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For India’s online food delivery giants Swiggy and Zomato, the Covid-19 lockdowns were the ultimate moment of truth. They presented a growth opportunity like never before. People were locked in their homes for months, discretionary spending on food services was at its highest, existing restaurants flocked to their platforms en masse, and new cloud kitchens mushroomed. Consequently, average order values (AOVs) peaked and order numbers shot up to record levels. Yet, improvement in operating margins remained elusive and the writing on the wall became glaringly clear—there isn’t much money to be made on pure-play food delivery business in India. But why is it so?
In food delivery, profitability means improving AOV and optimising delivery cost. The average order value of $5 for food delivery in India is approximately six times lower than that of peers in the US and Europe, according to a report by global stock investing platform Stockal. Even with one of the highest commission rates in the world that go as high as 30 per cent of the order value, Indian food delivery firms end up losing money on a majority of orders due to high delivery costs and discounts.
Our goal remains to be the preferred food company in India
Founder and CEO
The biggest headache: sub-optimal usage of riders. Food delivery is always a two-peak business—lunch peak and dinner peak. The low utilisation of riders in the mornings and evenings tear a massive hole through unit-level profitability. Swiggy and Zomato operate a marketplace model involving customers, restaurants and riders, and it becomes very tough to incentivise all three as they compete against each other.
Discounts for customers and restaurants, as well as incentives for riders, lead to massive cash burn.
Even at the height of growth, these inherent issues continued to haunt food delivery players. It led the start-up giants to strategic crossroads, forcing them to make bold moves that reaffirm or redefine the nature of their businesses. In particular, to keep riders meaningfully occupied during the hours they log in and to incentivise them through the day, it was inevitable that food delivery marketplaces step outside food to other verticals.
So, now you have Zomato wanting to take control of the restaurant economy with its B2B supply platforms and Swiggy gradually building its local courier delivery and subscription-based daily needs delivery (see Capturing Everything Food and Hyperlocal). At the same time, the fear of missing out (FOMO) is driving them into one another’s turf. While Zomato is in the process of snapping up 10-minute grocery delivery start-up Blinkit (erstwhile Grofers) to compete with Swiggy’s Instamart, Swiggy is foraying into Zomato’s stronghold of restaurant discovery and reviews with an investment into table booking app Dineout. And both are working on pay later services to help users order food and clear bills at the end of the month.
Since inception, Bengaluru-based Swiggy has maintained a hyperlocal focus. While it did try its hand now and then in other areas such as private labels in food and a marketplace model for grocery delivery, market realities forced it to commit fully to its original principles. The result was a renewed focus on the “neighbourhood convenience economy”, which is something of a new parlance for hyperlocal.
The primary driver of this approach is its express grocery delivery service, Instamart. Launched as an essential-goods-delivery service in the thick of the pandemic in 2020, Swiggy realised its worth in the convenience economy and doubled down on it. Instamart gave the Sriharsha Majety-led company a much deeper understanding of neighbourhood granularities, and helped it build supply chain management and just-in-time inventory capabilities.
And the bet is paying off. Instamart, now available across 23 cities, accounted for about 20 per cent of Swiggy’s revenues of Rs 2,547 crore in FY21. Industry sources put that share at about 25 per cent today. According to top Swiggy executives who spoke on condition of anonymity, the management expects Instamart to outgrow food delivery in the next 18 months. “Our priority and focus are quite visible. We are sponsoring IPL with Swiggy Instamart, not Swiggy. The budget goes under Instamart P&L. Similarly, more than 80 per cent of new capital will be allocated to Instamart for the next year or two,” one of the executives told Business Today.
Co-founder and CEO
With a commitment of $700 million to grow its express delivery business, Swiggy is aggressively building dark stores across the country. (A dark store is a micro-fulfilment centre where e-commerce firms store inventory for rapid online order fulfilment.) As it adds more SKUs (stock keeping units) across its expanding network of dark stores, the AOVs are bound to increase, helping it improve margins. The company targets to clock an annualised GMV (gross merchandise value) run rate of $1 billion in the next three quarters with Instamart.
So, with food and grocery, Swiggy has created two strong revenue streams, which are not feeding on each other. But there’s more. The company is gradually building out its pick-up and drop (courier) service, Swiggy Genie; subscription-based daily grocery delivery service, Supr Daily; and a meat delivery vertical called Meat Stores. Today, the Prosus-backed company delivers food across 520 cities, does local courier service in 68 cities with Genie, and offers daily essentials in six.
