ONDC discounts unsustainable, will not impact Zomato and Swiggy: Jefferies

As per the Jefferies report, seller and buyer apps can afford to charge a lower commission from restaurants when compared to Swiggy or Zomato as ONDC is funding most of the delivery cost.

Players on the Open Network for Digital Commerce (ONDC) network may not be able to sustain higher discounts or lower delivery fees if incentives from the ONDC cease, according to a report by analysts at Jefferies.

The current incentives on ONDC include direct discounts of Rs 50 per order for customers, but are restricted to three orders per user each day and up to 2,000 orders per day per buyer app.

The report suggests that ONDC-enabled platforms cannot continue to offer higher discounts or lower delivery charges compared to Swiggy or Zomato in the absence of ONDC-funded incentives.

The analysts further note that the delivery subsidy of Rs 75, which is limited to Rs 2.25 lakh per seller app per day and translates to Rs 125 per order, is unsustainable. Although the incentive scheme was initially supposed to run until March 2023, it was later extended until May 2023, and some reports suggest that ONDC will continue to discount orders until the end of this year.

The report highlights that seller and buyer apps can afford to charge lower commissions from restaurants compared to Swiggy or Zomato, as ONDC funds most of the delivery cost. This means that restaurants can offer better pricing on ONDC-enabled platforms.

However, if ONDC withdraws the incentive scheme after May, either the platforms or the customers will have to pay for delivery, impacting order volumes. If the delivery costs are passed on to customers, the price differential goes away, and if platforms decide to absorb the bulk of the delivery costs, they will have to charge higher commissions from restaurants, resulting in higher listing prices.

According to various estimates, the food delivery market in India is worth $5 billion, and Zomato and Swiggy command about 95 percent of the market.

Jefferies does not see a risk to the Zomato/Swiggy duopoly, despite food prices on ONDC through seller apps such as Paytm and Magicpin being about 21 percent cheaper than they are on Zomato and Swiggy. Although a difference in listing prices/discounts drove prices about four percent lower, near-zero delivery fees reduced prices by 15 percent, and packing charges were responsible for the rest.

Jefferies notes that there has been a decline in order volumes, which is estimated to fall even further as the discounting taps are tightened. The decline in order volumes was partly because there were teething issues on the open network, according to the report.

Even though ONDC is seen as a potential threat to Zomato, only if it meaningfully scales up across categories, allowing it to achieve greater efficiency compared to the walled gardens, at its current scale, analysts at Motilal Oswal Financial Services do not see enough evidence to alter their base case for Zomato.