In a deal that has been in the works for a while, Gurugram-based food tech company Zomato announced that it will acquire Uber Eats, Uber’s food delivery business in India, in an all-stock deal.

A statement issued by Zomato on Tuesday morning stated that following the closure of the transaction, Uber will get a 9.99% stake in Zomato. Though it didn’t specify the valuation at which the deal had been struck, it could possibly be around $300-350 million. Earlier this month, it was reported that Zomato was raising about $150 million from China’s Ant Financial at a valuation of around $3 billion. Consequently, a back-of-the-envelope calculation pegs Uber’s 10% stake in Zomato in this vicinity.

"We are proud to have pioneered restaurant discovery and to have created a leading food delivery business across more than 500 cities in India. This acquisition significantly strengthens our position in the category,” Deepinder Goyal, founder and CEO, Zomato, said in the statement.

Dara Khushrowshashi, Uber’s CEO stated that Uber Eats had achieved an “incredible amount” in India over the last two years. “India remains an exceptionally important market to Uber and we will continue to invest in growing our local rides business, which is already the clear category leader. We have been very impressed by Zomato’s ability to grow rapidly in a capital-efficient manner and we wish them continued success,” Khushrowshahi said.

Uber Eats in India will discontinue operations and direct restaurants, delivery partners, and users of the Uber Eats app would migrate to the Zomato platform, effective Tuesday.

India’s food tech sector has attracted billions of dollars in global investments over the years, owing to the inherent potential of the sector. With a young demographic, rising disposable income and busy lifestyles, eating out and ordering in has been in vogue for a while now. The size of the Indian food services market that comprises restaurants and food delivery is estimated at $50 billion. The food tech sector alone is expected to be worth $3.5 billion by 2021.

Zomato said that its revenue for the first half of the current financial year had increased over threefold to $205 million over the year-ago period, signalling the growth that these companies are experiencing. It is reported that Zomato is in the middle of a fundraising exercise, through which it expects to raise around $600 million (of which Ant Financial’s $150 million is a part). In December 2018, Zomato’s nearest rival Swiggy said that it had raised $1 billion from marquee investors like South Africa’s Naspers, China’s Tencent, and some hedge funds. The Gurugram-based company was valued at $3.3 billion after that round of fundraising.

Swiggy has been a leader and an early entrant into the food delivery business, wherein delivery partners pick up food from an user’s favourite restaurant and deliver it to their doorstep on bikes and bicycles. Zomato, which started of as a restaurant discovery platform got into the food delivery space much later, but has made rapid strides since.

There have been instances of consolidation in the food tech space in the past as well. Most recently, Swiggy acquired on-demand food delivery platform Scootsy in August 2018. Before that hyperlocal delivery startup Runnr had acquired another food delivery business, TinyOwl in 2016. Runnr itself got acquired by Zomato a year later.

Despite entering India with much fanfare, Uber Eats wasn’t able to make much of a dent in the food delivery business and found competing with the local big boys of this business—Swiggy and Zomato—a tough task. Since growing its ride hailing business in India and entering new modes of transport—like air and water—in the future is Uber’s primary focus, it made imminent sense for it to sell Uber Eats to a specialist in the business. In turn, it has also got a meaningful stake in a fast-growing company, which is sure to be worth much more in the future.

Though the food tech sector remains promising and revenues of companies like Zomato and Swiggy are growing multi-fold, the sector is also fraught with challenges. For starters, there is no visibility of profits as companies continue to burn cash to grow the market. In FY2019, Swiggy reported losses to the tune of around ₹2,345 crore, while Zomato reported a loss of around ₹1,000 crore.

Second, there appears to be some disenchantment setting in between these platform providers and restaurants. Promotional schemes like Zomato Gold and an all-you-can-eat offer for users have earned the company the ire of many restaurants who claim it is simply not viable for them to be a part of these discounted promotions. Last year, the National Restaurant Association of India initiated a #logout campaign urging restaurant partners to log out of these food tech platforms.

In a subsequent tweet, Goyal had gone on the offensive and said that Zomato was logging out of the #logout campaign. He stated that it was the larger restaurants that had an issue with the promotional services. “On a democratised platform like Zomato, large restaurant owners have to compete with independent restaurants on a hyperlocal basis, and are not able to leverage their large presence to pull more distribution/profit,” Goyal had said in his tweet. He further added: “An aggregator’s most important job is to level the playing field for everyone. This is not about aggregators versus restaurants; this is about small restaurant owner versus the large restaurant owner – and we are being painted as bullies.”

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