Zomato Ltd (ZOMATO) Q2 FY23 Earnings Concall Transcript

Zomato Ltd (NSE:ZOMATO) Q2 2023 Earnings Conference Call dated Nov. 11, 2022

Corporate Participants:

Albinder Dhindsa — Co-Founder and Chief Executive Officer

Akshant Goyal — Chief Financial Officer

Deepinder Goyal — Founder, Managing Director and Chief Executive Officer

Kunal Swarup — Head of Corporate Development

Analysts:

Vivek Maheshwari — Jefferies — Analyst

Gaurav Rateria — Morgan Stanley — Analyst

Vijit Jain — Citigroup — Analyst

Garima Mishra — Kotak — Analyst

Alok Srivastava — Credit Suisse — Analyst

Abhishek Bhandari — Nomura — Analyst

Amit Bhargava — Retail Investor — Analyst

Mukul Garg — Motilal Oswal Financial Services — Analyst

Swapnil Potdukhe — JM Financial Services — Analyst

Aditya Suresh — Macquarie Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, a very good evening and welcome to Zomato Limited’s Q2 FY ’23 Earnings Conference Call. From Zomato’s management team, we have with us today Mr. Deepinder Goyal, Founder and Chief Executive Officer; Mr. Akshant Goyal, Chief Financial Officer; Mr. Albinder Dhindsa [Phonetic], Founder and CEO of Blinkit; and Mr. Kunal Swarup, Head of Corporate Development.

Before we begin, a few quick announcement for the attendees. Anything said on this call which reflects outlook for the future of which could be construed as a forward-looking statement may involve risks and uncertainties. Such statements or comments are not guarantees of future performance and actual results may differ from those statements. Additionally, please note that this earnings call is scheduled for a duration of 45 minutes, and we will be starting directly with the Q&A section of the call.

Questions and Answers:

Operator

If you wish to ask a question, please use the raise hand feature available on your Zoom Dashboard. We will announce your name on the call, unmute your line and post which you can proceed with your question. We will wait for a minute while the question queue assembles. The first question is from the line of Mr. Vivek Maheshwari from Jefferies. Please go ahead.

Vivek Maheshwari — Jefferies — Analyst

Hi, good evening, team. A couple of questions. First, on the food delivery side. So commendable progress on the margins front. But how do you think about the balance between growth and profitability? Because this quarter has seen losses coming down quite a bit, but the GOV growth also has been more modest at about 3% quarter-on-quarter. So how do you think about this from coming quarters and medium-term standpoint?

Akshant Goyal — Chief Financial Officer

Yeah, hi, Vivek, thank you for your question. Akshant this side. So I think the way we’re thinking about this, Vivek, is essentially a focus both on good quality growth as well as profitability, right? And yes, you’re right, the September quarter growth, GOV growth was low, and that is largely because we traded some lower quality growth in our business in favor of economics.

But as far as good quality growth is concerned, right, and we define good quality as something where we acquired users which are going to be profitable if — in future, if not now, and the retention is going to be high and their cost of acquisition is justified, that makes total sense, right? So I think that was one of the reasons we saw a slightly lower growth in GOV in the last quarter.

Second reason has also been the general macros, right? While we don’t want to make that an excuse, but we’ve seen lower app opens in the last quarter compared to in the past, which clearly demonstrates some lowest intent to spend on a category like ours. And this is also a quarter where seasonally, there is the highest impact of rains, which leads to typically more muted growth if you look at the past trends. So these have been few reasons, I would say, we’ve seen a relatively lower GOV growth in the last quarter. But I would say that this does not impact our long-term view on the opportunity in this segment, so we continue to remain bullish on the potential of this business if we take a medium to long-term perspective.

Vivek Maheshwari — Jefferies — Analyst

Sure, Akshant. But just a follow-up on that. So whatever investor conversations that I have had today, some of the investors are worried. Can you hear me?

Akshant Goyal — Chief Financial Officer

Yes, we can. Go ahead.

Vivek Maheshwari — Jefferies — Analyst

Yeah. So some of the investors have this worry that if you prioritize on profitability and get to a breakeven, which is obviously, everybody is expecting. But in two quarters to four quarters, that will continue to weigh on GOV. You think that till the time the focus on breakeven continues, the GOV numbers will be lackluster, so to speak?

Akshant Goyal — Chief Financial Officer

I mean, we don’t — we are not really focusing on breakeven as a very important milestone. I think — I don’t think we are driving the business with that in mind as the first goal. I think our goal continues to remain to expand the market and set it up well, so that in years down the line, we can generate two schools [Phonetic] of profit, right? So while I understand that the Street is treating that as a big milestone, but in our minds, I think this is one of the milestones which we have along the way, and we are not going to compromise good quality growth just for getting to that milestone faster.

Deepinder Goyal — Founder, Managing Director and Chief Executive Officer

Also just to add, like we mentioned in the letter, we’ve — we continue to invest on our long-term growth vectors, whether it is initiatives like Instant, Intercity Legends, and all of those. And I think these are all opportunities that will take time to sort of build and grow. And we are not leaving any stone unturned in terms of investing in these.

Vivek Maheshwari — Jefferies — Analyst

Got it. Got it. And second and last question on Blinkit. Now that this was the first quarter of consolidating the numbers, and in fact, the consolidation. How — what are — what is your impression on the Blinkit side? How — are there — have there been any, let’s say, negative surprises or what are the key focus areas for you from a next few quarter standpoint on Blinkit?

