The other day I was talking to a person who is an early-stage investor. He was looking to invest in a food business. He explained to me his criterion: he said his fund wanted to invest in a sales-multiple food business.
This foxed me. I have heard of packaged food and its various segments, or QSR and fine dining. What was a sales multiple food business, I asked? For want of an established definition, my friend chose to explain with an example. He said – “Like that Biryani company, I hear it is raising money at a valuation of $2B”.
I remembered a friend of mine was handling fundraise for a rapidly growing B2B food catering company. The B2B catering company was a profitable company, growing at only 25%. I suggested to the investor to look at that.
The investor shook his head in the negative. He explained to me that this company would get valued at price earnings multiple. Said the investor “It is hard to make money investing in a PE multiple business”.
Since then, it has become clearer to me why Zomato is having a good time on the stock market. I am not referring just to the fact that it is a sales multiple business. I realise the massive opportunity Zomato and Swiggy are fulfilling for customers looking to order food home.
There are dozens of price-earning biryanis in India. Each city has a few or several well-established, high-quality biryani chains and outlets. While Hyderabad has Paradise Biryani and Bawarchi, Mumbai has Persian Darbar, Jafferbhais, Sher-e-Punjab and Zafran. Similarly every major city like Delhi, Kolkata, Ahmedabad, Bengalore have their local favourites, legends in their own cities and neighbourhoods, often liked by generations. A Zomato and Swiggy can bring these iconic brands at your doorstep. So what would a consumer choose? A new-kid-on-the-block sales-multiple-biryani, or an established, proven price-earnings biryani?
No wonder a Zomato has to quote at an order of magnitude (or several) over the sales-multiple-biryani. For Zomato and Swiggy have dozens of biryanis in their armoury. And they deliver hundreds of other food preparations too.
Personally, I haven’t had biryani in a long time. But when the kids order a snack home, I prefer to ask for a freshly made vada pav, compared to the supply-chain burger that they order.