Remember the dialogue ‘Anybody can cook’ from the movie Ratatouille? Similar was the scene in the Indian FoodTech sector as there were startups mushrooming in each nook and corner of the country. The FoodTech sector saw an investment of around $321 Million in the year 2015. But in the last couple of years, the funding in FoodTech sector has dried up. The number of startups in FoodTech dropped from a stalwart ‘337′ in 2015 to just ’64′ in 2016.
In 2015, Food delivery startups grossed $300 Mn in overall sales. In 2016, the amount was expected to be $500 Mn. The market is huge and can very easily touch 1 Bn dollars in the next 2-3 years. With the advent of smartphones and more and more online ordering habits of the millennials and young professionals. This sector is definitely not going to lose steam. So what makes this extremely lucrative segment so hard to crack?
It’s still fresh in our minds how some of the food tech startups like Dazo, EatFresh, TinyOwl have folded in the last couple of years. How FoodPanda is struggling for survival? How much money Swiggy is spending just to stay in the game? As per an industry report, Swiggy’s revenue rose from $18k in FY 2015 to $3.6 Mn in FY 2016. However, the losses bulged from $328k to $21 Mn in the same period. Total expenses almost seven times its revenue!!
Swiggy is venture funded with $155.5 million in six rounds from various investors. I am not questioning the investments here since investors invest in the long-term potential of a company, growth forecasts, market opportunity etc. The main players in the field are Swiggy, FreshMenu, Zomato, Box8, FreshMenu and InnerChef. New entrants in the ring are UberEats and CureFit which makes the game even more interesting now.
Zomato is about discovering restaurants and all about food experiences. InnerChef is mainly focussed on B2B segments. If we look at pure food delivery businesses Swiggy is at the helm, with competition from FreshMenu and now UberEats. The market is big enough for a few players but the business is highly ops-driven and the margins are low. Players like Swiggy keep a cut on the order amount in the tune of 15-20% and the delivery boys usually take around Rs 30-50 per delivery. Let us look at the key elements of this business model.
What do the customers want?
- Great food options at reasonable prices / with popular restaurant listings.
- Good packaging and quality food. Possibly warm if its meant to be at the time of delivery.
- Timely delivery. And nil/low cost if possible.
Sounds pretty simple, ain’t it? But it is not!
What are the key business challenges?
1) On-boarding restaurants. Building a great catalogue on the app. This is not that easy as it seems since the restaurants need to be primed to give a cut of 15-20% on each order. And then working with the restaurant partners to cater to the demand on time, ensure everything else goes on well from packaging to delivery to the entire customer experience. Helping the restaurants increase sales, providing actionable customer feedback etc. is all a part of the journey.
2) On-time low-cost delivery. ON TIME. This is a very critical piece since delivery takes time and resources/money. The players want to wow the customer with quick deliveries but this needs the delivery prowess. Swiggy has its own fleet of delivery but its a very resource intensive model. UberEats has a hybrid model of external delivery agents and some contracted delivery boys (from companies like Runnr etc.) Its business model is still evolving in India. But the problem here is scale, its tough to reduce the delivery costs when deliveries are made in smaller batches/individual basis. And with the rise in traffic in metro cities, this problem is only going to increase. Companies like Swiggy and UberEats hope that orders scale to a point that to multiple deliveries can be clubbed to minimize costs.
In this particular point, FreshMenu has an edge, since it has its own kitchens/managed kitchens. It delivers food from its own delivery centres so it saves one leg of the delivery process (interactions with the restaurant) and can also manage the food creation, curation and listing process. Since it saves significant time here, it is able to club deliveries together and saves much more on the delivery costs. So, if they can manage a good catalogue, chances of running the business at scale are pretty good. This business is a game of optimizations after all.
3) Another key element is the user retention and stickiness. Since there are so many kids on the block, there is no real stickiness in the products. The business lacks defensibility as such, and its more of a market where being a monopoly makes business sense. I can order from Swiggy or a FreshMenu, UberEats or Zomato. Or I might just subscribe to a lunch meal from a local vendor from UrbanClap. The options are many, and the customers keep switching from one option to other.
Why Uber Now: The motive behind UberEats?
UberEats has been launched in the US for quite some time now. And they are expanding at a fast pace in India. Food delivery is a multi-billion dollar business and Uber definitely wants a share of the pie. Especially after the Uber self-riding cars project has been shelved, it has been bullish on the food business.
Coupled with its tech-backing and sophisticated optimization algorithms it’s trying its best to crack this market. I am sure Swiggy will prove to be a tough competitor, given its massive base already, and a solid delivery network. But UberEats is going to try all tricks up its sleeve to woo the restaurants and the customers and be the market leader in the country. Uber wants to have riders listed on the platform to take care of the delivery. They are trying to create a true 3-way marketplace for this business: The restaurants, delivery partners and the end users (who order the meals). This is a tough problem to crack, but it is Uber after all.
What about the new kid on the block: CureFit?
CureFit is trying to do a few things effectively:
1) Pre-empt the orders, it takes orders only for some particular slots. Say if its 11 AM, you can not order lunch for the same day. You need to pre-order your meals. This helps them manage the demand. It makes it easy to process the orders. Serve great quality and enable timely deliveries that too low cost (since batch deliveries can be done).
2) User engagement: Engagement and stickiness are key challenges faced by FoodTech companies. CureFit provides a catalogue which consists of fitness (Cult offerings), Meditation courses/sessions (which are free of cost) and food/meal offerings. They create a nice engaging app, which shows your daily schedule/ helps you track your activities which is quite engaging. Next, it is trying to move its model to a subscription-based ordering which further helps it increase the customer share (more orders per user) and manage the demand better.
3) Another thing is curating healthy food options. Showing ‘calories count’ and focusing on an elegant packaging. Though these are not defensible features and can be copied by the competition in some form or the other. But it might just help them spread the word and get the initial set of customers.
FoodTech is again getting heated up in India, this time with matured and seasoned players. The warriors will continue to build the ecosystem and fight it out for supremacy. Swiggy and UberEats will be another Tom and Jerry game just like Ola and Uber, Amazon and Flipkart. A clear winner looks very unlikely. But they will be burn, a lot of cash burn.
The P&L’s are not going to look clean for a long time! Players like FreshMenu and CureFit are likely to make some merry given their business model. But in the long term, CureFit might just have an extra advantage. It makes a case for being a great niche player, if not catering to the masses. Swiggy and UberEats will continue to fight to be the numero uno player in this coveted segment.
Read this article to know why TinyOwl shut shop.