Akshant Goyal — Chief Financial Officer

So I think integration has gone well, Vivek. We haven’t had any surprises on — in the business so far. I think that also reaffirms our faith in the M&A approach that we had in this case and also in the other deals that we’ve done in the past, where we want to get to know to the — where we want to get to know the founders well and the business well before we proceed with the M&A. So to answer your first part of your question, yeah, there will be no surprises.

And as we mentioned in the letter, the — I mean, we are excited about this business, as you have seen in the numbers, the business has made good progress in the quarter compared to the previous quarter both on top-line and bottom-line, and we expect that trend to continue.

Vivek Maheshwari — Jefferies — Analyst

Perfect, perfect. Yeah, sorry, go ahead, please.

Akshant Goyal — Chief Financial Officer

No, nothing, Vivek, from our side.

Vivek Maheshwari — Jefferies — Analyst

Okay, great. Thank you, and wish you all the best then.

Akshant Goyal — Chief Financial Officer

Thank you.

Operator

Thank you. Next question is from the line of Mr. Gaurav Rateria from Morgan Stanley. Please go ahead.

Gaurav Rateria — Morgan Stanley — Analyst

Hi, am I audible?

Akshant Goyal — Chief Financial Officer

Yes, Gaurav, hi.

Gaurav Rateria — Morgan Stanley — Analyst

Hey, hi, hi. So first question is, if you look at your MTU growth is around 4.5%. You made also a commentary that AOVs have also grown, but then GOV is only 3%. So it appears that there has been some impact on the frequency. So is it the case that we have lost out on some high-frequency users and there has been some market share loss to competition in the recent quarter, which might be a deliberate strategy, but just trying to confirm that has that been the case?

Akshant Goyal — Chief Financial Officer

So we don’t think we have lost market share in the last quarter. The frequency has indeed gone down slightly, but I think those reasons are attributable to what I mentioned in response to the previous question. Yeah, I hope I answered your question.

Gaurav Rateria — Morgan Stanley — Analyst

So the share of power users would have remained constant, Akshant, in terms of the number of users or percentage of total annual transacting users that you guys had shared?

Akshant Goyal — Chief Financial Officer

Absolutely.

Gaurav Rateria — Morgan Stanley — Analyst

Okay. Got it. The second question is on the medium-term aspirations on profitability that you guys have shared. It looks like a lot of the revenue-led levers have already played out. So just trying to understand from a driver perspective, how should one think about the contribution margin going to 8% eventually? What will be the bigger drivers? Will it be more on the revenue side or more room for the take rates to improve, commission rates to improve or actually the bulk of the initiative on cost side is yet to play out and that will be the key driver for margin improvement from here on? Thank you.

Akshant Goyal — Chief Financial Officer

Yeah, Gaurav, so I would say I think it will be pretty much all of that, right? So you’re right. I think last couple of quarters, revenue side levers have played out perhaps more than the cost side. But going forward, we still think there is enough growth left to improve our revenue per order as well as drive our cost down, right? And the cost, there are again two elements, one is driven by scale and the other is essentially making the business leaner as we go along, right? I think all those levers are going to play out, and that’s what we’re expecting in the next few quarters as we go along.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. And if I may squeeze the last question, what exactly is the restructuring that we are doing in the ad sales and the monetize — and the Pro platform there, which is going to lead to increased losses in the coming quarters? Thank you.

Akshant Goyal — Chief Financial Officer

Right. So as we have mentioned in question 16 and 17 in our letter, essentially, we have launched a new product for customers on dining-out. And along with that, it’s a new monetization model where we are essentially driving transactions at restaurants through the Zomato app, right? So customers will be paying through the app — Zomato app in restaurants and then those transactions will get monetized.

So as we switch and transition to this new construct, the erstwhile monetization streams have sort of been discontinued, which includes sale of Zomato Pro membership as well as restaurants who are buying ads on our platform. So that has for a time — for the time being discontinued. And hence we see losses expanding in that segment for the short-term because we have all the costs, but we’ve lost the revenue. So I think that’s the transition we are going through, and we expect that to continue at least in the next quarter and maybe one more quarter after that before we start to see that business generating profits again.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. Very helpful. Thank you so much.

Operator

Thank you. Next question is from the line of Mr. Vijit Jain from Citigroup. Please go ahead.

Vijit Jain — Citigroup — Analyst

Hi, thank you for the opportunity. I have two questions. One on the food delivery business. So how do you think about your overall promotional budget spending on a Q-o-Q basis between new user acquisition and driving that better usage with existing users? And related to that, could you give me an approximate base of annual transacting customers for you at the end of 2Q?

Akshant Goyal — Chief Financial Officer

Yeah, Vijit, hi.

Vijit Jain — Citigroup — Analyst

Hi, hi, Akshant.

Akshant Goyal — Chief Financial Officer

Could you just repeat that question, Vijit? Sorry, we lost you for a second.

Vijit Jain — Citigroup — Analyst

Sure, sure, sure. So my first question was how do you think about the promotional budget, the incentive budget spending on a Q-o-Q basis in the food delivery business between the things which drive new user acquisition and things that drive better usage with existing older customers? And second part of that question was your total base of annual transacting customers as of 2Q?

Akshant Goyal — Chief Financial Officer

So, Vijit, on the first one, a majority of our spends are on acquiring new users or our promotional spends. That’s what we spend our capital on. Having said that, if you are a existing user of Zomato, you will experience that you still get some offers and discounts on our platform. Those are largely funded by restaurants who are essentially trying to target you as a new customer to that particular restaurant, right?

