Zomato Ltd, the online food delivery giant, has been on a journey to boost profitability, and their efforts are beginning to bear fruit. One of the recent moves by the company involves introducing a modest platform fee of ₹2-₹3 per order on its app. This “small fee” aims to assist in covering operational costs and ensuring the sustainability of the Zomato platform. While this change may seem subtle, it holds potential significance for the company’s margins. Let us explore in depth the implications of this strategic move and its potential impact on Zomato’s financial health.

The Platform Fee Experiment

Zomato’s introduction of a platform fee is still in its experimental phase, with a gradual rollout across India. The company has cited the need to “pay the bills so that we can keep Zomato running” as the primary motivation behind this initiative. Although the immediate financial gains may not be substantial, it reflects Zomato’s commitment to improving profitability.

Short-Term Impact and Future Possibilities

The platform fee’s impact may be insignificant in the short term, but it paves the way for future developments. According to Nikhil Choudhary, Assistant Vice President of Equity Research at Nuvama Institutional Equities, Zomato will likely evaluate the fee’s impact on customer demand and may even consider increasing the fee in the future.

Enhancing Customer Delivery Take Rate

One of the key benefits of the platform fee is its potential to boost Zomato’s customer delivery take rate. Zomato charges both restaurants and customers for facilitating orders, and this fee, when expressed as a percentage of the gross order value (GOV), is known as the take rate. Recent trends have seen a rise in Zomato’s restaurant take rate while the delivery take rate has declined. Ultimately, improved take rates contribute to higher margins.

Analysts from Kotak Institutional Equities have estimated that if Zomato’s 2.7 million high-frequency customers, with an annual ordering frequency of over 50 times, transact an average of 75 times a year with the ₹2/order platform fee, it could result in ₹40 crore of incremental contribution profit/EBITDA. It could translate to a 16 basis point increase in contribution margin, moving closer to Zomato’s targeted 8% contribution margin as a percentage of GOV over the medium term. Zomato had reported a contribution margin of 6% in the first quarter.

Blinkit and Future Prospects

Zomato’s quick commerce business, Blinkit, still operates in the red, but losses are narrowing. In Q1, Blinkit achieved an adjusted EBITDA margin of negative 6.2%, an improvement from the negative 27.8% in Q1FY23. Investors currently assign limited value to Blinkit, but there is potential for a shift in sentiment once the segment turns profitable.

Zomato aims for Blinkit to break even at the adjusted EBITDA level within the next four quarters, and recent fundraising by Zepto has instilled confidence in the prospects of the quick commerce sector. Zomato’s shares have already shown a strong recovery in 2023, rising to 66% year-to-date after a significant 57% drop in 2022.

Summary

Zomato is making strategic moves to enhance profitability and ensure its long-term sustainability. While introducing a platform fee may seem modest, it can have a meaningful impact on margins and financial performance. Investors are beginning to recognize the positive changes in the company’s stock performance. Zomato’s ambitious target of 40% year-on-year growth in adjusted revenue for the next couple of years will be closely watched, and achieving this growth while improving margins will be critical for the stock’s continued success.

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