Zomato is a tech business

Yes, you read it right. I believe Zomato is a tech company and not a food aggregator.

I know, almost every one of us believes that Zomato is into food aggregation business, I did too. But on closer scrutiny I realize I have been wronged this whole time.

Here’s Why.

From what I observe, Zomato did start as one but has gradually evolved into a tech company and has been able to use the advantages offered by the hospitality industry to build itself.

Zomato teaches us what a modern tech-company is and what it isn’t. A modern tech company can transform whole industries, achieve expansion of scale and scope at breakneck speeds, and make enormous profits, all without requiring significant capital investments.

Today’s tech giants must be contrasted against industrial giants like Ford motors, General Electric, Union Pacific, etc. Though they transformed industries and society, they also required large capital investments and took decades to build. And yet, a tech giant commands a library of soft assets that cannot be replaced or reproduced easily.

It has, if not all six, but most of the features that define a tech company.

Zomato aims to transform the eating habits of 1.36 billion people. It is removing the barrier of logistics and cultural taboo. It gives a new segment of the population access to restaurant food by delivering it with the touch of a button. It also removes cultural barriers by encouraging users to provide feedback – people with be less reluctant to try restaurant food when they see people from peer groups providing recommendations about dishes and restaurants.

Zomato has a scalable virtual model that can be magnified exponentially with few additions to their asset base. Putting it another way, tech companies can expand their revenues and income statements with little addition to their balance sheets.

Nevertheless, Zomato differs from other tech companies in one important aspect:

Companies like Google and Facebook can serve a foreign country without having a physical presence. In contrast, Zomato can enter a new market only after establishing relationships with local restaurants, assessing their offerings, and working with them to improve their menus and pricing. It also identifies, evaluates, and appoints local delivery agents. Thus, it invests in soft assets that cannot be replicated by competitors.

Zomato can track a customer’s tastes, need for discounts, and preferences in terms of cuisine, delivery time, and price, and combine those insights with local food trends, seasonality, and holidays and festivals to offer a customized menu instantaneously. This level of customer intimacy increases switching costs for customers, imposing significant barriers to entry for new players.

For most tech companies, the bigger the network, the more valuable the company. There are three types of network effects: direct, indirect and data effects. In a two-sided platform like Zomato, it doesn’t have direct network effects but has indirect network effects. The greater the number of customers, the greater the value for restaurants and vice versa. Now customers have more choices, restaurants have a bigger market, and the delivery network can be utilized more efficiently.

More importantly, Zomato benefits from data network effects. Every new customer and restaurant contribute valuable data that Zomato can use to improve the value proposition for all existing users by enhancing the quality and depth of feedback, understanding usage habits, optimizing logistics, troubleshooting and growing the repository of local tastes and preferences. This improvement, improves the options of products and services while lowering costs.

Zomato is expanding its ecosystem with minimal costs. It is leveraging its relationships with restaurants to source ingredients for them and books tables for customers at its partnering restaurants by offering customized recommendations.

Zomato can up its revenue with minimal variable costs, comparative to asset-based businesses. Use of futuristic technologies like drones, and autonomous vehicles can reduce delivery costs. Increased scale improves unit economics by improving revenues and lowering per-unit costs.

And since I realized this, my approach towards the business has made a dramatic shift.