Vijit Jain — Citigroup — Analyst

Right.

Akshant Goyal — Chief Financial Officer

So that’s why you will feel as a user that there are subsidies or discounts all the time, but they are not always funded by us. On this — I mean, in response to the second question, like we are not disclosing that data point every quarter, Vijit.

Vijit Jain — Citigroup — Analyst

Okay.

Akshant Goyal — Chief Financial Officer

So you’ll have to wait when we get to that.

Vijit Jain — Citigroup — Analyst

Right. So I guess the point I was trying to come at from that question was, I think you and Deepinder have earlier mentioned that you typically see about maybe 1 million new users come onto the platform with little or no marketing spends also. If I get that number right, 1 million or maybe 7 million to 10 million a year, something like that. So just was wondering if that is still holding true at the end of this quarter?

Akshant Goyal — Chief Financial Officer

Yes, that is holding true. I mean, the pace of new user addition hasn’t slowed down.

Vijit Jain — Citigroup — Analyst

Got it. And my second question is just on the Blinkit side. Two questions. One, on the delivery fleet integration side, are there any practical on the ground challenges to integrating the two delivery fleets right away from rider preference perspective or any other consideration? And the second question on Blinkit is, in terms of unit economics, you’ve said that your own store is not materially different versus franchise stores. Could you explain how, is that just a function of store maturity?

Albinder Dhindsa — Co-Founder and Chief Executive Officer

Hi, Vijit, this is Albinder. I’ll take both the questions. So on the rider side, like we had mentioned in the letter as well, the integration that we are doing is primarily right now in leveraging the common tech stack for both the companies. We are — that is probably a medium-term thing that we will pick up of actually cross-utilizing fleet. And the primary reason for that is that the scale of the two businesses is not similar when it comes to the last mile size of the fleet as well as the number of orders that are done in a particular locality by both the businesses.

So till the time that we actually get there, we are not really even experimenting with merging the fleet utilization right now. So the numbers that you see for fleet or the improvements are essentially Blinkit riders working for Blinkit only and Zomato riders working for Zomato only. And in some places, we started integrating the tech stack, the underlying platforms that we built, those are getting integrated. So that the tech — that effort on both sides can be leveraged.

Vijit Jain — Citigroup — Analyst

Got it.

Albinder Dhindsa — Co-Founder and Chief Executive Officer

On the unit economics side, see the store economics are primarily dependent on more of the throughput. So with the same infra and the same people, you can actually — you push through a certain volume of GOV. And irrespective of the size of the store, at every level, those economics are actually similar, whether it is our store or it is a partner store.

Of course, the nature of costs in each of the cases can end up differently, right, and one which in the partner stores, we basically have to make sure that in places where the number of orders are not scaling up materially early enough, we support the partners through the first few months of the process. But if that was our stores, we would also be taking that cost in terms of idling manpower at that store as well, right?

Vijit Jain — Citigroup — Analyst

Got it.

Albinder Dhindsa — Co-Founder and Chief Executive Officer

So the costs are not materially different. One of the things which is changing though is that as our brand recognition and brand value in each of the localities and the cities that we are present in, it goes up, the time that we are able to see the stores get to a certain number of orders, it’s actually getting faster. So the costs that we used to have to pay on the partner side to support them, they are — we are just getting to them a lot faster and we’re able to — and the partners start making money a lot faster.

Vijit Jain — Citigroup — Analyst

Got it. Thanks, Albinder. Albinder, just a quick question on that one. On the dark store side, are you now at a place where you would start to net add dark stores going forward or there’s still some — a little bit more rationalization to go? And secondly, when I look at the unit economics, is the right way to look at your unit economics that, that expense related to dark store on a per store basis? Because I see that number is roughly $5 million [Phonetic], I believe a quarter has been kind of around that number last two quarters that you reported. So is that understanding correct?

Albinder Dhindsa — Co-Founder and Chief Executive Officer

Okay. So, Vijit, so throughout the, I would say, the last two quarters, we have been adding stores to the network. The net store deletion number has not — it was higher earlier primarily for multiple reasons, we opened stores which were infrastructurally, they could not have been in the right places because obviously, the model was early.

Vijit Jain — Citigroup — Analyst

Right.

Albinder Dhindsa — Co-Founder and Chief Executive Officer

Our experience is that the net store addition pace for us stays roughly the same across each of the months. We are starting to see more and more of our stores being successful, so the net deletion pace is something which is going to go down, right?

Vijit Jain — Citigroup — Analyst

Correct.

Albinder Dhindsa — Co-Founder and Chief Executive Officer

So the overall number of store openings will go up. It’s still a question internally for us as our store network is fairly large now, it’s at around — number is around 400. At this pace, should we be opening more stores or — because we have more opportunities, more localities in which we have existing successful stores and more validation.

So should we be opening more stores or should we be introducing the figure of store openings as the number of stores go up? But that’s something that still at a stage that we are debating whether we should be investing behind it. But I think we will wait to do that till the overall existing store like-for-like network is breaking even.

On your second question, which was I think around the unit economics for the stores. Like I mentioned earlier, the unit economics for the store primarily move, you have the same infrastructure, you have the same people, and then you just increase net revenue that you get from a store with the increasing GOV, right? So that’s why you’re seeing that number stay the same, and while the overall throughput of the business has gone up dramatically.

Vijit Jain — Citigroup — Analyst

So roughly speaking, about maybe 2 times to 2.5 times the number of orders you do per store and you breakeven at a Company level across the board, right, that seems to be the case from these unit economics?

