Food Wars

It was a break that Sridhar Chorotee Nair was looking forward to after quitting his job at HSBC Electronic Data Processing in Hyderabad. Early last year he moved to Thane, adjacent to Mumbai, after having landed a job as a process and quality consultant with Tata AIA Life. He found a good accommodation deal in a building closer to his office on Pokhran Road, thanks to NestAway, one of the country’s fastest growing home rental network.

While he shared his 3BHK with two partners for a monthly rent of Rs.15,000, he got a shocker when he wanted to hire a cook. “She wanted Rs.5,000 per person every month, for making one meal,” says Nair. Instead, he opted for Swiggy Super, a subscription service that waives delivery charges and offers discounts.

While the app claims that he has made savings of over 50% on his monthly bill of Rs.7,000, Nair is not falling for it. “I know for sure that the difference isn’t 50% but more around 20-30%, but it’s still a deal,” says Nair, who places the most number of orders on lazy weekends, for breakfast and dinner.

The 30-year-old is one of the several users who are fuelling the rise of domestic online food delivery business, estimated at $7.08 billion by Statista, and is expected to compound at over 9% to surpass $10 billion by 2023. Incidentally, the platform-to-consumer (PTC) delivery segment is still much lower, at $1.26 billion, than the $5.82 billion that the restaurant-to-consumer delivery segment commands (see: Piping hot). The PTC segment refers to players who partner with restaurants that traditionally never engaged in food delivery.

The growth in food-tech space is not without reason. Neelesh Mundra, partner, McKinsey & Company, says, “Food delivery apps, unlike traditional restaurant businesses are asset-light. This digital business can scale faster and with comparatively less investment. Besides, it has a much higher promise to grow large with a ‘winner takes most’ share.” For example, the top four players in the US — Grubhub, DoorDash, Postmates and Uber Eats — account for more than 80% of the total food-delivery market by most estimates.

Online food delivery business has evolved. It began with aggregators allowing consumers to compare menus, post reviews and place orders at restaurants with a click. The primary role of these platforms was routing orders for a marginal fee from restaurants. But the euphoria didn’t last long — a consolidation wave resulted in 24 mergers and acquisitions between 2015 and 2016, including Runnr’s merger with TinyOwl and Delivery Hero acquiring rival Foodpanda. By 2017, two prominent business models emerged in the food-tech space — on-demand restaurant marketplace and cloud kitchen.

Interestingly, one of the players that reinvented itself during the upheaval was a logistics start-up, Bundl Technologies, which had shut shop in June 2014. The founders had realised their product to connect courier companies was a non-starter. Instead, sensing an opportunity in the hyperlocal food ordering and delivery space, Sriharsha Majety, a BITS Pilani and IIM-Calcutta alumnus, along with Nandan Reddy, also from BITS Pilani, roped in IIT-Kharagpur alumnus and former Myntra software engineer Rahul Jaimini, to rechristen the venture as Swiggy.

Operating out of Koramangala, a popular neighbourhood in Bengaluru, the bootstrapped venture, with a share capital of Rs.100,000, went live in August 2014 with six delivery executives and 25 restaurants on its platform. A year later, by building its own logistics network and charging for deliveries, Swiggy managed to onboard 100 restaurants, delivering over 70,000 orders a month with 800 delivery boys. That was enough to catch the attention of investors such as Accel, Saif Partners, and Norwest Venture Partners, pumping in Rs.2.30 billion across three rounds within a year of Swiggy’s inception.

