The explosive growth of food delivery in India — Part 2
In my previous post I explained the exponential growth of food delivery in India and the reasons for the same. While offline-to-online movement will continue to drive hyper growth in this industry, the erstwhile competitive moats are now the table-stakes. What would be the new competitive barriers that food delivery companies need to build? To identify these moats, we first need to understand the journey of the customer who orders food online. I listed below the broad stages a consumer goes through while ordering food and how competitive moats can be built for each stage —
Brand Awareness
As you can see in the snapshot above, brand/category awareness becomes crucial in the first two stages i.e. Hunger and Discover. There are various ways to generate awareness and be in the user’s mindshare whenever he/she has a food craving.
- Zomato and Swiggy are aggressive in external brand awareness campaigns and in a way also helping in category awareness and offline-to-online movement. Online search volume trends shown below shows the spike in demand from July onwards
It is no surprise that these 2 players between them have over 65% market share of online food delivery.
However note that this comes at a massive cost. Brand campaigns involving TV Ads are not cheap. Additionally such campaigns need to be supported through other marketing initiatives on digital and offline channels. The customer acquisition costs for both these brands could be higher than other 2 major players i.e. Food Panda and UberEats.
- Food Panda and UberEats leverage on the huge install base of their parent apps — Ola Cabs and Uber. UberEats and FoodPanda are separate Apps and there are costs associated to drive installs for these apps. Nevertheless cross-sell between the cab hailing and food apps has better conversion rates and helps in driving up the sales. Both also have in-app integrations to drive conversions.
- Zomato has one app for both restaurant discovery and food delivery. This is a competitive edge as there is no burden of educating users to download a separate app. Discovering restaurants, identifying popular dishes, searching deals and ordering food all in one app is a killer moat that Zomato has and I am sure others envy.
Supply Coverage
Zomato and Swiggy tops in terms of restaurant coverage while Food Panda comes next. Supply coverage on UberEats is low but growing at rapid pace. It is a matter of time before all 4 have same supply.
Thus just aggregating restaurants won’t be a moat unless complimented with needs of the user. User would want to eat food from a specific restaurant / cuisine which may or may not be closer to his home. How do you satisfy this?
- Get exclusive supply — Tie up with reputed and popular restaurants and sign up for exclusive supply. Zomato and Swiggy have shown their own share of exclusive restaurants. Zomato however has an edge due to its relations with restaurant owners since many years
- Bring new restaurants — By connecting customers to restaurants from far places through increasing delivery reach and establishing cloud kitchens. Zomato and Swiggy are quite aggressive here. Food Panda recently acquired Hola Chef
- Bring new cuisines — Not all cuisines are available everywhere. In Bangalore, people residing near Indirangar, Koramangala and Marathalli gets access to many more cuisines than other places. Food delivery companies have treasure troves of user behavior and order data. Leveraging this, they can work with reputed restaurant players in bringing new cuisines to other hyperlocations. They can add the exclusivity clauses for competitive edge. This is relatively an untapped opportunity. Uber has partnered with CCD and launched ‘virtual restaurant’ enabling CCD customers to try out food from other popular restaurants having it in CCD Cafes.
Delivery Time
Reliable delivery is very crucial in food delivery business. This includes spillage proof packaging, freshness in delivered food and timely delivery. Dominos, around 2010, introduced us to 30 min or free delivery of pizzas. All the 4 players have their own fleet on street. With standardization in packaging and transportation, reliable delivery is no longer the competitive moat and the focus is shifting to quicker deliveries. Route optimization is one way to optimize on costs and delivery times. However, more fleet on street is quicker way to improve delivery times. But this comes with increase in delivery costs. It gets further compounded because demand for food deliveries is not constant throughout the day —
Demand peaks only during lunch and dinner times and remains lean during other times. It is also high during weekends. If you have more delivery staff employed, then a large portion of the paid staff would be sitting idle during lean time. So now you need to control the cost while providing faster delivery times. How would you do that?
- Pay staff only for delivery hours. This works in the short run but treats staff as commodity and leaves with no personal bonding with company. This approach can be used if there are big sale days or days with unusually peak demands
- Make customers pay for faster deliveries. All the 4 companies charge for delivery above min order value. They also charge a surge fee when the demand is high. With no differentiation in delivery user tends to switch to the app offering it at lowest. There is no customer lock-in. To mitigate this, Swiggy also started Swiggy Super, a paid membership program that offers free food delivery for order value more than 99. But would customers pay? Indians have been averse to paying for deliveries. Then, perhaps a membership that gives guaranteed free delivery in under 30 mins? Amazon prime like model for food delivery? Zomato introduced discounted dine out membership with Zomato Gold — BOGO discounts on food and drinks. The simplicity of the membership resulted in strong demand for it. Other players like Dineout, sensing its popularity, brought their own version of the membership. What if Zomato starts offering free and quick food deliveries to Zomato Gold members? It creates a virtuous cycle — locking in customers to Zomato platform and in turn will increase demand for Zomato Gold membership as well as customers for partnering restaurants
- Apps can also create demand for food delivery during non-peak hours. Looking for hot Samosas for evening snacks? How about a Idli Sambhar bowl for breakfast? All players are trying to tap into this but both breakfast and evening snacks have nuances which need business model tweaks. For instance reduced food / restaurant options, quick delivery and hot & fresh food becomes very important for breakfast.
