Zomato To Nykaa: Jefferies Breaks Down Internet Sector Showdown

Zomato Ltd. and Nykaa parent FSN E-Commerce Ventures Ltd., two leaders in India's internet economy, will see their profitability improve and core business grow over the next few years, according to Jefferies.

Zomato is involved in food services, which is estimated at around $60 billion, with delivery accounting for around $6 billion in FY23, the research firm said. Nykaa is a player in the $3 billion online beauty and personal care market, with an overall industry size of $19 billion.

Both the online markets are expected to grow in double digits, led by demand-supply factors, Jefferies said in a Sept. 26 note.

Here's Jefferies head-to-head analysis of Zomato and Nykaa:

Zomato has a 55% market share in food delivery. It's a market that is a duopoly between Zomato and Swiggy after the consolidation phase over the last five years.

ONDC is trying to scale its presence in food delivery, but success is limited so far, the note said.

Nykaa's market share in online beauty and personal care is lower at 26%.

Jefferies cited Reliance Retail Ltd., which launched the Tira beauty app and is expanding its physical store presence. They acquired Insight Cosmetics, a beauty products company, and have their own beauty brand called Glimmer.

Shoppers Stop Ltd., another retail company, already has more than 140 offline beauty stores, including shop-in-shops, and intends to open 10 to 15 new stores each year in the future, the brokerage said. The Tata Group has also launched its online beauty and personal care app, Tata CLiQ Palette.

So competition could emerge as a concern for Nykaa, both in terms of market shares and profitability in the medium term, according to Jefferies.

Zomato's food delivery has a 3P hyper-local model, where it facilitates the discovery and delivery of food from restaurants listed on the platform, the note said.

Nykaa's beauty and personal care business is a 1P model, where it owns the inventory. A 1P model enables Nykaa to have tighter control over the inventory, which in turn helps ensure the authenticity of the products, minimise stock-outs, and shorten delivery timelines. It also results in higher margins as 1P models have greater control over the value chain, the brokerage said.

"However, 1P models are more capital intensive, as they have to finance working capital along with managing the supply chain and inventory," Jefferies said.

As Nykaa is a vertical e-commerce platform, it has a wider reach compared to Zomato, which has geographical restrictions as it is hyper-local.

Of the 70 crore internet users in India, 23 crore are online shoppers, of which 10 crore are online food customers. The number of online BPC shoppers is lower at 6 crore.

While around 60% of the online food customers transacted on Zomato in FY23, only 15% of the online beauty and personal care shoppers transacted on Nykaa. This lower share of users also reflects the premium positioning of Nykaa, Jefferies said.

Advertisement income is critical for the profitability of both platforms. The FY23 pre-Ind AS116 Ebitda margins for Nykaa were 6.5% for FY23, of which 6.1% came from ad income.

Similarly, Zomato's food segment saw breakeven in FY23, also helped by a 2-3% boost from ad incomes, without which the segment would still be at a loss.

The supply side for Zomato is quite fragmented--a long tail of restaurants. Nykaa's supply-side consists of relatively larger beauty and personal care brands, which have high ad budgets and can afford to make significant digital marketing spends, driving higher ad incomes for Nykaa.