The online food delivery business, one of the most well-funded start-up verticals in India, is finally beginning to show signs of profitability. Market leaders Swiggy and Zomato have just announced profitability in their respective verticals, marking a turning point for the sector.
Swiggy’s Co-founder and CEO Sriharsha Majety, in a recent blog post, claimed that after accounting for all corporate costs, excluding employee stock option costs, the company’s food delivery business has turned profitable as of March 2023. “This is a milestone for food delivery globally, not just for us, as Swiggy has become one of the very few global food delivery platforms to achieve profitability in less than nine years since its inception,” he wrote.
The very next day, Zomato said its business, excluding quick commerce (Blinkit), has turned ‘adjusted Ebitda positive’ in the March quarter. This means that the company’s operating earnings, barring certain non-cash expenses and one-time charges, are greater than its operating expenses. Zomato attributes its accomplishment to the food delivery business, which brought in Rs 78 crore of adjusted Ebitda over the period.
“In food delivery, over the past five quarters, we have improved our margins meaningfully while further strengthening our market position. We will continue with the same mindset, as we look to further expand the adjusted Ebitda margin (from the current 1.2 per cent) to our stated goal of more than 4-5 per cent of gross order value (GOV),” Zomato’s Co-founder and CEO Deepinder Goyal wrote in his letter to shareholders.
Persistent and fruitful efforts by both these platforms to raise their take rates or commissions from their restaurant partners are a major factor in this remarkable reversal, say experts. Improved profit margins can also be attributed to the implementation of a successful differential menu pricing plan, in which delivery menu prices are raised relative to dine-in menu prices. Discounts have been cut significantly, which has helped them immensely as well. “They are not trying to chase customers with low order values because unit economics can only improve with higher order values. They have been trying to improve customer retention and increase order frequency from high-value customers and these factors have helped them,” says Karan Taurani, Senior Vice President & Research Analyst at Elara Capital.
According to Taurani, the increased emphasis on profitability is ultimately aimed at improving valuations; for Zomato in the public market and Swiggy in the private market. Zomato’s market capitalisation, which once peaked at over $15.5 billion in late 2021, has more than halved since the start of 2022. Swiggy also has seen valuation markdowns from its investors Baron Capital and Invesco in recent weeks.
Meanwhile, the arrival of ONDC is threatening the duopoly that Zomato and Swiggy enjoy in food delivery. ONDC doesn’t pose an immediate threat, but it offers restaurants a degree of bargaining power, which limits aggregators’ ability to increase commissions periodically.
Private and public market investors now value companies based on their profitability prospects. “GOV growth may be about 15-20 per cent, but they will have to get their revenue growth beyond 20 per cent, maybe towards 25 per cent which along with a consistent path to profitability should help re-rating of valuations, both on stock exchanges and in private markets,” says Taurani.
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