More analysts point to ONDC not being a threat to Zomato and Swiggy duopoly

Over 90 percent the food delivery market, which is worth $5 billion in India, is controlled just by Zomato and Swiggy.

An increasing number of internet analysts are in agreement with each other as they point out that the initial food delivery volumes on the Open Network for Digital Commerce (ONDC) are unsustainable. After Jefferies and Motilal Oswal Financial Services Ltd (MOFSL) said ONDC was not going to end the duopoly of Zomato and Swiggy, analysts at JM Financial have now flagged that the ONDC, in its current shape, isn’t a threat to any player's business.

“There has been a hue and cry of late...many believe that restaurants on the (open) network will be able to offer better prices to customers. Hence…ONDC can disrupt the online food delivery market as it has the potential to emerge as a formidable third player…We, however, strongly disagree with many of these assertions. ONDC in its current shape and form is nowhere close to shaking up the online food-tech industry,” the analysts at JM Financial said in a note on May 17.

Over 90 percent the food delivery market, which is worth $5 billion in India, is controlled just by Zomato and Swiggy. The duopoly has however left restaurants unhappy. The National Restaurant Association of India (NRAI) has time and again called the two startups as 'digital landlords', mainly because of the commission rates that two charge. Broadly, both Swiggy and Zomato have a take rate of around 25 percent.

In addition, the NRAI has accused the key players do not pass on customer data to the eateries which could help them better plan offers and inventory. ONDC wishes to change just that by giving owners more control of their data.

But, the commissions that restaurants are currently paying to be available on the ONDC – of around 7 percent in some cases – are “grossly subsidized” and will have to be hiked to about 10-16 percent for the network to be sustainable, JM Financial’s analysts said.

A higher commission model was especially needed because ONDC cannot keep funding discounts for long nor can it forgo its own commissions for software and network upkeep.

“Assuming ONDC actually gains traction and reaches 100,000 orders daily with per order discounts/cashback of Rs 100, it will burn all its capital in about six months only. This does not even include the cost that ONDC may have to incur on maintaining its tech platform, salaries, marketing and payment gateway charges, et cetera. This would, in turn, necessitate asking seller apps to pay commissions or the shareholders taking over the subsidy burden,” the report said.

ONDC's own funds essentially comprise the Rs 180 crore that was raised from 19 banks and financial institutions. The government has not put in any money since ONDC was established as a company in late 2021. The only time that any taxpayer money was utilised had been at the stage when ONDC was being planned as a project under the Quality Council of India, T Koshy, CEO, ONDC had told Moneycontrol in an interview earlier.

The concerns did not end there. ONDC is not a vertical structure like Zomato or Swiggy where the platform was willing to subsidize some components in the value chain, like delivery, which could be offset by food prices and so on, so it had to ensure every participant makes money, as Moneycontrol had reported earlier.

Lastly, “We also do not believe the buyer/seller apps have significant appetite to expand their exposure in the food delivery category by burning cash amidst the ongoing funding winter in the global start-up ecosystem,” the report concluded.