India has found a new way to get lunch. Order online. It’s easy, quick and cheap. By 2023, business consultancy firm Market Research Future expects Indians to spend roughly $17 billion ordering in. That’s a 16% y-o-y growth from current levels. 

Even today, food delivery is the golden goose of the food-tech platform (FTP) industry – the dominant revenue generator. Take Zomato, for instance. While it remained a restaurant discovery platform for most of its early existence, it estimates that almost 75% of its revenue last year came from food delivery. The food delivery revenue clocked at $155 million represents a 4x annual growth from the previous year.

On the back of this, Zomato’s valuation has ballooned above the $3 billion mark. It is not alone. Swiggy, its arch nemesis, is also valued over $3 billion. Cab aggregating platforms, too, see merit in food delivery. Uber Eats continues to court the space after unsuccessful merger talks with Swiggy. Ola, meanwhile, is unfazed by the unsatisfactory outcomes with Ola Chef, and more recently, Foodpanda. It is now reported to concentrate on own brands. It earlier acquired Hola Chef, which is akin to Rebel Foods and Freshmenu. While Rebel Foods—which recently raised Rs 110 crore ($16 million) from existing investor Sequoia Capital—is valued at $400 million, Freshmenu is seeking a valuation of $250 million in Series C. 

Food delivery is a global phenomenon, with both publicly-traded companies, such as Grubhub ($6.4 billion), Delivery Hero AG ($8 billion), and privately-traded unicorns, such as Postmates and Deliveroo. 

Investors active in the Indian ecosystem take comfort from these international companies and are happily courting the sector for additional funding. The alpha is anticipated from high growth and consolidation. HSBC Global Research estimates 70-75 million monthly online food orders in India. China has 600 million monthly orders. It is estimated that 75-80% of monthly transactions are handled by Zomato and Swiggy.

None of this is an indicator of profitability, of course. The discount-driven promotional costs are not deducted from Zomato’s reported top line. The reality check sits in total costs, which rose to $500 million last year, as compared to $80 million the year before. Zomato estimates, in its last annual report, that most of its losses ($294 million) are on account of food delivery in India. Today, it estimates losing Rs 25 ($0.4)  per delivery (an improvement over a Rs 44 ($0.6) loss a year ago). Swiggy’s experience is no different. It lost Rs 390 crore ($56 million) on a top line of Rs 440 crore ($64 million) in the year ended March 2018. It is expected to be further in the red in the year after. Both are committed to outclass the other as they set up operations across the country. The losses, it is argued, are acceptable to acquire customers with lifetime value to be encashed in the years to come in a seemingly winner-takes-all market. 

AUTHOR

Daljit Kochhar

Daljit is the founder of KT Advisory, a boutique strategy consulting and investment banking practice based in New Delhi. He has effectively counselled executive boards at multinational companies, operated and led change in a logistics business with a revenue stream more than US$ 2 billion, guided family run businesses towards institutional funding; and conceptualized and delivered real estate projects. Daljit is a keen distance/ marathon runner and a wannabe (barbeque) pitmaster.

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