- Delivery staff will be occupied during lunch and dinner times and are idle during other time slots. All delivery use cases on the other times can be managed by food delivery staff given their geographical understanding of hyperlocations as well as experience in delivery. Early morning milk, eggs, bread, newspaper, grocery and all can be delivered by them. Medicines, Flowers, Adhoc deliveries all can be tapped into. Heck! They can even compete with Ola / Uber by offering Bike Rides for customers! Swiggy has already indicated of getting into new delivery based businesses and also looking for acquisitions actively in this space. Many of the milk and grocery delivery startups are seeing renewed VC interest with an eye towards future acquisition by the bigger players
If you observe from the above use cases, a delivery person with a bike is just not about food. He can do everything that we need his service for! This if done well can go head on against many established players — Amazon & Flipkart for e-Commerce, BigBasket & Grofers for Groceries, DailyNinja for Milk etc. Go-Jek has built this sort of platform for Indonesia and rapidly expanding with its playbook into other geographies. The below pic summarizes this pretty nicely. Thanks to Gandharva for sharing this..
But what if I want food and there is no need for delivery? The core premise of food delivery is not needed. That’s where Zomato moved swiftly into 2 spaces — Food Pick-Ups and Office Lunch.
- Zomato through its app lets user order food and pick it up from restaurant. It works well for folks who are traveling through the restaurant route, want to eat food from there but prefer eating at home or work. It will also help customer save delivery charges
- Office Cafeteria is another place where most of the millennial population order and eat. Zomato’s acquisition on Tounguestun shows its intent to capture a slice of this market. Tounguestun claims to do 150K meals a day which is about 20% of the current daily online food delivery orders Zomato was doing a few weeks ago
Pricing
Pricing plays a crucial role for an order conversion. In 2018 there was ample support from wallet, card and payment companies to co-fund the discounts. Food delivery companies were also doling out offers and further reducing the price. However these are short term initiatives and with negative unit economics these are unsustainable. Companies need to evaluate viable options that can bring down the price of product for end consumer.
If you break down the food delivery pricing, you essentially pay for these broad aspects of the service— Food, Packaging, Delivery and Support.
Packaging costs are a small fraction of total cost and can be parked aside for now. Delivery charge is typically about 10% — 15% of order value. It is higher for lower order values. Free delivery is a good incentive to increase orders but it pales in comparison with current discounting regime. In the long run, free deliveries for members is one way to bring down average cost for user as well as create a lock-in. Optimization in support systems will help in reducing the operations cost. However, the biggest of all is — Food.
Typical food portions at restaurants are meant for 2 or more people. The same portion (and pricing) is reflected in restaurant menu on food delivery apps. Single users either miss out on ordering online or pool with others for ordering. Some restaurants introduced the concept of half and full plates but the prices are still high. Swiggy introduced Swiggy Pop catering to this audience. Do read the brilliant piece on this at Swiggy’s blog. Zomato has recently started it.
Another popular way to optimize revenue is through dynamic pricing. In simple terms dynamic pricing lets businesses charge for same offering at different rates based on user’s perceived ability to pay. Pricing in this depends upon various factors including predicted demand, competition pricing, supply etc.. It is widely used by Airlines, Hotel Chains, eCommerce companies etc. Uber/Ola use this for surge pricing. The same could be applied to food pricing.
Imagine your favourite dish is available at 25% cheaper during lean times but at a premium of 10% during peak times. You may order early to get better pricing. You may place advance orders to restaurants to lock-in cheaper rates. This also helps restaurants in managing raw food inventory to meet the demand in those times.
Companies could also optimize deals and discounts based on user persona. They need to go beyond offering new user discounts. Can every user get a different discount for the same food being ordered? Access to behavioral data can reveal a lot of user’s craving for food and shopping behavior.
Funnel
All the above mentioned aspects cannot win without the support of a delightful booking experience — Discovering restaurant, apply deals, use your preferred payment mode, track order realtime, unpack hot food and enjoy it! All the major players have a satisfactory booking experience. I find Swiggy experience better than others
Suppliers
While the limelight is always around the demand side i.e. customers, it is crucial to provide all the support to suppliers to be able to serve a delightful meal to every customer. This support can translate into various forms — B2B marketplace to buy restaurant supplies, ERP systems that help them manage business better, financing solutions for them to expand and serve more customers and tie up with hospitality schools for customized training for restaurant staff. They can also help them in improving in-store dining business by offering consumers to book a table, buy food vouchers and share feedback
