Zomato Results Show That ‘Investor Authority’ is a Myth

A few days back, the food delivery company Zomato delivered its first financial results after getting listed on the stock exchanges.

As has been extensively reported in the media by now, the company continues to lose money. The revenue from operations of the company for the period April to June 2021 amounted to Rs 844 crore. The total expenditure was at Rs 1260 crore. To put it in another way, for every Rs 100 that Zomato earned, it spent Rs 149.

If we look at the same metric for the period January to March 2021, the company had spent Rs 128 for every Rs 100 that it earned. For the period April 2020 to March 2021, the company had spent Rs 131 for every Rs 100 that it earned. Clearly, the expenditure that the company has incurred for every rupee that it earned during April to June 2021, was higher than it was in the past.

A possible reason for this could be higher discounts offered to consumers to drive up sales before the company’s initial public offering hit the stock market. As I have said on multiple occasions in the past, Zomato, if it works, is a long-term bet.

The baseline success rate of startups is low to begin with. Many ecommerce ventures have failed in the past. The joker in the pack is whether people will continue ordering once discounts are off the table and once the company decides that it’s time to stop bleeding in order to drive sales.

Also, whenever this happens, will the sales be substantial enough. This means will enough people order food using the app for the business to be a viable proposition.

In that sense, the success of Zomato also depends on the success of India’s economic story, which has been stagnating in the recent past. The more jobs we are able to create, the more people will earn, and the more they are likely to order food than cook at home.

The current business model of the company isn’t viable, and that is obvious. Whether it will become viable in the days to come is a question that remains. So, we will leave it at that.

Nonetheless, there is another important point that needs to be made. In a letter to the shareholders, Zomato CEO Deepender Goyal said:

“We will do earnings/analyst calls once a year, at the end of each fiscal, where we will share a more detailed commentary on the year gone by along with key metrics.”

This when Rs 756 crore or 60% of the total expenses of Rs 1260 crore during April to June 2021, have been categorised as other expenses without an explanation for where this huge amount went. Are these discounts that the company is offering to the prospective customers? Or the money it is paying its delivery partners? Or both? This needs to be detailed. Of course, Zomato is not breaking any law here.

Further, this lack of transparency doesn’t seem to have bothered the newly minted shareholders or the so-called owners of the company, in any way. Nonetheless, this does show us something that the economist John Kenneth Galbraith talked about in his last book The Economics of Innocent Fraud.  

As he wrote:

“The myths of investor authority, of the serving stockholder, the ritual meetings of directors and the annual stockholder meeting persist, but no mentally viable observer of the modern corporation can escape the reality. Corporate power lies with management.”

Or as he puts it in an even more direct way:  

“No one should be in doubt: Shareholders—owners—and their alleged directors in any sizeable enterprise are fully subordinate to the management. Though the impression of owner authority is offered, it does not, in fact, exist.”

The management with their employee stock option plans are also part owners of companies these days.

By deciding to give out details of its business only once a year, Zomato, like many other companies before it, has once again proved what Galbraith had talked about in his 2003 book. That when it comes to the modern corporate structure, investor authority doesn’t really exist. And it’s basically a myth.

Of course, the investors themselves aren’t bothered about such details right now. They are busy with “greed, optimism, exuberance, confidence, credulity, daring, risk tolerance and aggressiveness,” as Howard Marks writes in Mastering the Market Cycle. The speculative orgy is currently on and there is no point in looking at data, examining it and asking questions.

But then all good things come to an end. Couples breakup. Marriages fail. SRK grows old. Lata’s voice doesn’t sound the same anymore. Kohli ends up out of form for an extended period in test cricket. And stock markets fall. Of course, one doesn’t know exactly when. But most times, this is how things go.

Why Bangalore Came Last in IPL

Virat_Kohli_26_Feb_2012

The Indian Premier League(IPL) is just about to come to an end. The Bangalore team did not do particularly well in this year’s edition and won only three out of their 14 games. They lost 10 games and one game was drawn because of rains.

The team was a finalist last year and lost to Hyderabad in the final. Given this, at the beginning of the 2017 season, nobody expected that the Bangalore team would come last among the 8 teams. Nevertheless, reasons are now being offered on why the Bangalore team did not do well this time around.

While analysing and offering reasons is fine, some of the cricket experts are now saying that they always knew that Bangalore wouldn’t do well this year. Multiple reasons have been offered. Here are a few that I have heard.

The captain Virat Kohli was injured and missed the first few games. KL Rahul missed the entire tournament because of an injury. Chris Gayle was not in his usual form. AB de Villiers was also injured and came in only after the first few games. One expert even said that the injury to batsman Sarfaraz Khan hit the team hard.  And hence, the team was never able to build the momentum that is required to keep winning T20 games.

While all this sounds fine, none of these reasons were offered at the beginning of the tournament. At the beginning of the tournament none of the experts said that they don’t expect the Bangalore team to do well this year. But now once the Bangalore team has not done well, they are busy coming up with various reasons to explain the non-performance.

And along with that they are convinced about the fact that they had always believed that the Bangalore team would not do well this year. As David Hand writes in The Improbability Principle: “After the fact, it’s easy to put the pieces together, and show how they form a continuous chain leading to the outcome.” Or to put it simply, everything is obvious once you know the answer. Hence, Bangalore did not do well because Kohli was injured and could not play in the first few games. Bangalore did not do well in these games and in the process, they were never able to build the required momentum which is an essential part of a tournament of this kind.

This kind of storyline could not have been offered at the beginning of the tournament. As Hand writes: “Before the fact, however, there are many pieces and potential chains and it’s just not possible to know which events fit together. This isn’t because there are too many pieces, but simply because they can be put together in a vast number of possible ways, and there’s no reason to select any one of them.”

Hence, before this year’s IPL started one did not know that Chris Gayle, the master of the T20 game, would have the kind of disastrous year he did. It was always difficult to predict that the likes of de Villiers, Travis Head and Shane Watson, brilliant T20 players in their own right, wouldn’t have much of an impact on Bangalore’s overall performance. Even Kedhar Jadhav burdened with the  responsibility to keep wickets, looked out of touch.

But all this and more can be now said with confidence, almost at the end of the tournament. As Hand writes: “Our innate tendency to retrospectively adjust a new recollection as new information becomes available, to identify the chain which led to the disaster and to say, after the fact, ‘Look, it was staring us in the face!’ is called hindisight bias.”

The point being that Bangalore lost because they did not score enough runs and they did not take enough wickets. Any analysis beyond this, is essentially hindsight bias.

The column originally appeared in the Bangalore Mirror on May 17, 2017