Delivery fee waiver by food aggregators a negative for quick service restaurants: ICICI Securities

The increased promotions of delivery fee waivers by food aggregators such as Zomato and the thrust of loyalty programmes is a big negative for quick service restaurants (QSRs) such as Jubilant FoodWorks, which draw a significant share of their revenue from delivery charges, said a report by ICICI Securities.

“Secondly, in the medium term, if the aggregator platforms gain traction in their subscription models (which offers free deliveries among other benefits), it also poses a risk to QSRs being able to charge separate delivery charges,” it said.

According to the report, food aggregators have started pushing promotions about delivery fee waivers increasingly with the easing of movement curbs. Zomato is offering delivery charge waivers to many of its users even without the membership. Also in its third-quarter update, the food aggregator had highlighted that the growth investments are being re-distributed more in favour of discounts on customer delivery charges vis-à-vis food coupons.

“It highlighted that there is a higher return on investment with discounted delivery charges as compared to coupons. While Zomato is more focused on this currently, in the past, we have observed Swiggy to match promotions,” said the report.

The development is not in favour of QSRs like Jubilant FoodWorks, which started for charging deliveries when movement curbs were in place and consumers were not prioritising value. Jubilant FoodWorks started charging its customers for deliveries in July 2020 and delivery charges now constitute over 20 percent of recurring profits for the company.

“At that time, negative price elasticity was not a worry as consumers were not prioritising value and food aggregators were aiding shift in consumer habits,” said the brokerage firm.

“However, increasing competitive intensity and normalisation of consumer behaviour can (potentially) change the equation. We note that Domino's brand has worked hard since 2017 to improve the RTB (reasons to buy) of 'value' and a delivery charge levy can (now, if not in the last two years) be a risk to this proposition,” said the report.

Even subscription being promoted by food aggregators are a risk for QSR, indicated the report.

“In the medium term, if the aggregator platforms gain traction in their subscription models, which offers free deliveries amongst other benefits, it also poses a risk to QSRs being able to charge separate delivery charges,” it added.

As per the report, the move also does not bode well for burger chains McDonald’s and Burger King as they may find it difficult to provide free delivery at (only) entry-level price points products. However, if competition intensifies, it may have to start offering free delivery above a certain bill value, it said.