It is difficult for a business journalist to be a smug customer. There is often a natural tendency to do back-of-the-envelope calculations on the profit margins of the products or services they purchase. As an occasional customer of Zomato and Swiggy, I am not surprised that stock market analysts have raised their eyebrows—and lowered their potential earnings expectations—after the government brought food delivery under its 18 percent goods and services tax (GST) net in its new tax reshuffle.
Morgan Stanley says that for Zomato, food delivery has an average service fee of Rs 11-12, which can now rise up approximately to Rs 14.5 per order —or Rs 2 per order. For Swiggy, the estimated average delivery fee is at Rs 14.5 per order, a potential impact of Rs 2.6 per order.
We will have to wait and see whether the companies absorb the tax by lowering their fees or do newer things to grow their business. But there is little doubt that they have to do their own Strategy 2.0 to match the GST 2.0.
Delivery Apps Are Selling Time, Not Just Food
There's a lot to be understood in this game—from the minds of venture capitalists to the hearts of customers. Overall, it is time for these companies to recognise that what they are doing is basically a courier service for food, with an express delivery service for their quick commerce customers through Zomato's Blinkit arm and Swiggy's Instamart.
You can call them new-age retail giants, but, unlike Amazon, JioMart or Flipkart, these platform apps play on things in which time is of importance.
Hungry people want their food fresh, and impatient people in urgent need of something pay a delivery charge or a higher price because their time is valuable.
If "managing perishability," of food and time, is the core value of Zomato and Swiggy, it is time to realise a simple truth. Both home delivery and quick service are essentially a luxury of sorts for most Indians, and it is not surprising that they have attracted a higher GST charge.
Competition Beyond Apps
If they are to worry about competition, they have to picture themselves as being no different from a Britannia, Hindustan Unilever, or Gillette India. It is time to define what is a real premium offer and generate new types or products and services to deliver, and above all look for volumes down the line rather than simplistic per-order margins.
Busy executives and IT workers may love Zomato or Swiggy because their time and odd-hour conference calls make the delivery and platform fees worth it, but a 145 crore strong nation of price-conscious customers may think otherwise.
I have a lunch supplier who lives three km away from my place and delivers a delicious, home-cooked thali at under Rs 100 and takes no delivery fee. In contrast, it is difficult to find a comparable thali on food delivery apps at less than twice that price.
On a hard look, I end up paying for "discovery" of food outlets through a glorified search mechanism and brand premiums-either for Zomato/Swiggy or the restaurants in question. Without facial make-up, Zomato and Swiggy are just what MBA graduates call "commoditised" services—or fast headed there.
A Reality Check
Let's go back a bit to understand their history. As venture-capital-backed companies, Zomato (now renamed Eternal as a corporate umbrella), and Swiggy have been hyped well beyond their visible earnings growth trajectory because they are futuristic companies. But it is not as if they are sitting on high-value patents or product design that make them world-beaters.
What they have been enjoying is a first-mover or second-mover advantage in a new technology-based platform opportunity. The GST hit is just a wake-up call to say the honeymoon is over.
Swiggy listed less than a year ago on the stock markets at price band in which the upper end was Rs 390. Its shares now trade at around Rs 440 a share and the GST has not really shaken its share price despite analysts saying their cost per order goes up thanks to the tax. Consider the fact that Swiggy's current share price is well below its year's high of Rs 617 per share, and the market capitalisation stands close to Rs 100,000 crore. That's a cushy valuation for what was only a startup the other day.
Eternal, listed as Zomato in 2021 with an IPO price of Rs 76 per share, and its current market price close to its year's high, is at Rs 390, more than five times its listing price—with a market capitalisation of close to Rs 300,000 crore.
Valuations vs Real Growth
Their perceived high growth potential puts the market cap of these companies in the big league of corporate brands like Kotak Mahindra and Tata Power. It is time to ask if their real growth rates are sustainable on increasingly higher baselines to justify huge valuations. That is exactly what analysts are doing—and the GST is a new occasion to run a reality check.
As a proportion of the overall food bill a customer runs up (given minimum order values or high delivery fees), the GST on delivery is a small fraction.
True, Zomato and Swiggy have software capabilities but unlike Amazon or Flipkart, they cannot use warehousing and shipping in a manner that significantly lowers the cost per customer delivery. The perishability and speed factors come in the way. Nor is it easy for them to negotiate lower purchase prices from suppliers—because well-known restaurants are not soap companies.
Hype vs Competition: The Market Is Catching Up
Zomato and Swiggy operate essentially as convenience brands with a technological spin-and there is only so much hype that justifies both these factors, given that the Internet is substantially based on readily available technologies.
Ola and Uber have woken up to new competitors like Rapido in public transport, and there are competitors waiting around the bend for Zomato and Swiggy.
The government-backed Open Network for Digital Commerce (ONDC) is helping food delivery the way Android helped proliferate mobile phones. Magicpin, Ola, and even Paytm have been trying their hands at food delivery.
What Zomato and Swiggy perhaps need to do is not just list restaurants that are already there but get into developing high-value, unique, or hygienic cuisines at lower costs through new-age partnerships and business development.
The GST charge is best seen as an opportunity by these giants to innovate or perish like the hot food that turns cold if not delivered on time by hard-working boys in colourful but sweaty corporate T-shirts.
(The author is a senior journalist and commentator who has worked for Reuters, Economic Times, Business Standard, and Hindustan Times. He can be reached on Twitter @madversity. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)