The journey since then has been phenomenal. The start-up broke into the unicorn club with a valuation of Rs.86.60 billion in July 2018, when it raised Rs.14.17 billion from Russian billionaire Yuri Milner’s DST Global and existing investor Naspers. It emerged as the second unicorn in the food-tech space after the Ant Financial-backed Zomato. By the end of the year, the five-year-old’s valuation skyrocketed to $3.3 billion (Rs.225 billion) on the back of a $1-billion (Rs.57 billion) funding round led by a $660-million (Rs. 35 billion) cheque from Naspers, besides a new crop of investors comprising Tencent and hedge funds Hillhouse Capital and Wellington Management (see: The making of a unicorn). In doing so, the founders’ cumulative net worth today stands at Rs.23.13 billion, with the stakes of Majety (5.6%), Reddy (2.6%) and Jaimini (2.1%) valued at Rs.12.72 billion, Rs.5.78 billion and Rs.4.62 billion respectively, besides annual remuneration drawn by Majety at Rs.10 million, Reddy Rs.7.2 million and Jaimini Rs.10 million as of FY18. Swiggy’s valuation, in five years, has skyrocketed 726x to Rs.225.30 billion from Rs.310 million in February 2015, when it raised its series A funding from Accel and Saif.

In line with the growing trend among start-ups to vest stock options, Swiggy has split its management team into four categories — leadership, senior, middle and lower — for its employee stock ownership plan (ESOP) that accounts for 3.6% of its equity and is worth about Rs.8.05 billion, post the billion-dollar fundraise in December 2018, as per business research platform Tracxn.

The wealth creation also has its first set of investors beaming. Saif, Accel and Norwest have seen the value of their investments increase between 11x and 14x.naging director, Saif Partners, believes Swiggy’s meteorical rise is not without reason. “Harsha’s understanding of the food-tech market was much more nuanced than the other companies that we had met. He was the only founder who could explain to us that the real pain point was delivery, and not ordering, which most other start-ups were focused on.” Concurring with Arora is Anand Daniel who is a partner at Accel. “Harsha and his team got it right by owning the last mile,” says Daniel.

Today, Swiggy has emerged as India’s largest food-delivery platform with over 75,000 restaurant partners spread across 120-plus cities (from mere eight cities in 2017) with a 1.35 lakh-strong delivery fleet. “The larger you grow the more economic sense it makes to have your own delivery fleet, since you can deliver at low cost with higher density,” points out Arora. Vivek Sunder, chief operating officer, Swiggy, “In the coming decade, 40-50 meals a month will be eaten outside, and about 75% of that will be delivered to homes and offices. Hence, we are looking at 10-15x growth in the food-delivery business.”

Naspers, which first partnered with Swiggy in April 2017, is convinced that the start-up is building a sustainable, long-term business that makes it an outstanding food-tech company. The private equity fund knows the space well since it owns Delivery Hero, a leading online food-ordering and delivery platform in 36 countries; iFood, a leading online food-delivery business in Brazil and Mexico; and Mr D Food, a leading online food-delivery business in South Africa. “Nearly two years later, we are even more confident that Swiggy has the winning formula. It has 10x the number of orders per month since our first investment, and has expanded throughout India to Tier-I, II and III cities,” Larry Illg, CEO, food and ventures, Naspers, had stated post the deal.

After the mega-funding round, Swiggy will have a significant capital advantage over its Gurugram-based rival Zomato, a restaurant-discovery platform that ventured into food delivery in 2015. Unlike Zomato, for whom delivery only in FY19 touched 75% of its turnover, for Swiggy, delivery has always been its bread and butter.

Getting It Right

The disaggregated nature of the restaurant industry is one big reason why food-delivery firms have been able to survive. Vishal Gupta, partner and MD at Bessemer Venture Partners, says, “The Indian restaurant market is different, with 65% of the eateries operating as QSR (quick service restaurants). Hence, food-delivery potential in India is humungous.” Another critical aspect is that food is also a high-margin business. “The restaurants can afford to give higher take rates (commission) to delivery players,” says Arora of Saif Partners, which is the second-largest holder in Swiggy after Naspers. The delivery players are not just compensated by the restaurant with a fixed margin of the order, but also with a small flat fee from the customers.

But where Swiggy got it right was identifying the last-mile delivery as the opportunity, and investing in analytics and advanced machine learning to get ahead in the game. This was at a time when Zomato had been in the restaurant-discovery business for long. When Swiggy got the traction, Zomato too realised that it had to jump on to the bandwagon. Gupta of Bessemer, believes the reason Zomato pivoted to deliveries was because the discovery business itself was not growing. “Because of the high mortality rate of 40%, there is no certainty of revenue. A restaurant which has spent on advertising today is gone tomorrow. If discovery was indeed a huge market, Zomato wouldn’t have ventured into delivery.”

