Hungry kya? Just open an app or make a call, place your order and you will have your food in a few minutes, hot or cold, just the way you desire. Over the years, the food industry has grown by leaps and bounds. A lot of credit goes to the delivery system that provides last mile connectivity to the business and ensures seamless operations.
Imagine a life without delivery persons. While restaurants and eating joints have existed forever, the system of large-scale door-step delivery has been more recent. A lot goes into even that one cup of cold coffee that you order on a food delivery app. Right from being available to taking the order and getting it ready on time to packaging it and having it delivered in your hands, the entire process chain is not as simple as it may seem. Many have failed not because their food was of inferior quality, but because they could not efficiently manage other aspects of the business.
That is where the food-tech industry comes into play. The food technology companies help iron out hurdles in taking the final product to the customer. The success of the industry can be gauged from the investment that is coming into it and the number of new entrants.
Investment is picking up in the sector, thanks to the realisation that it has a lot of business potential. After a brief slowdown during late 2015 and 2016, investors are back with money bags, willing to place their bets on food-tech start-ups in the Indian market.
While firms like Swiggy and Zomato are raising funds in millions, ride-hailing firms such as Ola and Uber are also trying to have a slice of the vastly and rapidly growing food delivery sector. Last year, Ola acquired Foodpanda while Uber Eats in 2016 introduced its popular food delivery business Uber Eats in India.
From helping small-time restaurateurs scale up business by generating volumes to doing targeted marketing for them, these start-ups are helping restaurant owners in different ways.
Pranay Jivrajka, CEO, Foodpanda India, says, “Creating a strong delivery ecosystem backed by technology is one of the most fundamental needs of the Indian food-tech industry. We at Foodpanda recognise this and are investing Rs 400 crore to further strengthen our delivery network. We will also ramp up our last mile connectivity by hiring 25,000 delivery riders. This is in line with our go-to market strategy to make a difference in the food ordering experience of our restaurant partners, customers and riders.”
Ups and downs
In 2015, food-tech as a sector saw enormous amount of investor interest, led by firms like Sequioa Capital that had missed out on investing in the e-commerce companies early on.
Pushed by the fear of missing out (FOMO) syndrome, the investors did not want to lose out on yet another promising bet.
However, a year later, the investment did not seem to make much sense. Many of the start-ups had to either shut shop or consolidate with larger rivals.
Companies such as TinyOwl merged with Roadrunnr, given that the two had common investors. Dazo which was backed by big shots like Amazon India country manager Amit Agarwal and Google India chief Rajan Anandan too succumbed to the market pressure.
Poor business models, lack of unit economics, loads of cash burn and eventual mistrust of the investors led to the crisis in the sector. Due to cut-throat competition, companies were offering heavy discounts to consumers and literally free early day services to restaurant partners.
Add to that the low ticket size of food-ordering in India, unlike the US, and high delivery cost. The average ticket size of food ordered in India is about USD 4-5 against USD 18 to USD 20 in the US. The companies were losing almost Rs 60 to Rs 80 on each order.
For some time, it seemed the crisis would never end.
It was then that Swiggy raised USD 15 million from investors such as Bessemer Venture Partners, Accel Partners, SAIF Partners, Norwest Venture Partners and Apoletto Asia. While its rivals were struggling, for Swiggy it was just the beginning. In less than a year, it raised another whopping USD 80 million from South Africa-based Naspers and other investors. The company recently also raised USD 100 million from Naspers and others. In 2016, Uber’s plunge into the market with the launch of Uber Eats signalled the potential for growth in the segment. The following year, rival Ola joined the bandwagon by acquiring food-tech firm Foodpanda in India.
In an effort to strengthen its market share, Swiggy recently forayed into Kochi and Coimbatore, and into Ahmedabad, Chandigarh and Jaipur prior to that.
How it works
Two types of food-tech companies have emerged in the market. One offers merchants higher order volumes but no delivery service while the other not only increases the order volume but also takes care of deliveries. In both cases, customers can choose from multiple options on one site.