Albinder Dhindsa — Co-Founder and Chief Executive Officer

I think there is a difference in how you are doing the arithmetic versus how we will do it, but that is not a guidance that we’re providing at this point of time.

Vijit Jain — Citigroup — Analyst

Sure, sure. Thanks. I appreciate it. Thank you.

Operator

Thank you. Next question is from the line of Garima Mishra from Kotak. Please go ahead.

Garima Mishra — Kotak — Analyst

Yeah, hi. Am I audible?

Akshant Goyal — Chief Financial Officer

Yes, Garima. Please go ahead.

Garima Mishra — Kotak — Analyst

All right. Hi, thanks for the opportunity. First question, your AOVs have held up very well actually over the last few quarters. Now could you help us understand the difference in AOVs that you see from new and old customers and also customers who might be in, let’s say, top 10 cities and other cities?

Akshant Goyal — Chief Financial Officer

Yeah, sure, Garima. So the new customers’ AOV is lower than repeat customers. So I think the trajectory here is that as customers mature, their AOV starts going up, and before it sort of settles down at a steady levels. And between Tier 1 and smaller cities as well, there is a difference in AOVs, right? So metro AOV is larger than the smaller cities. But having said that, I mean, just want to clarify that, that doesn’t mean that the smaller cities economics are not viable as we’ve also this time shared a chart on the number of cities which are profitable, while even with lower AOV given lower cost structures, a number of our smaller cities are also profitable.

Garima Mishra — Kotak — Analyst

Understood. Second question is really in terms of the growth of the food delivery platform. And there is a competitor in the market, so I think your focus would also be on driving some kind of differentiation. So could you highlight the new aspects, the new product innovation, etc., that you’re carrying out in the food delivery business for you to have a more differentiated platform going forward? Thanks.

Akshant Goyal — Chief Financial Officer

Sure, Garima. So I think like differentiation here could be in many aspects. I think one of the things we focus a lot on is quality of service, right, which is not really visible on the app. But as a customer, once you experience the platform, the error rates in the business and the customer support and so on, all of that adds up. So I think there’s a consistent focus on making our platform experience better for our customers every day. And I think that has a compounding effect on the growth and the relative market share in the business.

Outside of that, I think we — as we mentioned in the letter also, we are very keenly looking for large growth ideas which can drive multiplayer outcomes for this category in future, and couple of them are that we’ve — that we’re experimenting with right now are Zomato Instant, which is a 10-minute to 15-minute food delivery service, which is already live in Gurgaon and Bangalore in few locations.

And recently, we’ve launched Intercity Legends as a product and service where we are delivering food from legendary restaurants across cities, right? So I think both of these ideas so far have seen good traction, and we’re seeing lot of customer love and appreciation for both these products and services. And these are businesses which take a lot of, I would say — and the multiple building blocks in these businesses, and we’ve spent time, effort and resources in scaling them up. But I would say cautiously investing as they scale, and we’ll continue doing that as long as we continue to see returns from these two products and services.

Garima Mishra — Kotak — Analyst

And then just on that point, it’s safe to assume that all these new initiatives are going to be done organically within the Company, correct?

Akshant Goyal — Chief Financial Officer

Yeah, that’s the current plan. I don’t think we’re looking at — there is — I don’t even think there’s an opportunity for a inorganic route in these things. I think the knowledge that we have and the resources that we have, I think we need that to be able to scale these platforms.

Garima Mishra — Kotak — Analyst

Perfect. Thank you so much for your answers.

Akshant Goyal — Chief Financial Officer

You are welcome.

Operator

Thank you. Next question is from the line of Mr. Alok Srivastava from Credit Suisse. Please go ahead.

Alok Srivastava — Credit Suisse — Analyst

Yeah, yeah, good evening, guys. So, Akshant, on the number of cities point that you made and the one that you have mentioned in the Investor Letter that now 248 cities are contribution — are at contribution breakeven. So just trying to understand that this number was fairly low, let’s say, four quarters ago. And all the revenue measures that you have taken, for instance, higher take rate on the restaurants and customer delivery charges going up. Is it right to assume that all those initiatives across all these cities have been more or less uniformly applied? That is one.

And two, in terms of the smallest city where you will be contribution positive, what kind of household total population size or household size are we looking at? I mean, just trying to get a sense as to in what kind of population the model has become viable already?

Akshant Goyal — Chief Financial Officer

Sure. So, Alok, with to your first question, yes, I think we have seen the improvement in contribution pretty much uniformly across multiple cities. I think where we are still contribution negative are some of the more recently launched cities or cities where this flywheel of restaurant food ordering has not really kicked off yet, right? So, but we see enough traction on underlying consumer metrics because of which we continue to invest.

But outside of that, I think everywhere else, we’ve seen the contribution improve. And hence a larger number of cities are now contributions breakeven are positive. In terms of smaller cities — and by the way, just to clarify, this 248 cities doesn’t necessarily mean that these are the top 248 cities for us in terms of size, right? Of the cities profitable are actually not in the top 248 cities, but they’re still profitable because that ecosystem is maturing faster than some of the larger cities as well, right?

So to your second question, I mean, the smaller cities that we have where we are contributing — we are contribution breakeven is about like 100,000 people today, right, as a potential size of the market. And there are some — I mean, while we are loosely calling these cities, some of these are also locations and neighborhoods, dense population neighborhoods like university towns and so on, where the population is not large, they’re close to 50,000, but we are breaking even because it’s densely located and the target audience there is — it values the service and the product.

