Zomato Initiates Process to Liquidate Vietnam Arm

Zomato’s Liquidation of Non-Core Overseas Arms: Impact Analysis

Source and Citation: Originally reported in Economic Times by ET Bureau on January 6th, 2024.

Analysis for Layman

Zomato, a leading Indian food delivery platform, is in the process of shutting down and liquidating its international operations in Vietnam and Poland. This move is part of Zomato’s strategy to cut losses and focus on returning its core India operations and key overseas markets to profitability. While the impact on Zomato’s revenues is minimal, the closure of non-core international businesses reflects the company’s commitment to financial discipline and sustainable growth.

Impact on Retail Investors

For retail investors, Zomato’s decision to close non-essential international businesses signals a focus on profitability and disciplined capital allocation. This move comes after a period of rapid expansion into multiple geographies since Zomato’s listing in 2021. While it indicates prudence in consolidating smaller operations with negligible strategic value, investors should closely watch if Zomato continues this trend. In the short term, the management’s focus on cost-cutting and turning the core platform profitable is likely to positively impact investor sentiments.

Impact on Industries

Food Delivery Platforms

Rationalizing small international operations helps Zomato cut losses and reduce organizational overheads. This allows the company to refocus on core India profitability in the face of a sectoral slowdown.

Restaurant Partners

Zomato’s efforts to conserve cash may slow down the expansion of loss-making new initiatives. This could impact merchant partners’ optimism for scaling emerging services like Zomato Instant, which reduces wait times. However, efforts to simplify existing platform features for small restaurants continue.

Venture Capital

Zomato’s move validates investor sentiments, demonstrating prudent capital allocation amid a funding winter. This sentiment extends to other high-growth startups facing the priority to build sustainable cores over unchecked global aspirations. Unit economics and profitability matter more in this scenario.

Long Term Benefits & Positives

1. Leadership Retention
   • Focusing on profitability makes talent retention easier as employees derive motivation from creating real value for a robust business.
2. Platform Stability
   • Not expanding too fast allows the core technology platform to be strengthened, handling scale and localization needs with a deeper bench strength.
3. Core Focus
   • Growth pangs are compensated by integrating feedback from diverse small partners, refining existing services for simplicity, personalization, and creative monetization.
4. Turnaround Story
   • Demonstrating sustainable profitability turnaround re-rates Zomato’s equity story, making it attractive for patient capital as the next phase of growth kicks in.

Short Term Positives & Negatives

Positives:

1. Cash Preservation
   • Streamlining peripheral international businesses helps conserve cash, sustaining Zomato through industry slowdowns without forced fundraising or drastic course corrections.
2. Overhead Reduction
   • Fixed operating overheads reduce across functions, saving costs. While impacting employees, it aids in extending the runway for other emerging experiments and pivots.
3. Investor Sentiment
   • Signaling principles of capital allocation discipline reassures stakeholders that corporate governance benchmarks set post IPO remain intact, aiding sentiment bounce back.

Negatives:

1. Growth Limitations
   • Consolidating overseas presence dims global ambitions, relying more on core Indian operations for expansion into similar developing markets. Strike rate for new pivots may remain modest.
2. Talent Drain Risks
   • Employees may feel growth opportunities shrink, impacting morale. Competitors may seek key personnel with global vision while employee stock values remain underwater.
3. Platform Innovation Slowdown
   • Steadily experimenting with loss-making product variants slows down with a priority on profitability. Customer delight trade-offs may occur as conventions get prioritized over innovation.

In summary, while Zomato’s cash conservation strategy aids in navigating short-term challenges, the retreat from non-core international markets carries risks of missing global shifts. The company’s focus on profitability is commendable, but a balance with innovation and global expansion is crucial for sustained growth.

Companies Impacted by Zomato’s Vietnam Exit

Indian Companies Unlikely to be Significantly Impacted:

• Zomato: The company states the Vietnam subsidiary is not material and won’t impact revenue. This news might even be seen positively due to focus on core business and cost-cutting efforts.
• Other Indian food delivery companies: Swiggy, Zomato’s main competitor, could potentially benefit from a slight reduction in competitive pressure in the Indian market. However, the impact is likely minimal.

Global Companies Potentially Impacted:

• Talabat: The company acquired Zomato’s UAE business in 2019 and might view this exit as an opportunity to expand its reach in Southeast Asia.
• Other Southeast Asian food delivery companies: Gojek, Grab, and Deliveroo could benefit from reduced competition if Zomato’s exit weakens remaining local players in Vietnam.
• Investors in Zomato’s international ventures: Those expecting a revival of Zomato’s international operations might be disappointed, potentially impacting investor sentiment.

Overall Market Sentiment:

The news is unlikely to significantly impact the Indian market. Global companies in Southeast Asia and investors focused on Zomato’s international expansion might see some potential opportunities or concerns, but the overall impact is likely limited.

Disclaimer: This analysis is based on the provided information and is subject to change based on further developments. Market sentiment can be volatile and influenced by various factors beyond the scope of this analysis.