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ONDC - The Death of Zomato? ☠️

From the humble beginnings of digitising restaurant menus, Zomato has come a long way to enabling deliveries for 1.5 million restaurants. With a 55% market share, it is the largest player in the brutal food delivery business.

Naturally, a company with this legacy is almost supposed to do well in the markets. However, since listing in July 2021, after being the first among new-age start-ups to get listed, the stock has only seen one direction - downward.

Other than the general unforgiving behaviour of the markets towards internet stocks, there have been several reasons for Zomato’s stock price to have halved including leadership exits, inability to profit, the acquisition of BlinkIt, slow progress at other ventures, strategic changes with the Pro membership, and even flack for racing towards 10-minute deliveries.

But none of these hiccups has been as fatal as the one that’s now staring into Zomato’s face with a noose - ONDC! This beast has the potential to revamp several internet businesses, and even kill some. Will Zomato survive this?

ONDC for Sellers - Democratic Much

ONDC, short for Open Network for Digital Commerce, is an initiative founded by the Department for Promotion of Industry and Internal Trade (DPIIT) of the Indian government.

Unlike other e-commerce players, ONDC isn't just an app, a middleman, or software, but a democratic platform for anyone to set up their own e-commerce venture in a collaborative manner with other business owners. Look at it as the entire infrastructure itself.

While this looks like it is picked out of a media blurb, there is a simpler explanation for what ONDC does.

Picture this - Amazon and Flipkart (which control 60% of Indian e-commerce together) allow you to search and choose what you want to buy, pay for it, and deliver it to you as well. If you consider e-commerce as one giant shopping mall, Amazon and Flipkart are your only two gates.

Even for sellers who can’t afford to open their own shops (in the mall analogy), they are the only two places where their products can be showcased, and where buyers have already been flocking to.

This dominance makes Amazon and Flipkart dictate their own terms. They control everything from the placement of products to guidelines on listing to commissions charged for sales, delivery, and more. Sellers have no choice but to accept these terms.

Similarly, for food and grocery delivery, Zomato and Swiggy are your only two gates. And both of these, in a path towards making money, have been trying to squeeze as much money out as possible from both sellers (restaurants) and buyers (consumers).

ONDC basically breaks this dominance down and gives sellers the flexibility to choose who they want to work with on what terms.

To simplify this further, let’s take an example to show you what ONDC is all about:

Let’s say you want to order a doughnut, but instead of opening Swiggy or Zomato, you open MagicPin, the restaurant discovery and discount app, which has integrated ONDC into its app.

Unlike in the case of Swiggy or Zomato, this seller could be a large bakery or a mom who sells it from her home!

The delivery of the doughnut could either be handled by the seller, or an entirely different delivery partner that is registered on the ONDC platform could assist in reaching the order to you, like Dunzo for example!

ONDC breaks down every step and allows different people to chip in and make the orders reach the end consumer, in a much more democratic way.

ONDC for Buyers - So Much Cheaper

To understand why ONDC is a game-changer, let's look at how Zomato makes money:

  • 82% of its revenue comes from the core food delivery business

  • 13% from the Hyperpure segment which provides a range of products to restaurants

  • 5% comes from advertising and other activities

In the food delivery business, the main revenue comes from the restaurants that have to pay around 20% - 30% of the Gross Order Value (the amount that Zomato charges the customer) to Zomato for facilitating the order.

Obviously, restaurants are not happy to lose a large chunk of their revenue but don’t have much of a choice as the alternative is Swiggy which has a 45% market share and charges similar to Zomato.

To not lose money, restaurants end up jacking their prices up by 30-50%, so that after paying commissions to Zomato and Swiggy, they still end up with the same margins as they would have if customers ordered directly from restaurants.

ONDC only takes about 5-8% from the sellers. All those restaurants selling on ONDC have cut prices because suddenly they can afford to. If you compare any order on Zomato and Swiggy versus ONDC, you will see a massive 30-50% price difference.

You can make a case that Zomato has over 30 million active users and they will stick around. But this is India we are talking about - the land of getting the best possible price - and ONDC offers that incentive, one that Zomato just cannot fathom.

At the end of the day, the Indian consumer wants cheaper. They lack brand loyalty, even for small discounts and lower transactional fees, let alone for a difference this large.

Most customers have no qualms with Zomato as such, but cheaper is always better. The user experience will get a little compromised but those problems will get fixed over time. If the restaurants shift to other platforms, so will the customers. In fact, we as customers hardly care who is making the delivery in the first place.

MagicPin, post its integration with the ONDC network, boosted daily orders from 1,000 a day to over 10,000 a day in just 2 weeks! This is due to the fact that MagicPin brought with it a 22,000-strong restaurant fleet and a bucketload of consumers who’d love to get their orders at a cheaper price!

Race to Zero?

ONDC aims to raise e-commerce reach in the next 2 years to 25% of India’s consumer purchases, from 8% currently, a major push for smaller sellers, kirana stores and the various small businesses that previously didn’t have a stable network to rely on for visibility and logistical assistance!

It plans to onboard 90 crore buyers and 12 lakh sellers in the next 5 years, post the pilot runs that are now being undertaken in five cities – Delhi NCR, Bengaluru, Bhopal, Shillong and Coimbatore.

Whatever moat and duopoly that Zomato holds and is a part of seems to have stiff competition with the advent of ONDC. Here are some pros and cons that stack up for Zomato given ONDC’s potential:

Just the price being lower is enough reason for users to migrate away from Zomato and towards ONDC. But what can Zomato do to stop this potential migration, and save its business?

1. It can lower its commissions from 30% to levels that are comparable to those on ONDC

2. It can tap into the larger ONDC network to optimise its delivery force, by taking on deliveries for other sellers not restricting itself to food

3. It could tap more aggressively into other businesses and try monetisation those at a faster rate - advertising/listing preferences on the review business, or scaling up Hyperpure

In either (or in any combination) of the above cases, Zomato’s current stock price comes under threat because of lower revenue, and or lower profitability. The current valuation, even at half of what was at listing is predicated on the fact that it will become profitable someday but ONDC just opened an already bleeding wound wider.

No doubt that Zomato won’t go down without a fight and anything can happen but as things stand, it's a tough road ahead for the red-clad restaurant app!

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