The Zomato and Uber Eats Deal Explained.

Introduction:

Do you remember the last time you went to a bakery to buy a cake? It must be a ‘NO’ for many of us. The reason behind this is very simple- it’s just a click away! Even if someday you are too lazy to cook, you are happier that the food can be ordered online. Over the past few years, the arena of the culinary business has transformed profoundly. People can relish the delicacies of the restaurants sitting at their homes. These reforms, on one hand, have eased the availability of the food at one click to the customers, on another, has helped the restaurants to expand their business and generate employment opportunities. The latest update in this food- delivery world is the Zomato – Uber Eats merger.

The Gurugram based online food and restaurant discovery platform Zomato has acquired the Indian operations of Uber Eats, the U.S. based food delivery business run by Uber, for about 350 million dollars (2.5 thousand crores), as per the Economic Times report.

Important details regarding the merger:

  • The merger will be the all-stock transaction which will give about 10 % shareholding of Uber Eats to Zomato. That means, there will be no cash transactions between both.
  • Uber Eats will cease to exist as a separate brand locally and the users on its platform will be redirected to Zomato’s App.
  • Zomato will not absorb Uber Eats employees, which means that they will either be absorbed in Uber’s other verticals or could face lay-off.

What was the motive behind this merger?

Earlier, Zomato and Swiggy were the prominent market players, wherein Swiggy drew closer to 1.5 million orders per day, on average and that of Zomato was about 1.2 million per day. But, for Uber Eats, it was just between 2.5 lakhs to 3 lakhs per day. So, the deal seems to be attractive for Zomato which has been looking to splinter the stronghold of Swiggy, especially in the Southern parts of the country because Uber Eats has its market outspread there.

Majorly, Zomato took this moment to expand its business in the Southern States to increase its presence, which was otherwise sparsed. For Uber Eats, the merger was meant to be a savior as the food-delivery platform was recurring losses due to its slighter traction in the Northern regions.

For Zomato, that has been in a neck to neck battle with Swiggy, the intriguing question that is arising in the minds is that “Will Zomato be the new Numero Uno, leaving Swiggy behind? There are two aspects of the coin:

  • First, as per some analysts, with the acquisition, Zomato’s market share in the food-tech space may make it the number one player with over 50 % market share, which earlier stood at 30 % for Zomato and 12% for Uber Eats(in Southern India).
  • The second aspect is that the other groups of analysts believe that it may not be a simple linear integration for the reason that some customers of Uber Eats may migrate to Swiggy. Because it is the quality and price which determines the choice or preference of the customers and Swiggy may procure that trust.

Also, as suggested by the figures, the Uber Eats numbers in India may be a nerve-racking affair for the Zomato. As per some reports from the CNBC, Uber Eats India contributed 3% of global Uber Eats revenue but, contribute a huge percentage(25%) of Uber Eats global interest, tax, depreciation, and amortization losses. Uber even had plans to offload Uber Eats in India for some time, to earn profits. Earlier, the Uber Eats India business was forecasted to see revenue for FY20 at Rs 79 crore for an expense of Rs 1,390 crore. But now, it is being estimated that by 2030, the revenues will fetch Rs 12,5898 crores for an expense of Rs 5678 crores.

For Zomato, there will be some conspicuous advantages such as the Customer data it acquires from Uber Eats will help it understand the choice and pattern of order of the customers and thus, would facilitate to build a strategy for marketing and promotions. Next, Zomato will get great negotiating power with restaurants which could eventually reduce losses. Also, with the merger, Zomato will be indirectly bringing Soft Bank into India’s food-tech space.

Impact of the merger on the industry:

It is important to assess the impact of the merger on the Customers and the restaurants, and what are the reverberations it may produce.

  • As Swiggy and Zomato continue to expand to newer markets, discounts and subsidized offerings will be their go-to strategy to acquire customers but there is also a possibility that the discounts will be lowered due to the duopolistic(Zomato and Swiggy are the only players ) nature of the market.
  • The restaurants offering to dine out and deliver will lose bargaining power with Zomato because of the fewer players in the market and restaurants cannot afford to lose their customer base build-out of Zomato and Uber Eats together.
  • There could be a possibility of Zomato increasing commission from the restaurants again due to the above-mentioned reasons such as the duopolistic nature of the market and customer base.

Conclusion:

So, if the current market-like situation prevails, very soon India’s Food-tech sector may become duopolistic with the two mighty rulers in the market -Zomato and Swiggy and the way they are cutting down on discounts in the last 4-5 months, there could be a further rationalization. The menace from Amazon’s leap into food-tech is looming large. It will be engrossing to see the upcoming scenes as the COVID-19 effect has already shaken the restaurant and food-tech business due to ‘Lockdowns’ earlier, and even after the ‘Unlock’ people prefer to stay indoors. So, the food delivery platform can make the situation fortunate by committing heedful management strategies focusing on the quality and hygiene of the food delivered as, Mr. Prudhomme famously stated that “You don’t need a silver fork to eat good food!”

Author: Soumya