech startups and Zomato’s IPO will mark the beginning of this revolution in India.