In September 2017, Zomato acquired its own fleet of delivery personnel when it bought over Runnr in a reportedly $20 million all-stock deal. The Gurgaon-based start-up already had an edge in the food business with its subscription programme called Zomato Gold, which covers 6,000 restaurants in the country. By entering food delivery, Zomato has cross-leveraged its discovery platform — a Zomato Gold customer who dines out could try out its delivery, while a first-time delivery customer could end up buying a Gold subscription. As of March 2019, Zomato reported over one million active subscribers globally compared with 170,000 in 2018. It hasn’t, however, revealed the number of subscribers in India.

Owning a delivery fleet also draws more restaurant chains into partnering with platform players. Deepinder Goyal, founder and CEO, Zomato, states, “Over 100,000 restaurants are listed in India, generating an annual run rate GMV of over $1.5 billion. Around 94% of these deliveries are fulfilled by our 180,000 strong active delivery fleet.”

Even as Zomato is making inroads in the delivery space, Swiggy is working hard to defend its gains. Early 2018, it hired former Amazon India executive Dale Vaz to lead its engineering and data sciences department and, in February this year, it acquired Kint.io, a Bengaluru-based artificial intelligence (AI) start-up. To guarantee fast delivery, Swiggy displays only restaurants within four to five kilometres of a customer’s location. Swiggy has invested in machine learning to build its technology platform. For example, when an order is placed in a particular geography, machine learning will predict if around the same time there is a probability of a second order being generated; the orders are batched accordingly.

“Building the right execution team has an advantage. You not only need tech but have to get operations part of the business right as well,” says Daniel of Accel. Relying on its technology, the start-up introduced two new features services: ‘Scheduled’, which enables users to plan and order their meals in advance, and ‘POP’, a single-serve meal delivered for free since it gets discounted rates from the restaurant. For example, under POP, based on the ordering data, Swiggy helps restaurants curate dishes with a predictable demand, based on which restaurants offer discounted rates which is then passed on to consumers. As for Swiggy, a semi-ready dish meant faster preparation at the restaurant and lowering the wait time for a delivery executive to less than five minutes.

Aiming to go beyond the traditional commission and delivery-fee based model, in 2017, Swiggy forayed into the cloud-kitchen space. What began as a pilot project has now become core to Swiggy’s growth strategy.

Pie In The Cloud

Fancy as the term sounds, cloud kitchens are, put simply, a restaurant with just a kitchen space, sans chairs and tables given the high rental required for dine-in restaurants. Popular QSRs chains such as Faasos, Box8 and FreshMenu run cloud kitchens.

But why foray into cloud kitchen at all? What needs to be understood is that food-tech delivery players need to generate higher volume and also earn higher margins. According to market researcher and internet consultancy, RedSeer Consulting, on an average order value of $6, food-tech companies earn $1.2 from the restaurant (that is 20% commission) and $0.3 from a customer as delivery charges. The cost of delivery is $1.1, which leaves an operating margin of $0.4 (7%) for the company. As per data from KalaGato, a data analytics research start-up, Swiggy’s average order value is Rs.310 (see: Top of the pack). Assuming that it earns 20% as commission on an average, each order brings in around Rs.60 odd. If Swiggy has to pay 70-75% to delivery agents (excluding incentive), the balance 25-30% is not enough to cover all the overheads that Swiggy incurs.

In effect, it has look at ways to generate higher margins from restaurants or lower the charges it pays its delivery agents. Swiggy tried doing the latter in 2016 and 2017, but faced the ire of delivery workers. Again, in December 2018, a revised incentive plan raised concerns in Chennai — a Rs.1 cut in service wage (from Rs.36 for 4 km to Rs.35 for 4 km) is reportedly costing the riders a reduction of Rs.1,000 a week. Since the incentives are linked to delivery earnings, the fall is creating some disgruntlement. Zomato has revealed that its last-mile cost per delivery is Rs.65 and that it loses Rs.25 per delivery. Goyal though says that, the number of deliveries per rider per hour going up to 1.4 from 0.9 last year has helped it bring down the last-mile delivery cost from Rs.86 in FY18.

