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Good Capital: Indian Technology Review #40
How the world eats is changing dramatically. Until a decade ago, food delivery from restaurants was synonymous with only pizza and Chinese takeout. Today, food delivery is a global market worth more than $150BN, having more than tripled since 2017. The online food delivery market in India was valued at approximately $5BN in 2020. The pandemic accelerated growth in the industry and it's expected to reach $21BN by 2026, at a CAGR of nearly 30%, with growth being concentrated in large cities such as Mumbai, Delhi, and Bangalore.
Market Landscape
Even as the food-delivery ecosystem continues to expand, its economic structure is still evolving. Considerations such as brand, real estate, operating efficiency, breadth of offerings, and changing consumer habits will determine which stakeholders win or lose as the industry develops. Potential regulatory constraints, including possible changes to drivers' compensation, will figure into the reshuffling. And while the industry has experienced explosive growth during the global pandemic, delivery platforms, with few exceptions, have remained unprofitable but have seen an uptick in their unit economics, hinting that they’re inching closer to operational breakeven.
Zomato and Swiggy have dominated the space with a duopoly that seems hard to break at the moment. With market shares of almost 50% for each of them, it's hard to say if there is a clear winner at this point. Amazon has decided to enter this race too, starting in Bangalore last year, and is currently a sub 1% player in the market.
At their heart, these business models are fairly simple. Restaurants pay a percentage of the revenue coming to them as commissions to the platforms. Customers pay certain delivery fees for the service on top of the cost of the food itself. The platforms also typically have additional monetization measures such as in-app advertising as well as product measures that nudge users to buy additional products as part of their order. The single largest cost to these companies is paying delivery executives on a per-order basis with a host of additional incentives. The second largest cost for these platforms is promotions, which vary month to month; for example, the upcoming festive season in India with Diwali, during which discounts will spike. The other large cost centers are customer service, such as running a call center or offering chat-based support when orders go awry, and refunds.
Some known challenges that these firms are trying to optimize for are:
- Potential Customer Base: The penetration rate of these platforms is currently low if we factor in the users who have only recently come online or the users in the cities beyond the top 10 cities in India. The top 7 to 10 cities make up about 70% of the business. More recently, smaller cities have seen business double as all food delivery players went from a 10 to 20 city footprint at the start of 2019 to more than 400 cities by the end of 2020. Massive discounts play a large role in acquiring customers at this stage which means that these firms will have to invest heavily at the top of the funnel to retain about 25-35% of the users.
- Loyalty Programs: Both Swiggy and Zomato had multi-tier loyalty programs available for their users, to boost their customer retention rates. These programs typically offer free delivery beyond the minimum order amount as well as benefits during surge pricing periods. However, with the lever of delivery free removed, these orders have poorer unit economics when compared to non-member rates despite their contribution to customer LTV.
- Delivery Fleet Compensation: The delivery fleet for most of these major players is compensated basis the number of deliveries completed as well as the distance covered, among other factors. Due to the higher number of orders over the last 2 years as well as increased incentives to sustain this growth, the incomes of these blue-collar workers have risen by at least 25-30% on average. A hyperlocal industry such as this runs on very tight unit economics and increased incentives are not a sustainable solution if cash burn needs to be controlled.
Emerging Delivery Battlegrounds
As the landscape shifts further in the wake of the global pandemic, new challenges, opportunities, and decision points are emerging for a complex web of players—including delivery platforms, restaurants, drivers, consumers, and other tech enablers. As this sector continues to expand, a few key factors will determine the levels of success for the various players.
- Geographic competition among delivery platforms will be one of the most significant battlegrounds over the coming years. With the major metropolitan cities covered, the next phase of growth will be unlocked from the 400 cities in India that have a growing need to be serviced. Rival platforms will continue to fight one another for customers, restaurants and drivers in each individual market, potentially leading to further consolidation over time. This battle will also extend into new verticals beyond restaurants, as platforms widen the scope of services they provide.
- The flexibility within commission models for restaurants will determine which platform ends with the larger restaurant base. With the world returning to normalcy, these platforms have started to lift some of the pandemic concessions on commissions offered to restaurants. Traditional restaurants will once again feel the commission squeeze - particularly given that these platforms themselves are now larger and more powerful than they were before the pandemic. The ability of the platforms to be flexible on commission rates and terms will determine who ends up with a wider selection of restaurants.
- The rise of new technology businesses will transform the talent requirements in the industry and potentially drive down labor costs. One of our portfolio companies, CloudChef, is revolutionising the industry by quantifying intuition while cooking. They have developed technology wherein chefs can record recipes in CloudChef kitchens which are then converted into a step-by-step process that can be recreated by labor that is not as expensive as a skilled chef, allowing scale and cost benefits to the restaurants.
The rise of cloud kitchens will tighten the pressure on traditional restaurants. The number of cloud kitchens operating on Swiggy trebled between FY19 and FY21 and doubled on Zomato in the same period. Since these lower-overhead businesses can afford to pay the platform higher commissions, they are often featured more prominently in the platforms’ apps. They may also be able to lower the service fees placed on customers. Increasingly, a greater share of delivery volume is likely to go their way at the expense of traditional restaurants, some of which may be forced to consider whether they can afford to continue playing in the delivery space at all. At the same time, dark kitchens also present an opportunity for restaurants, which may choose to supplement their on-premises facilities with remote locations devoted exclusively to delivery.
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Warm regards,
Rohan Malhotra
PS - Find our previous editions here
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