Alok Srivastava — Credit Suisse — Analyst

Okay, yeah, thanks for that. The second one that I have is for Albinder. So, Albinder, in the Investor Letter, you have mentioned that during the festive season where there were certain days where the Blinkit as a whole was near contribution positive. So I’m just trying to understand that what was driving these wins?

Overall, it’s a 7% negative contribution. And from 7% to 0%, was it operating leverage driven by higher orders? What is — was it product assortment, which had perhaps higher take rate, or was it higher delivery fees that customers were willing to pay during that time? I’m just trying to get a sense as to this will give an idea how the model can become profitable going forward? Thanks.

Albinder Dhindsa — Co-Founder and Chief Executive Officer

Hi, Alok. So I think like we also showed in the contribution movement graph in the letter, I wish there was a easier answer to give than that. But you will see that the same pattern that took us from minus 17% to minus 7% in contribution over a three-month period was also driving — getting closer to contribution during the festive period as well. So it was not just a singular factor, but improvement across our average ticket size, improvement across average revenue per order, reduction in costs.

And to also clarify that during the festive period, we didn’t want to be the ones ruining the festive period for our customers too much, so we were not actually charging higher delivery fees for them. We try to always make sure that we are as a business working towards charging lower and lower delivery fees for our customers.

Alok Srivastava — Credit Suisse — Analyst

Okay. Got it. Thanks, and all the best.

Albinder Dhindsa — Co-Founder and Chief Executive Officer

Thank you.

Operator

Thank you. Next question is from the line of Mr. Abhishek Bhandari from Nomura. Please go ahead.

Abhishek Bhandari — Nomura — Analyst

Yeah, thank you for the opportunity. Akshant, I have just two quick questions. First one is on your Page 7 of your PDF, I see that the food delivery restaurant partners kind of stagnated at around new 200,000 [Phonetic] number for last three quarters. Now part of this might have to do with the pruning out of lower quality growth, what you mentioned. But if you could give us some indication about what kind of additions you’re looking at? Because I would like to believe that this is a lead indicator in terms of getting more customers on platform.

Akshant Goyal — Chief Financial Officer

Yeah, Abhishek, hi. So see, again, like in case of dark stores, which Albinder mentioned, this is the net number, right? So what has happened is, I mean, we continue to add thousands of restaurants, new restaurants on our platform every month. But the net number actually has remained flat as you can see and as you are pointing out. And that’s a function of the essentially restaurants shutting down in the country, right?

So that pace actually, we don’t repeat [Phonetic], and some — decent number of restaurants on our platform which have very low order volumes and low share of business from us. And as they churn out, the overall number of restaurants can stay flat or come down slightly as it has happened, right? But I think from a — I mean, we’re not concerned about supply being constrained at least at this point.

And if you look at the number of orders per restaurant per day, they’re still very low. And while we expect the supply of — and the number of restaurants to continue increasing in the medium and long-term. But even at this pace of restaurants, the business can grow meaningfully if it has to, so yeah.

Abhishek Bhandari — Nomura — Analyst

Sure. Thanks, Akshant. My second question is on the long-term target was you guys have mentioned that you would like to go up to 4% to 5% adjusted EBITDA margin as a percentage of GOV, which translates roughly to 8% contribution margin. Now I’m just trying to get a sense of what went behind that — the size numbers? And if I remember correctly, you have been mentioning that you think double-digit contribution margin is likely in your mature cities from a longer-term period. So are you scaling back on that 10% target?

Akshant Goyal — Chief Financial Officer

No, so, I mean, 8% is — so, first of all, I think this is not a guidance or aren’t — neither are we saying that we’re going to stop at 4%, 5%. This is a point of view which we have shared at this point in time given all we know, that perhaps a better use of capital beyond a point is going to be in making sure that we reinvest back in the ecosystem, which leads to faster growth, right?

Because I think eventually, the goal here is to get more dollar profits from the business, and the goal is not to get the maximum percentage margin, right? And if we are going after that goal, I mean the cash that the business generate, we have to look at the best ROI for that.

And is the best ROI in giving more discounts to customers or is the best ROI in actually giving back to ecosystem in terms of lower take rates and higher payouts, which leads to growth of the ecosystem. I think that is where we will always have a choice. And what we have shared this time around is that we feel that beyond a point, it will perhaps be a higher ROI if we leave money on the table for restaurants to grow faster, and if we pay our riders more, so the retention is higher and so on, right?

So — and on your second part of your question on 8% and 10%, we are not pulling back on guidance. I think like we said, some cities could get to 10%, 8% is an average, right? It can still go beyond 8%. But I think I would urge you to focus on the core message here and the numbers are, I would say, indicative of what we feel at this point in time and they can change as we go along.

Abhishek Bhandari — Nomura — Analyst

Thank you, Akshant, and all the best.

Akshant Goyal — Chief Financial Officer

Thank you. Thank you, Abhishek.

Operator

Thank you. Next question is from the line of Mr. Amit Bhargava joining in as a Retail Investor. Please go ahead.

Amit Bhargava — Retail Investor — Analyst

Can you hear me?

Akshant Goyal — Chief Financial Officer

Yes.

Deepinder Goyal — Founder, Managing Director and Chief Executive Officer

Yes, we can.

