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Rapidly growing Indian online food delivery industry and its unrealised profits

  • Evolution of online food delivery industry in India
  • Geographical penetration and scope for expansion
  • Key players and their zeal to balance revenue and costs

 

Online food delivery has emerged as one of the most fast-paced developments in the e-commerce space. This sector has revolutionised the entire outlook towards the food industry as consumers now have the privilege to choose from a wide variety of cuisines, anywhere, anytime from a range of restaurants listed online. Moreover, customer flexibilities in form of no minimum order value and various payment options like the internet banking, digital wallets and cash on delivery have further enhanced the convenience of all consumer categories. The growing urbanisation with easy access to smartphones has accelerated the growth of online food delivery system.

India’s online food business segment reached as high as USD 750 million in 2017, registering a YOY revenue growth of 150% (2016 and 2017) and growing at an exceptional CAGR of approximately 140% since 2014.

The online food delivery model was conventionally restricted to restaurants, enabling customers to order food online through their websites. This changed with the emergence of the concept of ‘aggregator business model’, wherein the business player provides a ‘single’ online window, facilitating the customers to order food online from a wide variety of restaurants registered on the portal. The aggregator collects a fixed margin of the order paid by the restaurant and, in turn, handles the actual delivery of food itself. However, the business model of the food delivery industry then swiftly evolved to a stage, wherein aggregators provide the delivery of food, thus causing disruption in the market. The focus shifted solely from technology to logistics as well, which act as the major cost drivers for the industry.

Let us examine a few online food delivery aggregators that lead the Indian market. Zomato is the leader in the online food delivery business with sales revenue of approximately INR 3.33 billion, followed by Swiggy at INR 1.33 billion and Foodpanda at INR 0.62 billion, as of 2017. The primary reason for the high revenue of Zomato is the number of listed restaurants, which stands at ~50,000. This is followed by Swiggy at ~35,000, Foodpanda and Uber Eats at ~15,000 and ~12,000 respectively. Though, Uber Eats has just set its footprints a couple of years ago in the country, it is galloping with a growth rate of almost 50% on a month-on-month basis and has seen its orders almost double in the last 3 months.

The future of the online food delivery sector in India can be gauged from the high investments pouring in for the big players Zomato and Swiggy, which have received huge investments from foreign investors. Zomato’s valuation reached $1.1 billion with $200 million investment from Ant Financial. The investment is expected to boost its technology and expand its foothold globally. On the other hand, Zomato’s close competitor Swiggy is not far behind with the latter raising funds from Chinese e-commerce company Meituan-Dianping and its existing investor Naspers worth $100 million. This will strengthen its market position, new services and product offerings. Additionally, the food delivery firm Foodpanda entered a $200 million deal with Ola, which acquired Foodpanda’s India operations to help it grow domestically.

Currently, the revenue generation is concentrated in a few big cities. According to the RedSeer analysis, the top 5 cities throughout India contributed more than 85% to the overall food orders volume (2017), with Bangalore leading the way with 32% shares, followed by Delhi NCR with the share of 20%. The below graph depicts the share of the top 5 cities for online food orders in India. Bangalore, Delhi NCR, Mumbai, Pune and Hyderabad contributed approximately 40% to the gross merchandise value of the Indian e-tailing industry as a whole.

If one further analyses the trend in the top 5 cities that lead the online food delivery business in India then this reveals that Mumbai has the highest number of outlets listed with online delivery partners, followed by Delhi NCR. In terms of the online orders per internet user per month, Bangalore has the highest percentage at 37%, with Pune trailing at 23%. Further, Delhi NCR has the maximum number of online delivery players which stands at 60, followed by Bangalore and Mumbai at 50 and 38 respectively. A large concentration of young working population with a high disposable income and readily accessible internet facilities in these metropolitan cities have helped to stimulate the growth of the online food industry in India. In addition, an increasing ratio of women being employed in big corporates in these areas has resulted in the growth of online orders. These are primarily the reasons for food aggregators to focus on these cities. However, this also implies that there is an immense potential for expansion to other cities in the long run.

Though the online delivery business in India has seen a rapid growth and the overall industry is expected to reach $100 billion by 2020, the penetration level as compared to other major economies in the world is still small. India is still at a nascent stage with a mere 2% of the share (online orders as a % of total delivery orders) in the global online delivery business, while the United Kingdom has reached a stage of maturity with almost 32% share in the global penetration level. The United States and China are hovering at about 13% and 11% respectively (figures are represented in the above graph). A high penetration level in major developed countries is attributable to a high disposable income leading to organised consumer spending, cheaper and quicker deliveries, sophisticated logistics, etc. The other reason for a low penetration level in India is the low access of the internet facilities, which stands at a mere 26% for a population of over 1.3 billion.

Furthermore, with the online delivery market in India still in its early stages, companies are striving hard to sustain the market by offering competitive prices, discounts and reduction on delivery charges. These companies further compete with each other by providing speedy delivery and prompt after-sales services. In addition, partnership with restaurants providing superior quality food with high ratings is another factor that makes an aggregator stand out among others. The food delivery model is highly dependent on order volumes and thus companies are undertaking every possible step to boost this aspect. The launch of ‘cloud kitchen models’ by Zomato and Swiggy was one such step to scale up the order volumes. Addedly, these firms have recently taken steps to increase salaries of their delivery partners through incentives based on execution of deliveries and distance travelled. Further, companies are also investing heavily on their online platforms by adopting artificial intelligence and machine learning, which are largely driven by trends and data.

The biggest challenge thus remains the reduction of excessive costs incurred to improve logistics and technology both at the front and the back end, which, in turn, yield high order volumes. These have resulted in companies still running into losses in spite of the increasing sales revenue and consumer base. The below graph depicts losses incurred for 2017 by the three major online food delivery firms in India. Zomato suffered a net loss of approximately INR 3.89 billion, with Swiggy closely behind at a loss of INR 2.05 billion, followed by Foodpanda at the net loss of INR at 0.45 billion.

Zomato has the highest number of food order volumes with multiple options on its portal like restaurant search, online ordering, table booking, chat support, etc., which has created more revenue generation capabilities, but concurrently made it incur increased costs on maintenance, logistics and advertisements. Nevertheless, Zomato’s revenue growth has been consistently high, it increased at a CAGR of approximately 180% in the past 5 years due to the aforementioned revenue measures. Further, Info Edge’s (investor in Zomato) latest financial report states that Zomato’s cash in hand is at sufficient levels as of now and it is expected to break even soon.

Therefore, online food delivery business has not only anchored its benefits and convenience to consumers, but has also revitalised the revenue generation capacity for businesses. The online aggregators have given a large customer base to restaurants over and above the already existing dine-out facility. These restaurants have a new source of business in form of online platforms with a contribution as high as approximately 35% for the overall business. Thus, considering the benefits available to restaurants, there is a high degree of probability that new and more restaurants would be compelled to join hands with online delivery firms. The profound growth of the latest entrant Uber Eats and the launch of new food delivery aggregator Areo by the big player Google emphasises the fact that the concept is not a bubble that will burst soon. In fact, it is expected to stay and realise gains in the long run.

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