With $2-billion worth of food ordering in 2018, India’s food delivery market is bound to get interest. This is only the start of a journey that will become more exciting in the coming years. According to industry sources, the market is expected to grow to $5 billion in 2019, and by 2023, it could cross $15 billion. However, if we compare it to other international markets, the Indian food delivery market is a mere one-twentieth of China’s corresponding market size, if we believe industry estimates that expect it to be around $40 billion plus, as compared to the GDP which is one-fifth of China’s. So, what’s cooking inside the Indian food delivery market?
Consumer behaviour is changing. About 2-3 years back some companies did a significant rollback on delivery capacity as consumer adoption was low. Today that’s not the case as customers have understood the value of delivery and are ordering online more. On an average a customer places an online order at least 3-4 times a month, and this is growing. We are also seeing new use cases of food delivery emerge. For example, customers now order breakfast, snacks, lunch at offices, dinner or snacks for home get-togethers, etc.
Investors have accepted and understood this market better. We have seen the large players, as well as the vertical or niche players, raise capital through existing and new investors. Also, unit economics are still stabilising. With the advent of cloud kitchens, increased customer willingness to pay for a delivery, lower discounts, higher revenue share within restaurants leading to larger margins, increased scale driving better utilisation, and increasing penetration of subscriptions and other ancillary revenue streams, we are seeing economics improve.
Cloud kitchens specifically have a very high potential to scale in India. In general, rental costs as percentage of income are higher in India leading to disproportionately high costs of dine in or restaurants in high footfall areas. This leads to a lack of attractiveness in ordering through restaurants which are meant for high footfall and pay high rents for the same. Additionally, restaurant owners do not want to reduce pricing for deliveries as that impacts dine in revenues. So, cloud kitchens not only reduce rental per square feet but also reduce the area as they do not have sitting. This lets kitchen operators focus on quality ingredients and offer food at lower prices.
Newer revenue streams emerge such as subscriptions, table bookings, etc., on the customer side and supplies delivery, SaaS, reviews, listings, lead generation, and a few others on the restaurants side. We have seen players show success in increasing penetration into a higher number of cities. With Zomato in more than 200 cities and Swiggy in more than 100 cities, online food delivery players are only short of surpassing offline restaurant chains such as Dominos and Café Coffee Day with respect to presence in the number of cities.
With some of these key trends, the market is surely expected to grow significantly given its very low penetration currently, with a lot of room for players to grow and develop differentiated strategies.
When we talk about some of the challenges players are facing in the space, even in the restaurants that get large enough business from online ordering, 70-80 per cent of revenues is still being generated through dine ins. Which is good for dine-in focused restaurants but still, that means that online delivery partners have not captured the value from dine-in revenues. It remains a big opportunity.
Another key factor to notice is while the economics are improving, they are still not that attractive. Cloud kitchens are still profitable at a unit level, but generally food delivery does not create enough margins. We can blame it on several factors including the high prices of dine-in restaurants, high delivery costs due to congestion, limited commissions given by restaurants, or 100 per cent orders not being paid for delivery, the economics are still on a road to improvement.
Discounts being one of the biggest areas of discontent for restaurants has had its share too. Though the government has now taken some steps that will benefit the FoodTech players in the longer term, it will cause some short-term crunch and resettling of discounts. Due to higher discounts, restaurants’ pricing gets affected and they believe they do not make enough margins on the discounted price. We have recently seen Amazon capitalise on this gap and enter the market with only 6-7 per cent commissions for restaurants.
Food delivery has high ‘seasonality’ with volumes peaking during lunch and dinner times, leaving drivers or delivery boys under-utilized during downtimes. Companies are figuring how to make the fleet productive during these hours to make better economics.
Another challenge restaurants face is declining average order values (AOVs) of food delivery as penetration increases in lower tier cities and smaller restaurants. This creates a lower revenue structure but a similar cost structure for delivery. Also, exclusivity with restaurants remains a pipe dream for delivery partners. With restaurants mostly working with 2-3 of them for increased sales, this will remain a clear area of differentiation on how partners drive relationships and exclusivity with restaurants.
If not a challenge, a clear opportunity remains, that a lot of pain points or value addition opportunities at restaurants remain unfulfilled by FoodTech players. Some of these include reputation management concerning dine-in reviews and utilising social media and marketing to attract new customers, some of the restaurants grapple with significant challenges in training and retaining manpower and need support in sourcing and managing inventory. Currently, offerings from online delivery partners have only scratched the surface in terms of the opportunity with restaurants.
With 15 million customers, 640 million annual orders, and $2-billion gross merchandise value (GMV), food delivery should continue to remain a highly attractive space for both, investors and entrepreneurs. Driving success in this space will require deep partnerships with restaurants, efficient supply chain to drive unit economics, depth in customers and restaurants, continued tech investment, driving adoption of newer cities and customer segments, growth across new use cases of food deliveries, and a continued investment in marketing for driving repeat purchase and high frequency. There is a lot of cooking in the Indian food delivery space, and like other categories, there is method in the madness in how players are building this category.
Aryaman Tandon is director, Praxis Global Alliance. Views are personal.