The ‘everything delivery’ model helps Swiggy reduce discounts across its platform, and allows it to plug all its riders into a single unit, which enables better utilisation of its delivery fleet. According to the company, it delivers products under 20 minutes in its key markets. As deliveries become fast and spread across the day, riders can fulfil more orders per hour, which allows it to reduce the incentives paid per delivery without affecting a rider’s earnings.
“You get a high open rate for the application when the customers have more than one reason to open your application. You open Swiggy for your food, for grocery, or to send a courier within the same city. This solves for the unit economics and rider optimisation, to an extent. Once you crack hyperlocal logistics, you can build food and grocery very easily, which is what Amazon, Flipkart and Reliance will all do,” says a foodtech company founder who wished to remain anonymous.
Zomato, on the other hand, has always been a food services company. It has stayed true to food all through its many pivots over the course of its journey that started in 2008 as a restaurant search and discovery platform, all the way to going public in 2021 as a full-stack food services company. “Our goal remains to be the preferred food company in India,” Zomato’s Founder and CEO Deepinder Goyal asserted in a recent blog.
With restaurants as the fulcrum, Zomato has been experimenting with several products to create an ecosystem beyond food delivery services. Products such as Hyperpure, which provides ingredients and other supplies to restaurants; and the recently announced, ambitious 10-minute food delivery, are steps towards expanding its food horizon. As per its December quarter results, supply-chain business Hyperpure grew by 168 per cent year-on-year (YoY)and 40 per cent quarter-on-quarter (QoQ) to `160 crore. Present in nine cities, the company said it supplied to over 27,000 unique restaurants in the third quarter.
‘Zomato Instant’, the 10-minute food delivery service, is being piloted in Gurugram. “Nobody in the world has so far delivered hot and fresh food in under 10 minutes at scale, and we were eager to be the first to create this category, globally!” Goyal wrote at the time of the announcement. The company is currently setting up a network of ‘finishing stations’ or mini-kitchens in close proximity to high-demand customer neighbourhoods, similar to Swiggy’s dark stores. These finishing stations will house bestseller items (about 20-30 dishes) from various restaurants based on demand predictability and hyperlocal preferences. “If Zomato Instant works as envisioned, it will create significant impact on affordability (at least 50 per cent reduction in cost to the end customer), accessibility (reduction of delivery time from 30 minutes average to under 10 minutes), and quality (with influence over the supply chain, we will be able to ensure highest grade ingredients and hygiene practices across the supply chain),” Goyal had said at the time.
Average eating out in urban India has grown from two to three times a month to about eight to 10 times. In comparison, most advanced markets in Southeast Asia average around 30+ times a month. In fact, many households in Singapore do not even have a full-fledged kitchen and they make do with a kitchenette. India may get there, and may not. But the country could move in that direction. It could become 20-25 times a month in select urban geographies or localities. With quick delivery in food, Zomato is facilitating this movement.
K. S. Narayanan
Food and Beverage Companies
“Average eating out in urban India has grown from two to three times a month to about eight to 10 times. In comparison, most advanced markets in Southeast Asia average around 30+ times a month. In fact, many households in Singapore do not even have a full-fledged kitchen and they make do with a kitchenette. India may get there, and may not. But the country could move in that direction. It could become 20-25 times a month in select urban geographies or localities. With quick delivery in food, Zomato is facilitating this movement,” says K.S. Narayanan, who serves as an advisor to food and beverage companies such as True Elements, 4700BC Popcorn and Polar Bear-The Ice Cream Sundae Zone, among others.
Beyond food, Gurugram-based Zomato’s first big expedition is grocery delivery, where it had failed twice earlier in a span of two years. Now it is trying to resuscitate that dream. Zomato is in the final stages of acquiring Blinkit, the SoftBank-backed quick commerce platform, in a deal worth $700-800 million. Zomato hopes to leverage Blinkit’s years of grocery business experience and club it with its delivery capabilities to join the quick commerce party without having to build the capabilities in-house. A potential merger offers multiple synergies including better cross-selling between food and grocery products, and effective optimisation of delivery, besides helping Zomato improve its top line, which is growing at a slow pace. On a sequential basis, its revenue rose just 9 per cent for the October-December 2021 quarter.
However, any attempt to ride Blinkit’s capabilities will need to also deal with the eight-year-old start-up’s baggage of challenges. Erstwhile Grofers, which specialised in delivery of groceries, fresh produce, stationery, electronics, and household products, took upon a whole new identity and pivoted its business model to 10-minute grocery delivery in December 2021. It then went on a growth spurt, opening hundreds of dark stores across the country and pumped millions into establishing the required infrastructure. Predictably, the model wasn’t sustainable and within weeks, it closed down services in many areas where it couldn’t fulfil its promised 10-minute delivery. The cash burn was such that the company was forced to shut down many of its dark stores and lay off workforce within months.