Amit Bhargava — Retail Investor — Analyst

Yeah, hi. My question is, if I look at this earnings report, I mean I’m sure there are lots of financial experts who would ask you questions on the earnings. But in your Q2, I mean, the question two, when you say when you say execute better, what do you mean? In that, I find one paragraph which I guess is very relevant for all investors as well.

A culture of high standards is an endless list of things. But the starting point is that culture is being present not just physically, but intellectually. Now in the Q1 earnings call, no retail investor was allowed to speak. In the AGM, no speaking, number was given, no — I was not allowed to speak.

And I had pertinent questions on the — on corporate governance. So when you say this in your earnings in the letter, then this doesn’t fit in. There were pertinent questions why conflict of interest between Albinder and Akriti was not disclosed. The day after this deal when the markets opened, many people didn’t know about it. When the TV news channels have started speaking about it, you know what happened with the Zomato stock, because the entire perception of people, I mean just look more like a scam, even if it was not a scam or is not a scam, I don’t know, but the perception was something else.

And you know what happened to Zomato stock. People who may have taken leverage positions may have lost their share who may not have money to fund it. So I guess there are some serious corporate governance issues which Zomato needs to think about. Blinkit, obviously, most of us feel was purchased at a very high price. Then there’s a question of ESOPs. I mean, the Company is still in loss, and more and more ESOPs are being rolled out. So I would like the CEO of Zomato to address this, these street — these things.

Above that, in the last Q1 earnings call, someone said, why there isn’t a loyalty program? And many people today are asking the gross order value as — the number of orders or expansion — rather expansion, new customers have come down. The competitor Swiggy has a loyalty program, a membership, Zomato doesn’t. So I guess the person who asked in the last Q1 earnings call did have a point that if you have a loyalty program, if you have some kind of a membership there could be regular customers who ordered maybe two times a day maybe more, every day they may want to see something like where they have a fixed fee for — a monthly fee for delivery and so on and so forth. So, yes, that is all that I have to say. Thank you.

Akshant Goyal — Chief Financial Officer

Thank you, Amit. To your first question I think if I zoom out, I think the, in general, we tend to endeavor and operate without any biases and the idea is not to sort of give any preference to any particular class of shareholders. And the idea is actually to give equal opportunity to all shareholders. There may be situations where we’ve not had adequate time to address all questions but people can write to us. We are always available to address any queries. So I think your point is noted and we will just ensure that there are no situations under which you will have a reason to complain going forward. But the broader sort of philosophy is not to operate with any bias.

On your second sort of point around the conflict of interest, etc. I think over there as a philosophy again we operate with the higher standards of diligence and our processes are as per global standards. In case of the initial conflict that you’re talking about, I think we had responded as well that Akriti is not a Director or KMP and as such as per applicable law there was no reason to all this irrelated party transaction and she was not even involved in the discussions on this deal. As far as — so I think from the law perspective we have — law and spirit we’ve not try to do anything which is outside of the high standards that we hold in terms of regions and process.

In terms of valuation as well, I think we’ve had the best of global firms advise us in valuation. Those valuations reports were made available for public inspection and again we have responded to you with that feedback. So I think, yes, so on both these things, I think again we hold ourselves to the highest standards and we will continue to do so.

On your point regarding ESOPs. I think, we’ve also in this letter if you look at it one of questions we’ve tried to address is, why human capital is so important and critical in Tech businesses and the speed of innovation and experimentation that we need to do to stay alive and stay ahead is purely people dependent and for us to be attract, to be able to attract best talent we also have to offer the right incentives and packages that we need to do to attract the right talent.

And when you go out into the talent marketplace to attract the best talent from the best Tech companies globally we need to offer that. Now it is a cost, now whether it is paid in cash or through ESOPs is a different matter but yes, we do think of this as a important long-term investment for our business, which will eventually lead to profitability for us.

Deepinder Goyal — Founder, Managing Director and Chief Executive Officer

Yes, I have — on our response in terms of what is in terms of Akriti and Albinder’s, maybe it’s not required under law but you know markets don’t work purely, they work on perception and various other things. So I guess disclosure, take it as a positive thing. I mean, not that why someone is questioning this. But had that disclosure been made beforehand, people who, when the markets opened on Monday after the deal they would have had this information and could have taken a informed decision.

All of a sudden, they came in for a surprise, 10 minutes into the markets every news channel is on the top of their voice, talking about this. So, sometimes you know maybe it’s not required under law but it’s required otherwise for various other reasons, as I’ve just explained. The one other thing that I said is that this loyalty program where someone in the Q1 earnings call, some institutional investor did raise it. I think that would help the Company. I ordered a lot from, I would say…

Akshant Goyal — Chief Financial Officer

So Amit on loyalty program, I think we are aware of what the competition is doing, right? And we also had one of our own, which we have discontinued, right? So it’s a business call. There are pros and cons were — of the form of loyalty program that is out in the market today. We are, as we speak working on creating something which is more differentiated we believe at least and perhaps make sure that we get the benefit of customer’s loyalty without really losing a lot of money. So I would request you to please wait and watch for that and we’ll come back with some loyalty program construct soon in the market.

Amit Bhargava — Retail Investor — Analyst

All right. I mean that thing has been there on the app for several months now. So, yes, I mean okay, let’s see. Thank you.

Akshant Goyal — Chief Financial Officer

Thanks. Amit.

Deepinder Goyal — Founder, Managing Director and Chief Executive Officer

Thanks, Amit.

