Sustainable Unit Economics — The new mantra for you to go for the KILL!!

2016 is turning out to be an year of “cautious optimism” in the Indian startup ecosystem. Investors showed bullish sentiment last year, with the fear of missing out (FOMO) running high. However, the approach varied and sustainable unit economics became the new mantra. Thus, making it difficult for startups to raise new rounds & expand into new territories. Valuations markdown, scale down, shutdowns, layoffs, deferred & revoked job offers were the most widely discussed topics in the recent times. Having said that, few startups showed patience, perseverance and passion and are fighting for their survival. It’s time we take a minute and recognise the efforts, sacrifices, struggles and the courage entrepreneurs have shown to innovate & change the future of India.

Recently, The Economic Times recognised and awarded a few fast-growing startups at the ET Startup Awards 2016. The awards included the coveted title — Startup Of The Year, awarded to Freshdesk among the other nominees Practo, BigBasket, Swiggy & Bjyu’s. It’s quite a surprise to see FoodTech & Grocery startups on the nominations list, specially when the space has attracted huge criticism not only in India, but also across the world. Inspite of FoodTech being the worst hit by the slowdown in funding, Swiggy delivered results in the over-crowded market (180+ startups operating in food delivery space in India). It mightn’t have been the Startup of the Year, but it surely can be called — The Fighter Of The Year.

Swiggy, which delivers food from local restaurants operates in 8 cities handles over 45k orders/ day with an average order value of Rs 375. Reportedly it’s generating profits in Bangalore and Hyderabad markets. It generates revenues either from restaurants or customers or both, detailed below:

  1. Commissions: Charges between 16–30% in commission from restaurants
  2. Delivery fees: Rs. 30–40/ order from customers where order value is below Rs. 150–250 (depending upon the city). It charges a delivery fee on 30–35% of the orders
  3. Fixed delivery fees: Rs. 50 from customers on select restaurants (assuming that the fee is applicable for restaurants which don’t pay commission)
  4. Surge Pricing: Rs. 20 from customers on rainy/ busy days, which would be passed onto delivery executives as an Incentive

Considering order values between Rs. 100–600, Swiggy generates revenues between Rs. 50–180/ order. Foodtech companies on an average spend slightly above Rs.50 to deliver a single order. Thus, it makes sense to assume that it has achieved positive unit economics. On average, Swiggy holds 15–20% of restaurant business, which make a margin of 65 to 70% on each order.

In the market widely known for plenty of discounts and free deliveries, Swiggy has succeeded in acquiring new customers without much cash burn. Started with no-minimum order, focused on referrals and banked on “timely execution”, contrary to cash burns and delays, which were inevitable for other FoodTech startups. It’s average delivery time stands at 35 minutes, and that’s what differentiates the company from its peers. Reportedly, 80% of its orders come from repeat customers which speaks about the brand loyalty it has created, a rare feat for an Indian Startup, not just limited to FoodTech space.

The Road Ahead:

It plans to lower the delivery time, consolidate its presence in 8 cities and double the number of transactions by the end of this year. It has also partnered with a 3rd party delivery firm, Shadowfax to distribute few of its orders in Bangalore and Delhi. It’s revamped the pay structure to delivery executives (based on no. of deliveries instead of fixed pay) would help the firm in reducing the inefficiencies. Over a period of time, these should help the firm gain network effects and scale and thus help in achieving high frequency orders, lower delivery time and better utilization of delivery executives.

Indian food ordering industry is estimated to be $15B and growing at a rate of 16–20% YoY. With such a huge scope and scale, Swiggy has to continue its survival by acquiring new customers without compromising on its unit economics. It definitely has to solve many, many problems in the near future, but the future is looking bright!!!