Zomato’s decision to fold Blinkit under its wing seems more like corrective action for an investment gone awry than a well-thought-out plan. A $100-million investment in August 2021, which Zomato had said was ‘purely financial’, changed to a merger sooner than expected as Blinkit started bleeding profusely and was looking to raise funds from new investors. Goyal, in his February blog post, rationalised the investment with Blinkit’s $450-million annual run rate GMV (January 2022 annualised) and spread of 400+ dark stores across 20 cities. However, how long will the company foot the cash-bleeding quick commerce business? Will the acquisition help Zomato compete with Swiggy on an even footing? It won’t be easy.
Food as a category offers higher margins, but grocery’s repeatability can bring about economies of scale faster. Swiggy, with an ‘everything delivery’ approach focussed on the neighbourhood convenience economy, seems to be nearing market maturity faster than Zomato’s dedicated food ecosystem play. According to a report by consulting firm RedSeer, e-grocery will be a $21-25 billion market in 2025 while the market size of food delivery will just be about half of it at $12.8 billion.
“The GMV that our food delivery business achieved in 40 months, took Instamart just 17 months, demonstrating the platform benefits of Swiggy. We will double down on this to build more categories in line with our mission of offering unparalleled convenience to Indian consumers. Our goal is to make Swiggy the platform that 100 million consumers can use 15 times a month,” a Swiggy spokesperson said in an email response to a questionnaire from BT.
‘What to order’ in grocery is well defined—households know what they need and have a budget for grocery. The ‘when to order’ is the difficult question as there are no standard routines to grocery and other household needs. Most are unplanned and impulsive purchases. So, quick delivery services are effectively addressing the ‘when’ element for the unplanned needs.
“Instant grocery delivery business today is where food delivery was four or five years ago. They are trying to capture the market and change user behaviour. Deliveries are more or less free. Margins are lower than food. A lot of capital is spent on setting up infrastructure, stocking SKUs and maintaining inventory. The segment is growing at a much faster pace than food,” says Amit Nawka, Partner for Deals & Start-ups Leader at PwC India.
Instant grocery delivery business today is where food delivery was four or five years ago. They are trying to capture the market and change user behaviour. Deliveries are more or less free. Margins are lower than food. A lot of capital is spent on setting up infrastructure, stocking SKUs and maintaining inventory. The segment is growing at a much faster pace than food.
Partner for Deals & Start-ups Leader
Adds Mohit Gulati, CIO & Managing Partner of ITI Growth Opportunities Fund: “Convenience is valued and people are willing to pay, meaning we have some maturity in the market finally, which also directly translates into the take-home salaries of the riders because the more deliveries they do, the more they get incentivised. Gross-level profitability in grocery can be made very quickly. If any of these players are to start making money, grocery will be the reason, not anything else.”
“In food delivery, micro-markets are maturing, but businesses are yet to reach break-even on a company-wide basis because every time a micro-market becomes sustainable, they would expand and focus on new micro-markets. This pattern would go on for some time because India is such a huge market,” says PwC’s Nawka. AOV in food delivery, which is around Rs 350-400, is likely to fall as more and more people get back to working from office. “Order values peaked during Covid lockdowns because people clubbed orders for other family members. People are going back to offices, so individual orders are rising. Food delivery firms are expanding to smaller towns where AOVs tend to be smaller. Owning to these factors, there will be some kind of correction in AOVs,” says Abhijit Routray, Engagement Manager at RedSeer.
Like every other e-commerce segment, grocery, too, is a long-term play, and sizeable investment over many years is needed to capture a meaningful market share. Zomato has $1.7 billion cash on its balance sheet, but its ability to take risks is far lower today than a year ago when it was not listed, while Swiggy, also with a similar war chest, is likely to build as much as it can before it hits the bourses.
Zomato refused to participate in the story and did not respond to a questionnaire from BT. Swiggy sent some email responses but declined to address many of BT’s specific queries.
Convenience is valued and people are willing to pay, meaning we have some maturity in the market finally, which also directly translates into the take-home salaries of the riders because the more deliveries they do, the more they get incentivised. Gross-level profitability in grocery can be made very quickly. If any of these players are to start making money, grocery will be the reason, not anything else.