While Swiggy declined to comment on the commission structure under a cloud-kitchen model, reports suggest that restaurants under the cloud-kitchen initiative, called Access, have to pay higher commissions. If the order volumes are higher, then the commissions are lower. However, Vishal Bhatia, CEO, new supply business, Swiggy, while refusing to reveal the financial arrangement with the restaurant chains, says that the larger objective was “delighting the customer” by ensuring that they don’t have to miss out on their favourite cuisine or favourite restaurant.

Besides customer retention and higher volumes, the other reason driving the cloud-kitchen business could also be the quality of food. Both Swiggy and Zomato had to delist over 6,500 restaurants last year for being non-complaint with standards set by the Food Safety and Standards Authority of India.

Under Access, Swiggy will invest in the civil work and accompanying soft infra network such as drainage pipes, water connection and electricity of a selected location by tying in the property for a five- to 10-year lock-in period. “The restaurant does not have to pay any rent or other charges to us,” says Bhatia. It’s a plug-and-play model, where the restaurant gets the equipment to cook. Though Bhatia did not reveal the quantum of investment made by Swiggy and the payback period, he says, “The investment is not phenomenally high under Access.” Gaurav Marya, chairman, Franchise India Group, however, feels that given that customers have been spoilt for choice and with enticing offers, food-tech companies have to look at ways to bring down the cash burn. “Today, the cost of customer acquisition is quite high, and this is forcing the food-tech industry to graduate towards a more mature business model by creating more supply.”

The initiative that began in 2017 today has 200 restaurant partners across seven metros. “Almost 40% of our partners operate in more than one location,” says Bhatia. National restaurant brands such as Paradise Biryani and Krispy Kreme, and local Bengaluru brands such as Vasudev Adigas, Truffles and Leon Grill are some of the partners on Access.

Riding this ‘cloud’, restaurants have entered new cities: Vasudev Adigas has launched in Delhi, Hyderbad-based Rice Bowl in Bengaluru and Kolkata’s Rang De Basanti Dhaba in Bengaluru. “Our smallest cloud kitchen has four brands, while the biggest has 10 brands,” reveals Bhatia. Biju Thomas, chief operating officer at Vasudev Adigas, sees merit in the initiative. “We can hit the ground running in these locations without worrying about infrastructure, overheads and delivery costs,” says Thomas. For example, instead of looking out for a 2,500 sq ft space, Adigas just has to invest Rs.15 lakh towards equipment cost to operate out of a 300 sq ft kitchen space. “We already have nine outlets under Access, and by venturing into Delhi under this model, we now have the confidence of setting up a full-fledged restaurant,” reveals Thomas. Swiggy is looking at Access making 20-25% of its revenue, which was Rs.4.42 billion in FY18.

For now, Swiggy has successfully managed to execute the standalone cloud-kitchen model, while its rival’s early initiative, Zomato Infrastructure Services, had to be shut down last year. The Ant Financial-backed food-tech player is now relooking at the space by developing hubs to drive business for its restaurant partners in smaller cities. In June 2018, Zomato invested an undisclosed amount in Bengaluru-based cloud-kitchen company Loyal Hospitality.

While Swiggy has its own private brands The Bowl Company, a single serve in a bowl, and Homely, under which it offers homemade food, Zomato is not looking at such a play. “There are far better ways to improve the margin profile of our food delivery business than taking the irreversible step of competing with our own partners,” mentions Goyal in Zomato’s annual report. Sunder, however, clears the air. “We are not a food company and the private brands are about just addressing demand gap that we feel no other brand or player can address.” Though the private brand initiative is more than two years old, it has not been extended beyond some pockets of Bengaluru and Hyderabad. 

