Porter’s 5 Force Analysis: Indian Online Food Delivery Business
Porter’s Five Force Analysis: Indian Food Delivery Business
Strategy building for any organization starts with an interpretation of porter’s five force model. These forces include the threat of new entrants, the threat of substitution, the bargaining power of customers, bargaining power of suppliers, and competitive rivalry.
Despite having potential, the carving strategy remains tricky due to the presence of a high number of competitors. Let’s look at each of them one by one.
Threat of New Entrant:
This factor varies from low to high, depending on the category of products. Higher infrastructure costs, it becomes low. Where there is a lower cost of operation, it becomes high.
Since Swiggy and Zomato being the major player in the industry with a combined market share of 70–80%, the threat of new entrant is low. Swiggy was leading the market with the highest number of users. But the acquisition of Uber Eats by Zomato is giving the tough competition to Swiggy. Ola with Food Panda has slowed down on investments as compare to Swiggy and Zomato.
Strategy
As the threat of new entrant is low for existing players, organizations operating in this segment can opt for the expansion strategy for increasing the market share by penetrating deeper into Indian markets. Many tiers 3, 4, and 5 cities are yet to be covered. The plan needs to increase partnering with maximum food restaurants and cafes.
Threat of Substitution:
This factor becomes high due to the nature of the product. Easy availability of similar products makes it higher. Having a different product with distinguishing properties can reduce the threat level of substitution.
All of the food delivery apps are available on the same platform for the user, it makes a very high threat of substitution. As the numbers of options are parallelly available, the user can shift from one app to another app easily. Suppose if a user is searching for ‘Biriyani’, then he/she can decide by portion size, price, preferences, brands by comparing on both platforms side by side. Hence, swapping in between apps becomes a major part of substitution.
Strategy:
The threat of substitution is inversely proportional to brand loyalty & negatively affects the brand equity building. In such a scenario, ranking of the brands comes along with the cash burns. Higher cash burns bring higher topline revenue; however, profitability remains under pressure.
Following are the vital attributes of building strategy:
1. Designing a product or service with unique features
2. Loyalty Programs
3. Awareness Programs
4. Customer Intimacy (Emotional Connect)
Bargaining Power of Customer:
This factor varies from medium to high range. As a higher number of options are available to the buyer, bargaining power increases. Promotional offers, discounts, variety of product gives the buyer a lot of options.
As the level of substitution threat in online food, business is more due the availability of similar products. Similarly, it leads to an increase in the bargaining power of the customer. To capture more customer base organizations often gives more and more offers to customers. But most of the time it happens that those customers leave once the offer gets over. This shows the bargaining power.
Strategy:
Organizations need to continuously work on acquiring more and more customers. Increase in customers reduces the bargaining power of customers. Also, the product offering should be unique to tackle this problem. Premium memberships can help to retain power for key players of the market.
Bargaining power of supplier:
This factor varies between medium to high range. Mostly in raw materials, suppliers have the upper hand. To ensure the uninterrupted supply to the planned production, annual contracts becomes critical. The raise in the bargaining power of supplier may result in the increased production cost.
Here in online food delivery business, suppliers are food kitchens, restaurants, cafes, bakeries, food joints, etc. Standardization is the key norms while enrolling the suppliers. The customer expects the same taste of the particular food product irrespective of geographies. Though it is easier to obtain raw material in tier 1 cities but in other tier cities, it might get difficult. Bargaining power of suppliers can still be called as Moderate due to the supply
chain challenges.
Strategy:
To arrest the bargaining power of supplier, organizations can apply the following strategies:
1. Defining the product portfolio to include multiple suppliers.
2. Allotting at least 2 suppliers to avoid dependency and single point of failure.
3. Annual contracts with the supplier with fixed price can help reduce and manage the production cost.
4. Timely review of the price is important to minimize errors in unusual price hike and supply.
Competitive Rivalry:
The intensity of competitive rivalry is more. The growing potential of Indian markets attracts many domestic and international players in each of the food categories.
E-commerce business is largely growing in India. Online food delivery business has seen a growth of more than 100% in the past 3 years. In order to grab a larger part of the market share, Zomato acquired the Uber Eats. Revenue for FY19 of Zomato was 206 million USD. Though, their marketing expenses was 500 million USD. They also said that “we are losing Rs.25 for every delivery”. All this is for gaining the market share over its major competitor i.e. Swiggy.
Strategy:
The increasing rivalry is unhealthy for business profitability. It exhausts a lot of organization’s capital in a race to grab the market share. The following are some of the ways by which rivalry can be addressed.
1. Understanding the gaps in customer experience and bridging them.
2. Building a unique category of offering to present differentiation.
3. Innovation is the key. Innovative products tend to attract more and more buyers.
4. Improving customer service. And remember the customer is always right.
Credits: Deepak Kucheriya-Shveta Sarastwat-S.B. Puranik-Vinay Kumar