Swiggy, Zomato Thrive on Delivery Boom, Strain on QSR Chains Grows

The food delivery market in India has undergone a transformative shift, with platforms like Swiggy and Zomato leading the charge. This evolution in consumer behavior, particularly the rising preference for delivery over dine-in options, is reshaping the Quick Service Restaurant (QSR) landscape. This article delves into the underlying factors driving this shift, the impact on QSR chains, and the future outlook for the industry.

The Shift Towards Delivery: A New Norm

The food delivery segment has seen unprecedented growth, catalyzed by changing consumer preferences and the convenience of rapid delivery services. Platforms like Zomato and Swiggy have capitalized on this trend, significantly expanding their reach and disrupting the traditional QSR model.

• Zomato’s Expansion:?Zomato’s active restaurant partners surged from 61,000 in FY19 to 276,000 in FY24, a massive increase that now dwarfs the 5,500 stores of listed QSR brands in the first quarter of FY25. This expansion has provided consumers with a broader range of dining options, fragmenting sales across the industry.

• Swiggy’s Influence:?Swiggy has also played a pivotal role in this shift, pulling consumers away from dine-in experiences with its robust delivery network. As consumers increasingly opt for the convenience of home delivery, traditional QSR chains are feeling the pressure.

Impact on QSR Chains: A Mixed Bag

The rise of food delivery platforms has created significant challenges for QSR chains, particularly in terms of profitability and margin management.

• Pressure on Margins:?Jubilant FoodWorks, which operates Domino's Pizza in India, has reported that delivering food is less profitable compared to in-store pickups, even when order sizes are similar. The shift towards a higher proportion of delivery orders has led to a reduction in EBITDA margins, reflecting the financial strain caused by increased competition in the delivery segment.

• Revenue Growth vs. Store Expansion:?The industry has witnessed revenue growth primarily driven by store additions. However, this has come at the cost of profit margins. Over the past two years, while more stores were added, average revenue per store has remained flat or declined. This trend has resulted in a significant erosion of EBITDA margins by 400-600 basis points post-rent adjustments.

• Same-Store Sales Growth (SSSG):?Despite the addition of new stores, like-for-like growth year-on-year has remained negative for most companies, with Average Daily Sales (ADS) also declining. This is a stark contrast to the industry trends observed a few years ago, where SSSG was a key driver of growth.

Store Addition Plans: Expanding Reach Amidst Challenges

Despite the challenges posed by the growing preference for delivery, QSR chains continue to expand their footprint in the Indian market.

• Domino’s:?Jubilant FoodWorks plans to open 180 new Domino’s stores in FY25, highlighting their commitment to maintaining a strong physical presence despite the growing preference for delivery.

• KFC and Costa Coffee :?Devyani International, which operates these brands in India, plans to add over 150 new stores, underscoring the continued expansion of QSR chains in the face of market fragmentation.

• Burger King :?Restaurant Brands Asia has set a target of reaching 510 stores by the end of FY25, focusing on both Tier-1 and Tier-2 cities.

Market Outlook: What Lies Ahead?

The future of the QSR industry in India is set against a backdrop of increasing competition, changing consumer behavior, and economic challenges. While food delivery platforms are likely to continue their dominance, QSR chains must adapt to these new market realities to sustain growth.

• Continued Pressure on Margins:?As food delivery platforms expand, their scale will likely tilt the bargaining power in their favor, further squeezing the margins of QSR chains. BNP Paribas CIB suggests that a sharp recovery in revenue growth and margins seems unlikely in the near term, and this could lead to further cuts in consensus estimates.

• Festive Season Hope:?Despite a weak start to FY25, QSR companies are optimistic about the medium to long-term potential of the industry. The upcoming festive season is expected to bring some relief, with hopes that increased consumer spending will boost sales.

• Demand Challenges:?The demand outlook remains a common challenge for both food delivery and dine-in. Despite a high base, weak demand trends have persisted in the first quarter of FY25 across categories. However, companies remain hopeful of a gradual recovery in the coming quarters, backed by the festive season and strategic initiatives.

Conclusion: Navigating the New Normal

The Indian food delivery market is at a critical juncture, with platforms like Swiggy and Zomato reshaping consumer behavior and challenging the traditional QSR model. As delivery continues to gain traction, QSR chains must innovate and adapt to remain competitive. While the road ahead is fraught with challenges, the industry’s ability to evolve and meet changing consumer expectations will determine its success in the years to come.

In this rapidly evolving landscape, the winners will be those who can balance the convenience of delivery with the profitability of dine-in experiences, while also navigating the complexities of market fragmentation and increased competition.