Food delivery business in India

India is one of the top five economies globally in terms of total GDP. It is also one of the most populated countries globally, surpassing China in 2023. The two stats do give a rosy picture of the market, but there is still so much to achieve in the real sense. For instance, we are yet to be the top market in terms of per capita income, literacy rate, etc. To give context here,? per capita income in India is $2.6k as against $80.4k in the US and $12.5k in China.

Even with a vast population and huge internet base, we have a long way to go before we can commercialize them and talk about the mammoth opportunity it presents for those willing to capitalize on it.

And this is reflected in the lower demand for online services, which kind more accessible to affluent educated audience and is counted as an additional expense(why?, will discuss this later), online food delivery is one such domain.

It is coming from cultural aspect too, we Indians have been laggard in terms of eating out or restaurant food consumption. Indians love to eat hot food ,which can’t be possible while ordering food online, or perception that good food is something that is only linked to home’s kitchen.

It’s also not about developed vs. developing - China has much higher demand for such service when compared to us both in absolute and relative term, although it will be wrong to call China a developing economy!.

However, there is likely going to be growth in the future. With the increasing pace of life and increasing disposable income, demand for convenience will drive demand for online food delivery, especially with increasing women’s participation in the workforce. Also, a relatively younger population will eventually drive demand for online food delivery.

However, the high commission rate charged by the food delivery apps is acting as a deterrent for consumers from frequently using these services, more will be discussed about the same later in this piece.

Food delivery competitive scenario in India.

Now that we have discussed briefly the market dynamics of the Indian food delivery business, While it looks lucrative from a high user base and an unsaturated point of view, It is hard for many to survive in a market with low revenue per customer; lower per capita income translates to lower revenue per user. Given profitability, revenue per customer is key for online aggregators to survive. As a result of this tough competition and tough market dynamics, the market has seen duopoly for quite some time, with players like Swiggy and Zomato dominating the online food delivery domain. Many others tried to build their presence in the space but failed or moved out, few to name are UberEATS and Amazon. While Amazon did pilot work in some cities, I think it was only confined to Bangalore. While UberEATS did full-fledged service in the country but was acquired by Zomato in the end.

Talking about Swiggy vs. Zomato, both have different approaches to the food delivery domain. Swiggy is focused on ‘convenience’ and Zomato is focused on the entire ‘food industry value chain’. This has resulted in Swiggy extending its delivery capabilities to online grocery delivery (Instamart). While Zomato has focused on 1) dining-out opportunities (Zomato Pro, advertising) and 2) raw material delivery to restaurants (Hyperpure).

Duos have done well until now and are moving with almost equal market share. In the future, given the saturation of Tier I cities and metros, the duos will likely expand into Tier II and III cities. But the move has its own drawback: high population density and big-ticket orders tend to make food delivery more efficient as they drive revenue per customer higher. As the footprint and economic profile of delivery expand to meet more and varied customers, platforms and restaurants will need to figure out how to serve these different population segments and yet keep revenue per customer intact—for example, geography with lesser population density(read non-metros) and with customers who tend to spend less money on meals are likely to pull down revenue per customer. Given the same, we are likely to see growth in the near future, primarily from an increase in the user base, and AOV will more or less remain flat. Hence…

Chart: AOV will be likely barrier to revenue growth in future

Lets talk about this from another angle, in term of revenue model – how players operate and what is scope for the growth. In general food delivery business has following revenue models:

• Commission -based
• Subscription- based
• Advertising- based

Obviously, all three models are not mutually exclusive.

In India, subscription-based demand will take time to pick up as consumers have a lesser tendency to pay additional subscriptions to avail service with the additional fees. At least this won’t grow further than 5–10% of the existing user base in next five years.

Advertising-wise, it may come in the form of e-commerce ads. For instance, if anyone is searching for cake and your restaurant comes up at the top of the search results. The e-commerce advertising space is quite robust and ads at ecommerce platforms come at place where consumers are willing to purchase. However, customers (read restaurants) will likely think about advertising when it is already coping with a slowing economy, high commission rates, inflation rates, etc. Hence, advertising share in total revenue is low currently and is likely to grow by a single digit.

Last but not least, commission rate is a much talked-about topic in this space and how it is inflating the price between offline and online offerings. Please see one such illustration below:

This difference in pricing creates dissatisfaction among both customers and restaurant owners. While customers have to pay high price while availing online delivery in the name of convenience, It is also eating restaurant’s margin as Zomato/Swiggy take share of commission from restaurants. As a result, ONDC is one of the alternatives that could be the solution, but it has its own drawbacks. Read more about it here.

Future of food delivery business in India.

In the end, with current situation, there is likely going to be three possible outcomes –

• Duopoly of Zomato and Swiggy will continue unhindered. Given the competitive landscape, there is little chance for third players to enter the market. Zomato and Swiggy will continue to dominate the market with further expansion in to non-metros and driving demand among existing customers through loyalty programmes, discounts, building convenience.
• More direct relation between the restaurant and customers. We will see increasing direct interaction between restaurant owners and customers. There is an increasing evidence of customer preference to order directly from restaurant’s apps or websites. This is not just due to high commission rate but also due to several other reasons, like restaurant owners wanting more control on their customer data.
• ONDC- ONDC is an open network for digital commerce. It does help all the parties involved in the domain: customers, restaurants, and food delivery service providers. Given the market’s dynamics, we should expect a reasonable impact from applications like ONDC in food delivery business. ONDC is likely one of the options, but sellers have to make much effort in terms of customer service and delivery, and ONDC is yet to get popular among customers, or customers are yet to trust apps on ONDC for their requirements.