The Future of Indian Food Delivery Tech is more than just delivery!

food delivery tech

The struggle for food delivery is heating up once more. Food delivery entrepreneurs Swiggy, Zomato, and even Dunzo are poised to raise big sums of money over a year after a statewide lockdown placed consumer Internet businesses in a bind. But, the future of Indian food delivery tech is more than just delivery.

In India, food tech isn’t a one-size-fits-all market

The Indian food delivery business has been a tough nut to crack in the past, with losses including TinyOwl, Foodpanda, Spoonjoy, and even UberEats (which exited to Zomato). Investors in the food delivery business, on the other hand, are unsurprised. According to HSBC Global Research, venture capital and private equity investing into Indian food delivery and food tech firms have been gradually increasing since 2014, with no indications of slowing down.

Swiggy and Zomato receive the majority of investment for food delivery, prompting analysts and investors to speculate that the Indian food tech business is virtually a duopoly. However, as evidenced by recent events, Swiggy and Zomato have adopted opposing business methods.

“We believe the food delivery business has reached a reasonable level of competitive equilibrium and is essentially a duopoly market.” Swiggy has little motivation to undercut Zomato considerably. According to a February 2021 HSBC research on India’s consumer internet sector, “this follows the worldwide pattern with 2-3 firms enjoying steady growth.” According to the report, food tech presently handles annual GMV of $2.5-3 billion in 2021, with the potential to reach $16 billion in annualized GMV by 2025.

Karan Sharma, Executive Director of investment banking firm Avendus Capital, thinks that the food delivery sector has become nearly a duopoly, with both Swiggy and Zomato operating as separate aggregators. Food delivery will continue to be a core offering for both Swiggy and Zomato because India has a significant localized supply of eateries that have yet to move online. “For someone like Dunzo, I believe they will continue to refine the category mix and value offer, and they will not compete directly on food delivery with these two behemoths.” “I believe they will continue to diversify into new spaces and towns,” Sharma adds.

The big concern for many experts and observers is whether the Indian food tech business has the ability to produce more billion-dollar startups. This is where Dunzo comes in, because a duopoly may not be capable of meeting the diverse requirements and aspirations of a multicultural society.

Full-Stack Play on Zomato

While Zomato and Swiggy are competitors in the food delivery space, their business models and growth paths are vastly different, and Dunzo comes from completely another place. Although the origins of these enterprises can be traced back to food delivery, as we will see, the next few years of food tech in India will not be solely focused on food.

Zomato, which began as a restaurant discovery platform in 2008, aggregating information such as menus, meals, and user ratings, did not enter the food delivery market until 2015. In actuality, ad sales, meal delivery, ordering, and Zomato Pro subscriptions were Zomato’s key revenue sources in FY20. Zomato is now doubling down as a direct service provider for restaurants, enabling online discovery, table booking, cloud kitchen infrastructure, and B2B raw material delivery for restaurants as part of its next phase of expansion. It has also expressed an interest in entering food-related areas including supermarkets — which it finally abandoned — and now nutraceuticals and health supplements.

And it appears that some of these wagers are paying off. For example, revenue at the company’s B2B restaurant supplies subsidiary ‘Hyperpure’ increased eightfold from $1.8 million in FY19 to $14.7 million in FY20. According to Zomato, Hyperpure is currently used by over 2,280 eateries. On the Zomato app, these have the ‘Hyperpure’ tag, which seeks to promote Hyperpure as a trust metric.

Hyperpure is an upsell to Zomato’s restaurant partners, and it’s part of the bundle of services aligned with food delivery. It not only allows Zomato to better forecast demand and thus source raw materials such as grains, fruits, and vegetables on a larger scale, but it’s also an upsell to its restaurant partners — part of the bundle of services aligned with food delivery. Given that India now has 70 lakh eateries, and the larger market opportunity comes from the 2.3 crore restaurants in the unorganized segment, according to FHRAI’s projections, Hyperpure significantly expands Zomato’s addressable market.

Dunzo, Swiggy to Narrow Focus on Hyperlocal

Food delivery, ride-sharing, movie and travel ticketing, home services, payments, lifestyle services, and more are all available through a typical mega app in the delivery and commerce area. Swiggy and Dunno, on the other hand, have restricted their focus to hyperlocal deliveries, either through store aggregation (marketplace model) or through the use of dark storefronts (inventory model). Given their specialized concentration on deliveries rather than the supply side of things like Zomato, food delivery alone will not add to future income for Swiggy and Dunzo.

Even Zomato dabbled in food delivery, grouping businesses on its app during the initial lockout period in April of last year, only to abandon the service two months later.

Swiggy entered the grocery industry with a marketplace model in September 2019 under the ‘Swiggy Stores’, only to abandon the business a year later. Under the Instamart brand, Swiggy presently only delivers groceries in two cities: Gurugram and Bengaluru. BigBasket’s dark store approach is substantially adapted by Instamart, with a major difference in delivery frequency. Swiggy aims to deliver groceries in less than 45 minutes, but Bigbasket takes four to 48 hours to fulfill orders. Swiggy is establishing this concept through a network of ‘Urban Kirana’ dark stores.

Typically, any store inside the hyperlocal area becomes a point of supply for the platform in the hyperlocal deliveries ecosystem. Swiggy and Dunzo will compete with eCommerce platforms like Flipkart, Amazon, Jio Mart, and Tata’s forthcoming super app in some ways. Given the omnichannel nature of eCommerce markets, there will be some overlap. However, because goods (food, meat, groceries, etc.) are locally procured, supply is monitored in real-time, and last-mile fulfillment must begin near-instantaneously after an order is placed, hyperlocal deliveries are fundamentally different from the more widespread distribution architecture of an eCommerce marketplace.

Food delivery will make up about 75 percent to 80 percent of Swiggy’s revenue even if the business introduces non-food categories in all 600+ operable areas, according to two sources familiar with the company’s operations, and this is unlikely to alter over the next several years. This inflexibility is partly due to the difficulty for hyperlocal delivery businesses in Tier 3/4 cities and smaller towns in smoothing procurement and adding equivalent depth to supply for all categories such as grocery, pet foods, meat, and alcohol. 

Swiggy and Dunzo have been extending their inventory play through dark stores as the marketplace availability has been short in smaller towns and specific places even in large cities. However, this does not mean that both firms should entirely transition to an inventory model, as BigBasket and Grofers are attempting to do, but rather strike a compromise.

According to reports, Swiggy’s Instamart currently stocks roughly 1,000 of the most popular SKUs throughout its dark storefronts. However, because of the smaller SKU count, the average order value (AOV) is significantly lower than Grofers and BigBasket, where the AOV exceeds INR 1,000. This is why Swiggy and Dunzo both demand exorbitant delivery fees for non-food items.

Wrapping It Up

Although it is difficult to estimate when meal delivery startups will break even, the example of eCommerce behemoths Flipkart and Amazon offers some hope. Flipkart not only created a massive eCommerce user base, but also a sophisticated supply chain operation that reaches down to the last mile, after burning through over $6.1 billion in investor money between 2007 and 2018. Food delivery businesses such as Swiggy, Zomato, and Dunzo, which operate in over 600 cities, are now attempting to reproduce the same ecommerce journey at a hyperlocal level.

Swiggy and Zomato, the two survivors of India’s food-tech tale, currently operate in a less competitive industry, with minimal room for better food delivery monetization. So how players rebuild themselves, reinvent their models, and use their last-mile network to capture a larger piece of the pie will be the focus of food tech in India over the next five years.