Why Zomato Stopped its Grocery and Nutraceutical Businesses

Shares of online food aggregator Zomato are in focus today, three days after the company announced it will scrap its grocery delivery service.

That's not all. One day after shutting down its grocery delivery service, it also pulled the plug on another business - Nutraceuticals.

Last week on Friday, in a letter to its grocery partners, the food delivery giant said,

• Over the last two months of operations, we have had a few important realizations. Store catalogues are very dynamic, and inventory levels change frequently. This has led to gaps in order fulfilment, leading to poor customer experience.
  
  In the same period, the express delivery model with under 15-minute delivery promise and near-perfect fulfilment rates has been getting a lot of traction with customers and expanding rapidly.
  
  We have realised that it is extremely difficult to pull off such a model with high fulfilment rates consistently in a marketplace model.

There's also stiff competition from Swiggy and Dunzo.

Second failed attempt

Note that Zomato has abandoned plans to diversify into delivering groceries for the second time in two years.

The reason behind this? Infrastructure gaps in a highly competitive online grocery market.

The company entered the segment last year during the lockdown on account of the Covid-19 pandemic, but later, quickly exited the business as the core business was also facing challenges.

Then, it launched the pilot grocery delivery service in July this year in select markets offering grocery delivery within 45 minutes to its customers.

Recently, Zomato had invested US$100 m in egrocery unicorn Grofers and its wholesale unit Hands on Trades Pvt, which also pivoted to the under 10-minute-delivery model.

The company said that Grofers has found high quality product market fit in 10 minute grocery. So it's investment in Grofers will generate better outcomes than its in-house grocery effort.

Nutraceutical business

As mentioned above, Zomato will also shut its nutraceutical business.

What are nutraceuticals? They are defined as any food-related product which provides medical or health benefits. This could range from food to beverages or even tablets with a claim of prevention or cure of chronic diseases.

Zomato forayed into this segment in 2020 as there was huge opportunity in it following the Covid onslaught.

Zomato's decision to shut down this business comes at a time when the government is on the way to become stricter about private label norms for marketplace businesses in the country.

In June this year, the government's came up with new ecommerce rules, aimed at strengthening protection for consumers.

The new rules included limiting flash sales, barring misleading advertisements and mandating a complaints system, among other proposals.

On a spree...

Since the last couple of months, Zomato has been on a clean-up drive.

Apart from the recent grocery and nutraceutical business, it had announced the closure of its Singapore and United Kingdom (UK)-based subsidiaries last month.

Before that, it also announced the winding up of its US subsidiary Nextable Inc.

Why are experts bullish on Zomato?

Zomato, India's first internet unicorn to tap the primary market, began trading in July this year after its Rs 93.8-bn IPO was oversubscribed. The stock rallied 84% from the IPO price of Rs 76 per share on the listing day.

Aswath Damodaran wrote in his blog that Zomato's true value should be just Rs 41 per share.

Even as Aswath Damodaran and Rakesh Jhunjhunwala, among other brokerage houses are not sure about the stock, a handful of brokerages have initiated coverage on Zomato.

They believe Zomato will be a key beneficiary as the demand for food and services in India will grow.

Also, Zomato is the only listed company and controls half the market in a duopoly.

As the food delivery business plays catch-up in the wake of unlock activities, Zomato is likely to benefit.

Zomato stock performance

Zomato share price opened the day up by 1% at Rs 143.20 against its Thursday's close of Rs 141.55.

Presently, it is trading up by 0.5%.

Shares of the company scaled new 52-week high of Rs 151.35 earlier this month on 3 September. When Zomato scaled new highs, it surpassed Godrej Consumer and Dabur India in terms of marketcap.

It had a Rs 1.16 tn marketcap, ranking in the top 40, ahead of notable companies Vedanta, NTPC, Shree Cement, and Bajaj Auto.

Since its listing, Zomato shares are up 12%.

About Zomato

Zomato was incorporated in the year 2010. The company, during its initial stages, started off as a restaurant finder.

Following in the footsteps of its competitor, Swiggy, the company formally launched its food delivery service in India in the year 2015.

By 2020, Zomato expanded its food delivery business to over 500 cities, facing stiff competition from both Swiggy and Uber Eats.

However, during the same year, the company acquired Uber Eats to consolidate its position in the food delivery space.

Based in Gurugram, the company generates most of its revenue from food delivery and related fees it charges restaurants. It also allows users to book tables online, leave reviews, and avail special discounts while eating at select restaurants.

Together with SoftBank-backed startup Swiggy, Zomato has come to dominate an Indian delivery market that benefited from the pandemic as people stayed in and turned to online ordering.

For more details, check out Zomato company fact sheet and quarterly results.

And to know what's moving the Indian stock markets today, check out the most recent share market updates here.

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