Operator

Thank you. Next question is from the line of Mr. Mukul Garg from Motilal Oswal Financial Services. Please go ahead.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Yes, thanks. I hope, I’m audible. So just a quick clarification on this. Was there any impact of the gradual phase-out of Pro Plus on volume or GOV growth during the quarter? Was there something which kind of resulted in either lower volume or number of orders or order frequency? And the second part was given that your market share in Q2 was stable. What portion of the impact on GOV was came from seasonality versus the move towards lower customer spends in terms of focus on good quality customers?

Akshant Goyal — Chief Financial Officer

Yes. Hi, Mukul. So I think, look at the combination of the various things you mentioned. I mean the first part of your question was on Pro Plus membership. So yes, I mean by the way, like the, while we have stopped selling new memberships but there are still members who are continuing to use that service till their membership expires right? And for customers for whom the membership expired at least the more frequent customers we haven’t really seen much fall in their frequency post the membership expiring, right?

So while that may have contributed in some form in terms of lower growth, but these are sort of multiple variables which are all impacting the overall order volume in the quarter. So it’s very hard to isolate the impact of each one of these and then sort of I would be unable to give you more color on how this, the overall impact of each one of these is on the overall performance in the quarter.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Right. Basically what I was trying to understand we are going into Q3 which again is a seasonally high quarter for you guys. Is that something we should expect Q3 growth to be meaningfully strong given, A seasonality and B normalization in the Ad spending, kind of that getting into that base or are there any impacts, which are kind of still going through the system?

Akshant Goyal — Chief Financial Officer

So Mukul we would not want to give any guidance for the next quarter at this point in time.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Fair enough. The second question was on the letter, you mentioned that you have pocketed a large portion of low-hanging deals as of now. Are you referring to that take rate in that commentary, you have obviously seen a meaningful improvement in take rate over the last three quarters. How much more scope is left, last quarter we did discuss that, that is an area where there is still meaningful scope. Have you captured most of it by now or are you referring to something else?

Akshant Goyal — Chief Financial Officer

No. So we are referring to essentially the overall pace of improvement in contribution. So if you see over the last two quarters contribution as the first stage of GOV has grown from 1.7% in Q4 FY ’22 to 2.8% Q1 FY ’23 and then 4.5% in the last quarter, right. So I think that, I mean the pace of change has been sharp and that’s because there were opportunities on both the revenue and cost side and our comment was simply essentially telling everyone that we don’t expect that pace of improvement to continue. So that pace of improvement would slow down, but that doesn’t mean that it’s either revenue improvement slowing down or it’s cost right. So I think we’ll continue to working on all the levers, where we see opportunity to improve margins, but the overall margin expansion pace we want the shareholders to know will slow down going forward at least from now.

Mukul Garg — Motilal Oswal Financial Services — Analyst

No, I get. So again, just following up from last quarter do you expect the take rate normalization of restaurants where it was initially low to continue abreast, what you have done in last two to three quarters or is that also something which should start feeling some impact or the base effect?

Akshant Goyal — Chief Financial Officer

I mean, it’s work in progress, Mukul. I think, I mean nothing in our business is essentially done and where we can’t make any more progress. So there are opportunities across the board and take rate also is an area where we might see some improvement going forward. So I would not want to specifically discuss on that specific level of growth, but I just want to leave it at, saying that the overall margin improvement. There is enough scope in the long-term and that journey from where we are today to the 8% that we have mentioned, I think will involve improvements both in the revenue and the cost side.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Understood. Just sorry one final clarification. When I look at the Blinkit revenue and adjusted revenue, there is a difference of just about $5 million [Phonetic]. Ideally, the difference between your revenue and — adjusted revenue and reported revenue is the delivery cost given obviously the break-up, it cannot be that low. So is there something wrong, which we’re reading there or was there something which did not come into the numbers?

Akshant Goyal — Chief Financial Officer

So for Blinkit the business model is different. So the customer delivery charge that we get from customers there is our revenue there. So it’s already recorded in the revenue. So pretty much revenue and adjusted revenue for the Blinkit business is same unlike food delivery where the customer delivery charge is passed on to the delivery partners directly.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Okay. I understood. I think that’s all from my side. Thank you.

Akshant Goyal — Chief Financial Officer

Thank you, Mukul.

Operator

Thank you, ladies and gentlemen, we will be extending this call by 10 minutes and moving to the last few questions. Next question is from the line of Mr. Swapnil Potdukhe from JM Financial. Please go ahead.

Swapnil Potdukhe — JM Financial Services — Analyst

Hi, thanks for the opportunity. So just continuing on the last participant’s question on contribution margin improvement. So I wanted to — one of the levers that I think would be your delivery cost that you paid to the riders. And what I see that some of the competition has been outsourcing this deliveries to third parties. So, and in the past from what I understand is like we have been managing our own fleet majorly. So, has there been any change in the strategy there? Or are we thinking on those lines? Any thoughts over there?

Akshant Goyal — Chief Financial Officer

No, Swapnil, I don’t think there is any plan to outsource, at least, I mean, we’re not planning to outsource a meaningful portion of our delivery fleet to third parties. There is a very small component, a portion of delivery fleet which is outsourced. But as far as we know, we are the cheapest delivery service in the country today and at least at this point, we don’t see much merit in outsourcing more than what we already have here.

Swapnil Potdukhe — JM Financial Services — Analyst

So just to clarify the earlier number that you had shared was 94% of the delivery is taking through your own fleet. Is that the same number that you are continuing with or like there has been a material change in that?

Akshant Goyal — Chief Financial Officer

There is — it’s more than that now, yes. But it’s anyways not material, because I would say majority of it is now done directly by us.

