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Thursday, February 20, 2020

Explained: After Zomato eats Uber

Uber has sold its food-delivery operations to Zomato in an all-stock deal. What is the big picture in India’s online food-delivery market? How will the Zomato-Swiggy duopoly impact restaurants and consumers?

Written by Pranav Mukul | New Delhi | Updated: January 22, 2020 8:44:53 am
Explained: After Zomato eats Uber Zomato is likely to benefit from getting its hands on Uber’s customer data. (Archive)

In 2017, when Uber Eats launched in India, commentators flagged its late entrance in the online food-delivery business dominated by Naspers-backed Swiggy and Alibaba-funded Zomato. Uber had reasoned then that entering a semi-mature market could possibly save it investments in developing an ecosystem in which people ordered food online.

Less than three years later, Uber has sold its food-delivery operations to Zomato in an all-stock deal that gives it 9.99% ownership in Zomato.

What is India’s food-delivery market like?

Swiggy and Zomato together command nearly 80% of India’s online food-delivery market, with smaller players including Ola (which acquired Foodpanda), and various cloud kitchens occupying the rest. According to estimates, more than 3 million orders are delivered by online platforms every day — with a majority of orders being placed in the seven cities of Delhi, Mumbai, Bengaluru, Kolkata, Hyderabad, Pune, and Chennai. Both Zomato and Swiggy claim a presence in more than 500 cities across the country. Uber Eats was able to establish itself in 40 cities.

Over the past year, both the big players have expanded aggressively to tier-II and tier-III towns on the back of a growing selection of restaurants, and increased preference for online food ordering. Over the past two years, Uber Eats too, while controlling just over 1% of the market, went into smaller cities such as Guwahati, Madurai, Kottayam, Udaipur, Kollam, and Mangaluru.

The expansion, however, has come at a cost. Like other consumer tech sectors, food-tech too, is struggling with losses due to high spends on subsidising orders to acquire and retain customers. Both Zomato and Swiggy offer discounts and services like free delivery to retain customers on their platforms.

What does the deal mean for Uber?

Since the company’s disappointing public offering last year, it has been taking its hands off loss-making businesses. In November last year, Uber CEO Dara Khosrowshahi had laid down the company’s strategy for the food-delivery business — suggesting that it would operate only in markets where it was able to occupy the No. 1 or No. 2 spot. In line with this strategy, Uber has already pulled out its food-delivery business from the Vienna and South Korea markets.

In fact, Uber had conceded to Zomato and Swiggy as early as in April last year. In filings with the US Securities and Exchange Commission prior to its public offering, Uber had said: “Our competitors in certain geographic markets enjoy substantial competitive advantages such as greater brand recognition, longer operating histories, larger marketing budgets, better localised knowledge, and more supportive regulatory regimes.

“In India, for example, our Uber Eats offering competes with Swiggy and Zomato, each of which has substantial market-specific knowledge and established relationships with local restaurants, affording them significant product advantages. As a result, such competitors may be able to respond more quickly and effectively than us in such markets to new or changing opportunities, technologies, consumer preferences, regulations, or standards, which may render our products or offerings less attractive.”

According to industry estimates, Uber Eats’ India business contributed less than 5% of the vertical’s overall food-delivery bookings globally, but accounted for almost a fourth of the segment’s global losses. Between August and December last year, Uber estimated a loss of $107.5 million for its food-delivery business in India; the move to sell to Zomato is in line with the company’s strategy of pruning loss-making businesses.

The deal gives Uber 9.99% ownership in Zomato, which according to the latest round of fundraising earlier this month, was valued at $3 billion. Even though Zomato is loss-making as well, holding a stake in a growing company gives Uber the chance to recover at least a part of its investment in India at a later stage. Additionally, divestiture of Uber Eats would give Uber more room to invest in other growing businesses. In a statement on Tuesday, Khosrowshahi said Uber will continue to invest in its local Rides business, in which the company claims to be the category leader.

What does the deal mean for Zomato?

Zomato has been in a neck and neck battle with Swiggy for the top position in India’s online food-delivery business. Acquisition of Uber Eats barely strengthens Zomato’s position in the segment, but it certainly gives it an advantage over its rival in terms of the customer data that it acquires from Uber.

Also, the exit of a player from the market will give Zomato greater negotiating power with restaurants, which could translate into lesser cash burn and reduced losses going ahead. Zomato’s purchase of Uber Eats also indirectly brings Softbank into India’s food-tech space. Earlier, Softbank had been in talks with Swiggy for a significant investment, but it did not come to fruition.

What does it means for consumers and restaurants?

As Swiggy and Zomato continue to expand into newer markets, discounts and subsidised offerings will be their go-to strategy to acquire consumers. Restaurants, which are already at loggerheads with Zomato over its Gold offering for dining out and delivery will, however, lose bargaining power in a duopolistic market.

But unlike other sectors where a duopoly would effectively function like a monopoly, the online food-delivery segment is expected to be competitive even with two players, given that future valuations and fundraising for these companies would depend greatly on the numbers they are able to show to their investors.

Finally, there is the question of Uber Eats’ 100-odd employees, whom Zomato is unlikely to take over. Sources said some Uber Eats staff will be absorbed into Uber’s other verticals, while the remaining will be laid off.

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