After a long winter of bitterly fighting for a share of stomachs while counting on the internet to deliver them their daily food, companies such as Zomato, FoodPanda and Swiggy are beginning to see their fortunes change
“Be in the food business, because no matter how bad things get, people still have to eat,” Lee Iacocca’s father told him. The sage advice that the storied former president of Ford Motor Co got from his father is beginning to ring true for a handful of so-called food tech companies in India.
For, after a long winter of bitterly fighting for a share of stomachs while counting on the internet to deliver them their daily food, companies such as Zomato, FoodPanda and Swiggy are beginning to see their fortunes change.
The cheque books are out this year, again. In the first two quarters of 2017, food tech companies have already received $131 million. Swiggy, owned by Bundl Technologies, raised $80 million
Two things are driving this change — India’s swelling internet user base, which is already close to 450 million, and more people in Indian cities getting familiar with ordering food on an app. “Urbanites are spending less time in the kitchen because the sheer convenience of ordering food overrides the collective effort to plan a meal, buy groceries and cook at home,” says Srivats T S, vice-president (marketing) at Swiggy, in an email interview.
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Swiggy says its customers order at least five times a month on its app. “Our top customers order as often as 30 times a month,” adds Srivats.
Some like Saurabh Kochhar, CEO of FoodPanda, say that the perception of the market has changed. “Food delivery will continue to be a big story. The $300 billion opportunity is too big to ignore,” he says. Restaurants as a part of the pie make for $50 billion and home delivery $15 billion.
The scaling up of the business coincides with a careful watch on costs, rationalising every paisa spent in operations at the companies. “What has definitely changed is the scale and the understanding of the business,” says Kochhar. “All of us were losing a lot of money giving heavy discounts, and operating at high costs… And there were many players doing the same business.”
About a year ago, Zomato fired more than 300 people. FoodPanda also laid off 15% of its staff.
The food delivery business is a high-volume and low-margin business — the smallest of costs decide whether it will be in the black or red. Kochhar talks for FoodPanda: “We picked up every single operating head and worked upon it. We have brought down the cost of fulfilling every order by 80%.” It reduced dependence of humans and automated processes. Kochhar claims that FoodPanda fulfils 99% of orders on its platform.
“Urbanites are spending less time in the kitchen because the sheer convenience of ordering food overrides the collective effort to plan a meal, buy groceries and cook at home” — Srivats T S, vice-president (marketing) at Swiggy
Research firm Kalagato lists three broad business models in the online food tech business:
Swiggy is planning to launch new products and services. That is where it will deploy the money it has raised. It has also got plans to double the headcount for its tech team and increase investments across engineering, automation, data sciences, machine learning, and personalisation.
Customer experience is what’s top priority. “We solve for the high overheads of restaurants by maintaining a large delivery service (over 13,000 delivery executives), provide analytics support to assist in retaining consumers and peak-time resource allocation, leading to additional business, and a higher bottom line,” says Srivats.
Zomato has redesigned its ad platform. It stopped accepting ads from “low-rated restaurants” to avoid negative feedback of the platform. It also introduced new products to improve targeting the customer, changed it interface and offered better visibility into restaurants that were rated well. As a result, its ad revenue grew to $38 million in 2016-17 — an increase of 58% — which makes for 77% of the company’s total revenue. Zomato declined a request for interviews for this story.
With a mix of clean up and better targeting, food delivery platforms have managed to strike a balance between bleeding money, and making it. But this is just the beginning
Swiggy and its competitors are not wrong in saying that they drive value for restaurant partners. But, at what cost?
The platforms typically take 10% to 15% of the order value as commission, says a source who works with one of the startups. Add delivery to it and there is a cost of Rs 30 to Rs 40. If there is advertising, ordering and delivery, it can be anything between 25% to 30%, this executive adds.
Food, to be sure, is a high-margin business for restaurants. It can range from 40% and go up to 55% to 60%. Still, to give away 15% to 30% to a food tech platform is something restaurant owners resent. They want to move the customer from the platforms to their own websites, but the problem is one of discovery and traffic.
“We don’t have the marketing budget of most of these channels, so that’s a tough sell to the customer,” says Kingsley J Joseph, founder of Bengaluru-based BiteMe Cupcakes. “Like many restaurateurs, we too feel that a big part of the delivery cost is passed on to us, instead of being borne by the consumer.” Consumers are charged on smaller orders, but that is not really enough to cover costs.
Joseph also feels that companies like Swiggy haven’t innovated enough. BiteMe is a well-regarded bakery in the southern city and Joseph wants to engage with customers more. But, he is not happy with what platforms offer. “A number of features — for example, favourite restaurants — are either implemented halfway or with low discoverability or usability,” he says.
Talk of lack of innovation and higher pricing — recently some present and former employees of Swiggy wrote an anonymous blog alleging that the company cheats restaurants and its investors.
Food, to be sure, is a high-margin business for restaurants. It can range from 40% and go up to 55% to 60%. Still, to give away 15% to 30% to a food tech platform is something restaurant owners resent
Cloud kitchens, to put it simply, are restaurants without storefronts. And, they are becoming the new customer acquisition tool for food tech platforms. Cloud kitchens offer better margins (about 20% higher), quicker delivery, and better control over food quality.
The strategies of Swiggy and Zomato come with minor differences. Swiggy operates its cloud kitchens under the name The Bowl Company while Zomato invites restaurants to something it calls Zomato Infrastructure Services to open kitchens without storefronts for it.
But, how will restaurants compete with the platform-owned cloud kitchens? Swiggy did not answer the question directly. “We have a strong partnership with over 12,000 restaurants in the country. Our focus remains on expanding the reach and order-taking capacity of restaurants,” Srivats replied.
Watch: Ever wonder what happens when you order food online? This video tells all
Swiggy and Zomato are not the only ones in the cloud kitchen space. Faasos started cloud kitchen services in 2015. It struggled for a long while but is in better shape now. It ranks second on annual order value per customer (the total money one user spends in a year) at Rs 6,780, according to Kalgato. Swiggy tops the list at Rs 9,393, Zomato follows Faasos at Rs 5,847, and FoodPanda is at Rs 4,548. (This value includes all orders).
There is other competition, too. From InnerChef in Gurugram, in Mumbai there are HolaChef and Box8, TinMen in Hyderabad, and in Bengaluru there is FreshMenu. Some shut down as well. Delhi-based BiteClub promised homemade food. It got $300,000 as angel money, scaled fast, and then shut down.
“People used to call me up and ask when am I shutting down… We don’t want to be an aggregator (like Zomato and Swiggy)… Quality is important in food” — Rashmi Daga, founder and CEO of FreshMenu