Swapnil Potdukhe — JM Financial Services — Analyst

Okay. Good. So the next question is on Zomato Pay business model. So I know this is a nascent investment that you’re doing right now but any thoughts on, like how do you plan to monetize this new venture that you’re trying?

Akshant Goyal — Chief Financial Officer

Yes. So I think, yes, you’re right Swapnil, still early days. I think essentially, we want to, I mean the main monetization here will continue to remain, continue to be ad sales, right. But what has changed now is that the ROI of those spends that restaurants will do on our platform will be more tangible, right because it will be visible in terms of more transactions that customers will do at their restaurants, right?

So that essentially increase confidence of restaurants when they spend on ads on our platform, which we think is going to lead to better monetization down the line. So, yes, that’s the broad strategy and we’ll share the results with you on how this is going perhaps next quarter, once we have more data with us. So far, it’s been a very recent launch and we just few weeks into it. So it’s too early to share any data on this at this point.

Swapnil Potdukhe — JM Financial Services — Analyst

Okay. And just a last one on quick commerce and so one of the comments in the shareholder letter says that quick commerce is turning out to be another opportunity for Hyperpure. So I would like to understand like, what are the synergies that you looking here from the cost side, from the revenue side? What should we think about it?

Albinder Dhindsa — Co-Founder and Chief Executive Officer

Hi, Swapnil. This is Albinder. So the primary integration that we’re doing with Hyperpure at this time is joining forces to figure out whether we can do direct from farm sourcing for a large part of the fresh produce that our sellers need and obviously Hyperpure needs to be able to supply to restaurant. If you look at sort of the both Zomato and Hyperpure’s sort of vision statement is to we get out the system of getting better food for more people and I think adding Blinkit to that mix allows us to be able to do two things at once, improve our scale of sourcing from the farms directly and to be able to give more opportunities to farmers in those areas to have access to a wider market.

And that’s an option that we are presenting to our sellers as well, that if they partner with Hyperpure they will be able to get better quality produce, faster from farms and that is something that also helps our overall sourcing ecosystem. So that’s what we’re working on and then there are obviously services that where Hyperpure is able to offer to our sellers that it uses for the restaurant partners as well, but that is something that we are still in the process of development. So most of the synergy right now that we’re exploring and working on is direct from farm source.

Swapnil Potdukhe — JM Financial Services — Analyst

Okay. And any timeline by when we can see these synergies reflecting in the numbers? Would you like to comment on it?

Akshant Goyal — Chief Financial Officer

See, primarily like if you look at the customer love around Blinkit’s quality of fresh produce, some of these metrics would already be reflecting over there. So I don’t think you’re going to see a separate breakout for it. The economic impact of this is something which will also probably baked in somewhere in the commissions we are able to charge our sellers, but you’re not going to be able to see a specific breakout for just integration outside if you are a customer and you ordering on Blinkit the quality of produce will consistently keep going up.

Swapnil Potdukhe — JM Financial Services — Analyst

Okay. Thanks a lot for taking my questions.

Operator

Thank you. Next question is from the line of Mr. Aditya Suresh from Macquarie Capital. Please go ahead.

Aditya Suresh — Macquarie Capital — Analyst

Yes, thank you for the candid remarks and the commentary. So two questions. First question is on concentration. So in the past you spoken about your top eight and top 10 kind of cities. Are you able to share what proportion of this kind of cohort — values? And maybe even for contribution profit?

Deepinder Goyal — Founder, Managing Director and Chief Executive Officer

Hi Aditya, this is Kunal here. Look, we haven’t put that data out, but it is — it hasn’t changed meaningfully from what it was in the past and the larger point here is that both the top 10 and the markets beyond the top 10 continue to grow and see growth both from a new user addition perspective as well as order volumes perspective. So at this point, we don’t see any reason why that mix will change substantially.

Aditya Suresh — Macquarie Capital — Analyst

In terms of growth in gross order value for this cohort of top eight top 10, then that’s consistent with the broader theme. Is that a fair comment to make?

Kunal Swarup — Head of Corporate Development

That’s correct.

Aditya Suresh — Macquarie Capital — Analyst

Cool. The second piece is on kind of cost optimization, right and this is more a point about scale and some of the global models we’ve seen that scale necessarily does not drive down cost and therefore improve profitability, be more that optimization dynamics. So, as you all kind of optimize some of these delivery cost etc. Can you speak about some of the practical challenges that you are facing here today?

Akshant Goyal — Chief Financial Officer

So, I think, Aditya it is a continuous process. I mean our fleet has grown to almost 200,000 delivery partners now across multiple cities and in that journey in last two, three years, I think we have learned incrementally on how do we make this a better experience for our delivery partners, a better earning opportunity for our delivery partners while ensuring that the customer service also continues to be better, right? So I think it’s a constant challenge and a learning process for us. I mean, there isn’t any specific practical challenge which has emerged, which I would like to highlight at this point.

Aditya Suresh — Macquarie Capital — Analyst

Thanks. And just maybe a final piece, right. So in terms of the contribution profit itself at 4.5%. Just a specific question, do you think this is a solid baseline to work from on an incremental basis, i.e., 4.5% next quarter can only be up or is there kind of risks from both sides?

Akshant Goyal — Chief Financial Officer

We hope so Aditya, that we can go from here.

Aditya Suresh — Macquarie Capital — Analyst

All right. Okay. Thank you.

Operator

[Operator Closing Remarks]

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