CIO & Managing Partner
Growth Opportunities Fund
Meanwhile, the pushback from disgruntled restaurateurs is getting stronger. Indian food delivery marketplaces bill restaurants 15-30 per cent depending on the size and scale of their business. Restaurants, led by the National Restaurant Association of India (NRAI), have long been opposing the commission structure, exclusivity clauses, deep discounting, and data masking of Swiggy and Zomato. NRAI has partnered with several technology solution providers to help members build their own ordering channels. Swiggy itself has been piloting a direct order product with Mumbai restaurants.
On April 5, the Competition Commission of India (CCI) ordered a probe into the operations and business models of Swiggy and Zomato pertaining to alleged violations of competition norms, based on evidence provided by NRAI last year.
“In a typical restaurant bill, GST is about 5 per cent, digital aggregators take about 15-30 per cent, food cost typically will be in the region of 25-35 per cent, packaging costs are about 5-10 per cent, energy cost is 10 per cent, manpower 15 per cent for a full service restaurant, and rentals constitute about 5-20 per cent. Until the average order value goes up and a business achieves great scale, it doesn’t add up [for restaurants] to work with online [food delivery] providers,” says Narayanan.
Both the companies have scaled down their cloud kitchen businesses. Food works on skills, not on analytics—running a delivery service and cooking good food quickly are very different ball games. While Zomato has fully exited the category, Swiggy still runs plug-and-play kitchen infrastructure vertical Swiggy Access in five cities.
Both Swiggy and Zomato have realised that pure-play food delivery is not going to take them to profitability as the market is going to plateau beyond a point. It’s not clear how Zomato is going to integrate Blinkit with it. Running two different platforms for groceries and food is not going to help its cause. Tracking data from two different platforms and making a single consolidated address for every user to derive meaningful insights on time is a herculean task. Both services not placed within the same platform kills cross-selling opportunities.
With Swiggy, on the other hand, it’s a unified interface. The company enjoys granular hyperlocal data, gathered and mined for insights from two hugely popular use cases, which gives information on the purchasing power of a locality, eating preferences of a household, shopping practices and more. It helps them decide where exactly to set up dark stores, stock what products at which pin code, and decide what to promote in each micro market. Swiggy may bring many more verticals into the app, thus becoming a super app of hyperlocal deliveries.
Consolidation is slowly picking up pace in the segment as insistent discounting and high cost of delivery are putting companies at considerable pressure across the globe. US-headquartered rapid-delivery giant Instacart slashed its valuation by nearly 40 per cent owing to recent market turbulence, while New York-based rapid grocery delivery platform Buyk filed for bankruptcy protection, and Fridge No More, an instant grocery delivery service in the US, shut down its operations permanently.
Closer home, Zepto, the new kid on the block that accelerated the quick commerce game in India, is bearing the brunt of high cash burn. The Mumbai-based company has held acquisition conversations with both Swiggy and Zomato, people in the know told Business Today. It last raised $100 million in December 2021 at a valuation of $570 million and is now in the process of raising a new round. “Those interactions (with Swiggy and Zomato) were more like a valuation testing game, and investors chose to wait for a larger valuation. They are now seeking a unicorn valuation in the next round, but the times are tough, and it doesn’t look like they are getting there. The valuation now being discussed is in the range of $700-800 million,” a person aware of the developments at Zepto told Business Today.
The valuation of Zomato itself, now a listed stock, has been on a downward spiral for months after an initial strong show after listing day (see Dwindling Fortunes). Its share prices slipped 5 per cent on April 5 to hit an intraday low of `82.15 on the BSE after the CCI ruling. On a year-to-date basis as of April 5, the shares have fallen over 38 per cent. “The market has understood that these [new-generation] businesses may grow at high digits, but profitability will revert only in the long term, needing a balance in valuations. The company will have to maintain its high QoQ revenue growth trajectory with focus on generating real profits in the coming years,” says Sethumadhavan K.S., Research Analyst at brokerage firm Geojit Financial Services.
Both companies, meanwhile, are deep in the red (see How the Numbers Stack Up). It is clear that Swiggy sees its delivery fleet as its main resource and strives to improve its utilisation to bring profitability, while Zomato sees its restaurant network as its main asset and is building products around it to move out of the red. Either way, winning user mindshare—across different products and verticals—is the name of the game as grocery and food services are moving towards convenience. “Food delivery is a cut-throat industry where even the restaurants push back in a big way, there are regulatory challenges and unionisation, besides the obvious economic impracticalities of making large margins,” says a global investor, whose company has backed one of these firms. “Finding new adjacent avenues of scale is the only logical way forward.” Which is exactly what Swiggy and Zomato are doing.
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