Zomato, on its part, is looking at becoming an enabler for the restaurant industry by also becoming a supplier. It has a venture, HyperPure, that provides quality-checked raw materials, right from vegetables and fruits, groceries, meats and seafood to dairy, beverages and even eco-friendly packaging. “Restaurants buying ingredients through HyperPure are tagged ‘HyperPure Inside’ on Zomato, allowing users to trust the food they are eating,” states Goyal. HyperPure is currently supplying to more than 1,000 restaurants in Bengaluru, and in March, entered Delhi by setting up a 40,000 sq ft warehouse.

Swiggy is yet to show any interest in the supply business, but it has been helping out partners with a financing programme with collateral-free loans, and a rebate on the interest rate if the restaurant generates high sales on the platform. Indifi Technologies, a market place that connects lenders and borrowers, is Swiggy’s partner for the initiative that began in late 2017. Without revealing the total loan amount disbursed and number of Swiggy restaurants that have benefited, Alok Mittal, co-founder and CEO, says: “We have over 2,000 restaurants that have availed a multitude of loans for expansion, renovation, working capital, and a significant number has come through Swiggy referrals.” Swiggy earns a fee on every loan sanctioned though Mittal refused to divulge any numbers.

Though Swiggy refused to share any financial or order-value number, according to industry sources, it processes an estimated 28 million orders a month. Zomato, which forayed into online ordering in 2016, claims a 38 million monthly order run rate (which is an extrapolation of a good week’s orders); its absolute orders are estimated at 14 million per month. In fact, Swiggy tops the chart in terms of order frequency at 1.83 times, as per data from KalaGato. (See: Mix and match). Not surprising that Swiggy’s market share by volumes, as per KalaGato, stands at 48.50% — nearly double that of Zomato’s 26.25%, as of November 2018.

The New Disorder

Swiggy started off late but it caught up with Zomato as revenue rose more than three-fold over the previous financial year to Rs.4.68 billion, while Zomato’s topline rose 40% to Rs.4.65 billion. Zomato, in FY19, expanded to more cities — 200, against Swiggy’s 120-plus.

The battle for the top spot in the food-delivery market is costing Swiggy dearly, with losses rising 93% to Rs.39.7 million. Since the beginning of CY18, both Swiggy and Zomato have ramped up discounts and incentives. Swiggy’s advertising and promotional expenses in FY18 rose almost three times to Rs.1.54 billion, of which discounts were Rs.260 million versus Rs.110 millon in FY17. Effectively, for every Rs.1.11 that it earned, Swiggy lost one rupee in FY18.

But in FY19, Zomato has turned on the heat. Though Swiggy is yet to announce its numbers, Zomato has revealed that its delivery revenue in FY19 stood at Rs.11 billion ($155 million), accounting for 75% of its total revenue of Rs.14.40 billion ($206 million). After lower losses in FY18, Zomato’s three-fold topline jump in FY19 has resulted in a record loss of $294 million (Rs.20.35 billion). Goyal mentions that a significant loss was recorded in the food-delivery business owing to Zomato’s aggressive first-tomarket strategy. Zomato has mentioned that its FY19 numbers are unaudited and based on Indian accounting standards — which means discount-driven promotional cost borne by the company will not be deducted from revenue until the audit.

Putting Zomato’s aggressive spend in context, Goyal says, “All the marketing investment we made in FY19 will bear fruit in FY20 and beyond — when we realise the lifetime value of the users that we have acquired.” If one were to extrapolate the Rs.62 commission per order on monthly orders of 28 million, then Swiggy’s revenue too will see a three-fold to jump Rs.20.83 billion, with even higher losses, for FY19.

Swiggy’s COO Sunder believes the investment phase at Swiggy will continue given the “serious underpenetration” of restaurants in the country. “If the food-tech space has to grow exponentially, you cannot merely rely on the restaurant industry to invest and meet the supply demand. To understand the opportunity for Access you need to understand the context. Beijing alone has restaurants what Swiggy and Zomato put together partner across the country,” he says.