Swiggy calls itself a facilitator. It provides restaurants a partner’s app and there are rules they must adhere to. The restaurants must confirm the order within six minutes. In case that the merchant does not confirm the order after Swiggy’s attempts to call, the order will be deemed as cancelled by the former. In such as scenario, Swiggy says that it will have the right to recover service fee from the merchant. The restaurant is expected to prepare and package the item after which Swiggy’s delivery person picks it up.
On the face of it, the whole process sounds mundane. However a lot of algorithms are at play to ensure that the customer gets the right order with the right specification at the right time.
Why it works
Conventionally, restaurants have been setting tables and doing the deliveries on their own. However there’s a limit to where they can reach and deliver while catering to customers at the restaurant. That number can pick up only through efficient marketing.
An average restaurant sticks to distributing pamphlets to customers to increase its reach. Through this mode, the reach can at best go to three to five km.
With efficient online marketing, the order volumes too increase. Companies like Swiggy also help restaurants with delivery partners. This further reduces the responsibility and expense of the restaurant.
For example, it is unlikely that a restaurant will get to hire delivery staff on demand basis. The owner will have to give them salary and related fuel expenses. After all that, one person can do a maximum of 15 to 20 deliveries in a day, that too in a radius of two to five kilometres.
Now on dull days when the orders may not be many, the delivery staff would still need to be paid. Besides, the company can only hire a fixed number of persons and that becomes a trouble during peak hours or high rush days.
The food-tech firms offer packages to merchants and mostly charge on per-delivery basis. This saves restaurant the cost of marketing and hiring delivery boys. The service fee include fee for listing and lead generation. The delivery fee is for those who want it.
They charge less from known brands and quick service restaurant chains while for individual relatively unknown restaurant the fee is higher.
At the end of the day, it is a commission-based business that depends on the number of orders received. So nobody loses if the orders are not enough or are below expectations. In a nutshell, the food-tech companies act as aggregators that enable businesses to sell extra and acquire new customers who could eventually turn out to be regular customers of the restaurants.
According to reports, Swiggy charges merchants anywhere between 10 and 30 per cent commission for marketing and delivery services. It works with about 25,000 restaurants across 12 cities in India.
Deepinder Goyal, founder & CEO of Zomato, in his blog post talks about the numbers of FY17, “We have ended the year on a very high note. We are currently at an annualised revenue run rate of $100 million. Our food delivery business in India grew by approximately 48 per cent in March 2018 over the previous month in terms of number of order volume and by roughly 55 per cent in terms of revenue. If the momentum continues, we will be recording one of our best years in business.”
He adds, “We introduced a new app version a couple of months ago. All the conversion numbers are up significantly and this update could not have come at a better time because we are investing heavily in marketing the app. As we enter a new financial year, we are extremely excited and hope we can add more value to our restaurant partners and keep delighting our users.”
The owner of a restaurant in Sector 15 of Gurgaon, on condition of anonymity, says that he recently availed services of Swiggy and Zomato and has been keeping watch on the services he gets. According to him, Zomato takes at least 24 per cent commission charges on orders while Swiggy charges less. Alongside, his employees at the restaurant too double up as delivery staff, which benefits his business.
As per consulting firm Redseer, the Indian food-tech segment has witnessed tremendous growth in 2016-17 with daily order volume increasing from 2 lakh to about 4.5 lakh. It adds that the sector has also witnessed correction in the unit economics.
While the average ticket size ordered by consumers has not revised to a large extent, the correction in the unit economics could be a result of improvising volumes.
While the sector has enormous potential, a lot will be defined by how new entrants like Uber and Ola behave to scoop the market share out of the pockets of Swiggy and Zomato.
If they go back to the cut-throat competition tactics by offering insane discounts and adopt practices of 2015, it is likely that the sector may witness the same fate, yet again!
However, needless to say that while the incumbents will fight for the land grab, customer and the merchants will continue being served delicious food owing to investors’ money.
(With inputs from Anushruti Singh)