Why Zomato, Swiggy will fail (and the ace up their sleeves)
Dependence on scale but then venturing into low-margin business and an arrogance towards product-market fit.
Why Zomato and Swiggy has failed to see profits after so many years, even though we use them so much?
Zomato Legends, an inter-city food delivery program that can deliver freshly prepared food within 24 hours. But the thing is I do not plan my meals 24 hours in advance. I do not know if I would really want to eat a gulab jamun tomorrow. All I know is that right now I am craving for some wings and a gulab jamun, and I hope to get it before my craving runs out.
Swiggy Dine-out
If I went out for a dine out, I am not looking for the cheapest discount I can get, I am looking for an experience that would compensate for my long week. Dine-out was launched with the idea that we will see a discount in a particular restaurant, and people would flock to that restaurant on that particular day, thus increasing cash flow through visibility. Algorithms will decide which restaurants to be promoted yada yada. But you see, the consumer behavior is such that, we do not select places based on discounts. You go for an experience which is worth far more than the 10–15 percent you would save. And the result? Once the bill comes in, you pull out the dine-out app, and see if there is a discount applicable. Does this reflect product-market fit? Absolutely not.
Call me biased, but what I feel about these products is that they are based on an assumption that their products can change how consumer behaves, as opposed to building a product centred around consumer behavior. You or I, we craved for some good South Indian meal while vacationing in North, or vice versa. But how many times a year? And would you wait 12–24 hours for such a meal to be delivered? Over the years, will you change your behavior to wait for 12–24 hours to eat that dream meal? Thus, why this obsession that your product will change the consumer? Why not offer something that the consumer wants?
Zomato has a not-for-profit arm
Why now? When the company is listed on the stock market and is currently showing only losses. I know it is a noble effort, but is this the right time for this? I know one thing, you should save yourself before you save others. I will forgive Zomato for this one, because this one just pulls at my heartstrings.
Scale. But where to?
Moving on. Most importantly, you ask any person about Swiggy or Zomato, it is almost always the same answer: they are gonna see profits once they scale. And this is the most ridiculous thing that I find. You are gonna scale to what exactly? India has only so many Tier-1, Tier-2 cities. Secondly, why this dependence on scale? I know businesses have to scale. Eventually. But that happens as a causation, not as an obligation. Recently, Swiggy reported a loss: Swiggy’s revenue grows two fold in FY22, losses widen. So, even scaling could not help their losses. The obvious reason why they are so dependent on scale is because of low-margins. And the second reason is because of the same-sided network effects, which means customer acquisition cost decreases for each new user. Granted, that scaling is a really good option. But with low-margins, how much are you going to scale?
Zomato Hyperpure
Most of their revenue model is based on low margins. I am saying most, but I might as well as say all. There is not a single offering from these two that runs on a good margin. I mean, is there really not a single product/offering they can come up with which is for premium users? What is this obsession with low-margin revenue models? Zomato Hyperpure, a recently launched initiative, is another low margin business. Hyperpure looks great on paper; aside from the financials, everything else looks great: value-add for restaurant chains, good quality food and so on. But is it a good business decision? Absolutely not. Is it philanthropy? Maybe yes.
The ace up their sleeves
Now, coming to the quick commerce delivery arm of both the players. Instamart and BlinkIt. You can get an iPhone within 10–15 minutes. You can even order books. This model is the budding danger for the other two behemoths namely, Amazon and Flipkart. It won’t replace Amazon and Flipkart. It cannot. Because Amazon and Flipkart cuts away the middleman and offers better discounts. But it will cut away quite a huge chunk of market share from the two behemoths for sure. This is the ace up their sleeves. Coming back to the old question of, is it a low-margin business? Again, sadly, it is. But I cannot be this pessimistic. I hope they can turn this into an ace up their sleeves.