He believes the intense competition in good in a market like this. “Competitive intensity in a saturated market is dangerous because it would effectively mean customers are only switching from one player to another, but in a growing category like food tech it’s great to have a competitor like Zomato. Their and our investments are expanding the market.”

That said, he adds that Swiggy does not engage in reckless discounting. “An average consumer is today transacting 40-50 times a year. Beyond discounts on the first few offers, a majority of the orders are undiscounted. The discounts on the orders are to drive behaviour such as increased frequency or new meal slots or new restaurants,” he says.

Gupta of Bessemer believes that mere discounting won’t work. “A delay in delivering a phone, with a 10% discount, does not worry the buyer. But the discount appeal wanes if a food delivery comes late.” Swiggy claims to have industry-best delivery time of 32 minutes. Mundra of McKinsey too believes the viability of a food-tech business model is based on the average order-value and the landed per-order delivery cost. “For this to work, the delivery cost has to be reasonable as a percentage of order value,” says Mundra.

One way to increase this percentage could be taking the inorganic approach. Swiggy has acquired Supr Daily, a subscription-based grocery service, and food and essentials delivery firm Scootsy in Mumbai for around Rs.500 million. With an average order-value of Rs.750, Scootsy will help Swiggy increase its average order-value to around Rs.1,000. While the app will continue to operate independently, Swiggy is looking to extend the service to other cities as well. It has already inked pacts with 200 brands and delivers from over 3,500 stores in Gurugram.

Meanwhile, Zomato is trying out its hand in the events space with Zomaland, a food-and-entertainment carnival that brings top eateries, musicians, DJs, comedians and carnival games under one roof. Currently active in seven cities, Food@Work by Zomato serves 125,000 meals a day, partners with 300 caterers and serves 70 companies. Swiggy too has launched Swiggy XL aimed at tapping into the bulk-order segment.

The new segment that Swiggy is latching on to is the student population across university campuses. “Campuses tend to have 30% lower average order-value, but it is also accompanied by 30-35 % lower cost of operation because of the sheer scale,” says Sunder. Looking at the potential of the 20-million student population every year, Swiggy has also partnered with food brands such as Faasos and Chai Point.Swiggy has currently covered 30 universities, and is looking to reach 250 by the end of 2019.

For now, the food-tech race is all about chasing scale. Zomato, which claims to serve over 65 million users every month, is reportedly looking to raise between $500 million and $1 billion to take on Swiggy. Cab aggregator Ola, which had acquired Foodpanda India from Delivery Hero in December, had said it would be infusing $200 million in the firm.

Though Swiggy is backed by the deep-pocketed Naspers, the South African investing giant has for the first time deployed such a large capital in an investee company to compete. In the past, Naspers has been astute about consolidating its investments in India as visible with MakeMyTrip merger with RedBus and Ibibo, besides the merger between PayU and Citrus. Though Swiggy refused to comment, reports state that talks of taking over Uber Eats fell through over valuation mismatch. Whether Swiggy will be coaxed into a big merger or an acquisition only time will tell, but Gupta of Bessemer believes that going ahead, the No 1 player is where the capital is going to get concentrated. “The first phase of investment in food tech in 2014-2015 saw even the fifth and sixth player getting funded, the first spurt is always crazy because everyone thinks that what is being invested in will become a $500-billion business. But today, the winner will take the most capital. That’s happening with Swiggy.”

Sunder though points out. “Every round of investment has come with greater level of scrutiny on how and where we are going to use the money.”

For now, what is getting amply clear is that neither investors nor the players are obsessed about profitability. “As long as the runway to profitability is clear, there is no reason to worry,” says Sunder. If Yum! made a profit after almost 17 years and Jubilant FoodWorks almost shut down thrice before emerging as the dominant QSR player in the country, then Swiggy doesn’t have to worry about its bottomline till the day its 80% owners feel the need to do so. As for Nair, who recently tied the knot, he wants to be a Swiggy Super customer for as long as the discount fever lasts.