Bringing home the bacon: India’s food tech companies see sustenance after a long winter

Sunny Sen August 3, 2017

Story Highlights

  • In the first two quarters of 2017, food tech companies 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
  • Stakeholders believe the online food business is just opening up. The ones with efficiencies and scale will be the ones who win the battle

“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

The war is far from over, but with fewer companies left in the field, it is not an unstemmed bleed-to-death scenario any more. TinyOwl, which had raised in excess of $27 million got acquired by rival food app Runnr; Dazo and ZupperMeal shut down.

Business on the internet is all about who gets to the No 1 or No 2 spot, and food tech is no different. Sensing sustainability of operations in those left standing, investors are pumping in capital into the industry once again. In the October to December quarter of 2015, 23 food tech startups had raised nearly $180 million, taking the total for that year to over $483 million. Funding went off the cliff the following year: food tech companies raised just about $74 million in 2016 — a 85% drop in funding.

FoodTech_snapshot_2017
Source: News Corp VCCEdge

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. The total doesn’t include the warchest that FoodPanda has access to via the $431.45 million round that its Berlin-headquartered parent, Delivery Hero, raised.

Swiggy, without disclosing absolute numbers, says its revenue grew six-fold in 2016-17.

Zomato, according to InfoEdge (best known as the owner of Naukri.com), cut its losses Rs 101 crore in 2016-17, lower by Rs 324 crore the year before. The company’s revenue grew 80% to Rs 334 crore in the same period. InfoEdge is an investor in Zomato.

Food on tap

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.

Also read: The leaky bucket of Indian food delivery startups

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.

Source: News Corp VCCEdge
Source: News Corp VCCEdge

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. Swiggy started and shut down its operations in Kolkata, a city where people love to eat out.

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

That’s a long journey from the time of rumours in early 2016 that FoodPanda was shutting down its operations. The company, which lists restaurants in 150 cities, delivers food to the doorstep in seven of them.

The numbers are dramatic at its rival, Zomato. The Deepinder Goyal-led company reduced its annual operating burn from $64 million 2015-16 to $12 million in 2016-17. According to its blog, its average monthly cash burn for the period of December 2016 to March 2017 was a little less than $250,000, down from $4.2 million a year ago. “We are well on our way to hit profitability,” writes Surobhi Das, chief of staff at Zomato. The company has set its target for profitability as 2018.

Kochhar says that FoodPanda will be profitable by 2019. But there is a battle that is yet to be fought to become the leader of the pack.

Building once again

Research firm Kalagato lists three broad business models in the online food tech business:

  • Complete ownership: Dominos and Faasos take ownership of the entire supply chain and production.
  • Asset light: Zomato and FoodPanda rely on large traffic volumes for order generation but outsource delivery to third party vendors.
  • Hybrids: Swiggy focuses on providing a better user experience by controlling the logistics and customer experience.

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.

Zomato has redesigned its ad platform. It stopped accepting ads from “low-rated restaurants” to avoid negative feedback of the platform
Zomato has redesigned its ad platform. It stopped accepting ads from “low-rated restaurants” to avoid negative feedback of the platform

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

FoodPanda did not give out its numbers.

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 despite the likes of Uber announcing UberEATS and Google its Areo app.

Value for the ecosystem?

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.

Swiggy says its customers order at least five times a month and top customers order as often as 30 times a month on its app
Swiggy says its customers order at least five times a month and top customers order as often as 30 times a month on its app

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

According to the blog, Swiggy is heading into a regime where it will charge 40% from restaurants. The bloggers — four of them — wrote that at that rate restaurants will bleed, considering that most of them will be small shops. The big ones, they wrote, won’t pay anything more than 20%.

“Some restaurants are paying us more than their net margins because Swiggy in some areas in Hyderabad and Bengaluru has been able to become a significant portion of their revenues,” the anonymous bloggers wrote. (For BiteMe, for example, 15% to 20% of the orders come from Swiggy. For Cullinaire, a Chinese eatery with four outlets in Delhi, Zomato counts for nearly one in five orders — and that is increasing, making these outlets more dependent on the delivery apps.)

Soon after the blog took social media by storm, Swiggy issued a statement that it was to “malign the reputation” of the company. “Our restaurant partners are at the heart of our success,” the statement read. It rubbished the claim on the blog that Swiggy’s monthly orders stand at 2.7 million. Four million orders a month, Swiggy insisted.

That works out to some 133,000 orders every day. Kalagato estimates Swiggy’s average order value at Rs 300, which makes the company’s daily gross merchandise value nearly Rs 4 crore. At that average, Swiggy has an annual revenue of Rs 1,460 crore. But it wants more.

Cloud kitchens rev up

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.

Rashmi-Daga_CEO-&-Founder-FreshMenu

“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

“People used to call me up and ask when am I shutting down,” says Rashmi Daga, founder and CEO of FreshMenu. “We don’t want to be an aggregator (like Zomato and Swiggy)… Quality is important in food.”

That requires getting the right raw materials, from meat to vegetables to grains. There should be consistency in the taste, and a menu that serves palates from city to city and state to state. Zomato and Swiggy might be very good with delivering food, but if they have to be successful, they will have to have their supply chain of raw materials.

Daga believes that the online food business is just opening up. She is not threatened by the big boys. “One needs to hold fort, even when the industry is low… Our numbers are growing month on month. Adoption is growing and food delivery is becoming a habit. We are at an inflection point in the food industry,” she says.

TinMen had a hard time. It started 22 months ago. A few months into business, investors pulled back. Investment in food delivery startups became negligible. “Investors were afraid to put their money in food tech,” says Chaitanya Degala, founder of TinMen, but he was not ready to give up. There was a gap in the market — between food available in office canteens and what employees would want to have.

He and his team studied Mumbai’s dabbawalas and realised that they had to focus on homemade food at affordable prices. To reduce fallouts, employees have to order in advance — one day to a week in advance. “Doing on-demand meals drives the cost up… Our unit economics is positive at the operational level,” Degala says.

The future of the food tech business looks bright once again. The ones with efficiencies and scale will be the ones who win the battle for the customer’s heart — via his or her stomach.

Also read: Too tired to cook but want to eat healthy? Skip the deli and order on an app

With inputs from Shrabonti Bagchi

Lead visual: Nikhil Raj

Updated at 12.35pm on August 3 to add the source for the infographics.

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