Zomato, a food delivery firm, is estimated to grow at a compound annual growth rate (CAGR) of 21% over FY23-27, according to a report by brokerage firm JM Financial, which revised its previous forecast of 25%.
The annual growth of investments over a given time is referred to as CAGR.
Instead of focusing on expanding the long tail of consumers who order infrequently, the company led by Deepinder Goyal is now investing in customers with high order frequencies. The report stated that while this strategy may boost profitability in the long run, it would impact the growth of monthly transacting users in the short term, leading it to revise its earlier growth forecast.
Zomato reintroduced the Gold loyalty programme in January to offset the decline in food deliveries. According to the report, the re-pricing of the membership fee and the shutdown of operations in 225 cities that were making losses may help the company reach profitability soon.
Since it offers a considerably bigger total addressable market than food delivery, especially when the level of competition is declining, Zomato and its rival Swiggy are doubling down on rapid commerce as a growth frontier. In terms of strategy moving forward, both companies are investing more incrementally in rapid commerce than in food delivery.
The brokerage firm claimed that despite average order volume likely declining due to the company’s focus on improving customer experience and expanding the transaction base, Zomato continues to report excellent sequential growth in gross order value, driven by volume.
“We also expect both contribution margin and EBITDA margin to increase due to improvement in take-rates (because of better product commissions and ad income), slowing competitive intensity, and delivery partner-related cost efficiencies,” JM Financial said in the report.
Though the company aims to increase the number of dark stores by 30 to 40% over the next 12 months to offset improvements in existing store profitability partially, EBITDA is unlikely to reach break-even in the near term. The company is well positioned to gain from strong industry tailwinds like improving tech penetration and rising income shares of digitally native millennials or GenZ, according to JM Financial, which added that it continues to be optimistic about its long-term prospects in the hyperlocal delivery space.
