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The rise and rise of food delivery

  The near-ubiquitous presence of food delivery aggregators like Zomato and Swiggy shows that these companies have struck gold of a sort in their business model. This helps the restaurants focus on their core business of creating inviting food as well. A study of how this segment is functioning.  

Dr Suresh Srinivasan

Swiggy and Zomato, two of India’s largest food delivery aggregators, are having a dream run. They seem to have perfected their execution model with every passing day. For both companies, customer acquisition rate has exponentially increased over the last 12 months, and so have their valuations.

Sheer burgeoning scale
Swiggy is now valued at close to US$2.5 billion, translating to around `18,000 crore. The company is now entering its third round of funding; with expansion and market share comes ‘cash-burn’, which necessitates further funding. Swiggy is currently shopping around for funds from global investors like SoftBank, General Atlantic and other Chinese hedge funds.
Similarly, Zomato, valued at close to US$1.3 billion and backed by investors like Ant Financial and other Singapore-based investment firms, is also growing at a breathtaking pace.
So what’s happening in the food delivery aggregator business? What has now fired up so much interest in this segment, both from customers and investors? With the emergence of the e-commerce aggregator model, the restaurants business per se is now getting disrupted, and restaurant chains have realised that if they are not part of such a disruption, they will perish. The same mantra that is visible across the world today holds true here as well: Innovate or perish.

Why the model works
Food aggregators have figured out that the emergence of a new segment of consumers requiring to be served differently is a source of profitability. This segment prefers the convenience of ordering from the home or office, and expects rapid delivery of a range of food items, generally not served by any single restaurant. Obviously, one single restaurant cannot satisfy the needs of a customer (who may be a family of four, placing the order), as their requirement of such a consumer could encompass much more than what a single restaurant can offer.
The aggregators have hence figured out that it is not necessary to build all the required capabilities to deliver value to such customers entirely by one party; this is where the aggregators are primarily adding value. They give the customer a complete range of food items for order, much more than what a single restaurant can ever offer!
Secondly, the aggregators add value in helping the restaurants better utilise their resources! How?

The right partner for restaurants
Even for a single large restaurant, the back end kitchen operations and the front end marketing and customer service can be carved out, with two independent parties performing the two functions that can then be seamlessly integrated through technology. Today, restaurants spend on fixed costs, create food processing capacity and ensure the utilisation of the capacity is maximised, i.e., they also take charge of bringing customers into the restaurant, which is a very different capability as compared to preparing food at an optimal cost.
With the emergence of the food aggregators, however, traditional restaurants that run their own home delivery operations (which may or may not be operating sub-scale) can now find a partner who can seamlessly pitch into that part of the value chain. These latter firms not only run the delivery service more efficiently, but they also give the restaurants a larger growth to the top line and a better capacity utilisation, thereby becoming a win-win for both the parties as well as to the customer. Restaurants can now completely do away with recruiting delivery staff, digital marketing campaigns, investment in logistics and transportation assets like motorcycles and delivery vans, most of which anyway remained highly underutilised.
Resources that get released due to the presence of these aggregators can now be spent more meaningfully in enhancing the backend capacity of food production, ensuring the food specifications meet and exceed the targeted customer’s expectations, and ensuring that this is done better than the best practices of the industry. With such aggregators, restaurants can now deepen their focus to create the most appealing food to their target customers without diluting their efforts by getting into marketing, selling and capacity utilisation issues, leaving such headaches to the food aggregator.

The aggregator advantage
As compared to restaurants, the food delivery aggregator is generally more technology and customer savvy, and is able to take care of the front end by establishing an efficient app that is easy and enjoyable for the customer in terms of simplicity of use. This simplicity and intuitiveness is built by offering to the customer various search parameters, ease in navigating through the ordering process with minimal hassles, as well as tracking and paying for the delivered food. Clarity in pickup and drop locations has vastly improved with the enhanced location mapping technologies that are currently available.
The core business of the food delivery aggregator lies in customer focus and the use of technology, which blends into apps that is also well integrated with the restaurants. Seamless order confirmation, pickup by delivery personnel and payment integration systems enhance the customer experience. Over and above the technology aspect, the aggregator also focuses on the people, i.e., the motivational levels and incentivisation of the delivery personnel that will differentiate themselves in the market.
Another key difference an aggregator can bring in is the careful choice of restaurants that would be listed on its app, ensuring that these are offerings that would appeal to the targeted customers, both in terms of value delivered and the price point offered. Over a period, this would become a ‘self-selection process’, where restaurants will carve a niche for themselves for specific food items.
Both Zomato and Swiggy have also started to venture into what’s called a ‘cloud-kitchen’ model as one of their services, in order to help their partner restaurants with backend infrastructure supply. They provide real estate and kitchen equipment support, and help them scale their order volumes in new localities without the restaurants having to invest in infrastructure for expansions.
The thorn amidst the rose
Although this is an opportunity for the restaurant, there is a downside to partnering with such firms. The aggregator is not exclusive to the restaurant. Many competitors of the restaurant are also featured in the food aggregator’s app, which means that this provides a seamless platform for the customers to evaluate the ‘value delivered-price’ of different restaurants within a cluster, and choose the one that offers them the best deal.
Hence, the restaurant’s products must stand the close scrutiny of such high level of transparency brought about by the app and the aggregator. This effectively means that any dilution in ’food product quality-value-price’ dimensions could seriously impact the restaurant’s sales proportion on the aggregator app for the respective target customer group.

Other innovations
There are further disruptions being witnessed in this industry. The distinction between food delivery and grocery delivery is blurring and converging. Meal-kit delivery is emerging and becoming popular. These e-commerce service providers provide ready to cook complete box of all ingredients you need, in exact quantities, for you to ‘freshly’ cook any particular dish for the entire family. One can cook and have the final dish in 15 to 30 minutes. Dishes like Paneer Butter Masala and Hara Bhara Kabab are extremely popular.
Meal-kit products come at a substantially cheaper price as compared to cooked food items ordered through the aggregators. Happy Chef Gourmet, a part of Bigbasket.com, is offering meal-kits starting at a mere `200 for two people. Of late, many other players are emerging in this space too. The Chinese e-commerce giant, Alibaba, along with Ant Financial, has invested not only in Zomato, but also in Happy Chef.
Hence the food aggregation model and the meal-kit models are fast emerging entities, with leading players in this space already boasting billion dollar valuations. Investors pouring funds into these segments are enabling the players to scale up rapidly, and the customer base is rising exponentially. The next 12 months will see most of the players perfecting their business models and sharpening their capabilities, and the customer will stand to benefit the most. Yes you can order anything anywhere in the smallest of the quantities you want, and all of these come at an affordable price. Yes, consumers are for sure reaping the benefits of technology and entrepreneurial zeal of innovators!