Restaurants struggle for profits as food-delivery giants Zomato and Swiggy conquer India

04, Aug. 2021

A file photo of Zomato’s delivery staff.  Food aggregators Zomato and Swiggy have set their eyes on the country’s current addressable food service market of $65 billion which Iis estimated t to grow to $110 billion by 2025. (Photo: Zomato)
A file photo of Zomato’s delivery staff. Food aggregators Zomato and Swiggy have set their eyes on the country’s current addressable food service market of $65 billion which Iis estimated t to grow to $110 billion by 2025. (Photo: Zomato)

By Atul Ranjan

NEW DELHI, NNA - For food and beverage operators in India, getting listed on dominant food aggregators Zomato and Swiggy was supposed to give a fillip to their business because of their online connection with millions of consumers and a ready army of delivery riders.

But their experiences with the two food app-based delivery giants have subsequently left a bad taste in their mouths instead. Accusing them of abusing their monopolistic position, restaurants said the main bugbear was their high commissions which ate into their profits.

Many businesses were even forced to close shop as pandemic lockdowns dealt a further blow.

To survive, Bisque Bakery, a popular bakery in Gurugram, decided to go solo and quit its alliance with market leader Zomato after their steep commissions shaved off a chunk of its profit.

The move might mean a lot to Bisque, but probably no love lost to Zomato, which commands the food delivery market with transactions amounting to 94 billion rupees in the last financial year.

Raising the issue recently, the National Restaurant Association of India (NRAI), which claims to represent over half a million restaurants, urged the country’s fair-trade regulator, the Competition Commission of India (CCI), to probe the alleged anti-competitive practices of Zomato and Swiggy which have dominated the food delivery landscape after elbowing out or acquiring smaller players.

The association denounced the two companies for violating their platform’s neutrality by promoting only eateries with paid partnership and charging exorbitant fees in the range of 25-35 percent of an order value.

In a litany of complaints, association members also claimed that the two companies were slow in making payments, forced them to use their delivery services, pressured restaurants to offer bigger discounts to consumers as well as withholding customer data from them.

Flushed with massive investor cash for aggressive expansion, the food aggregators are becoming “digital landlords” that control the entire ecosystem rather than just being platforms where buyers and sellers transact on their own terms, said the association.

“Therefore, NRAI strongly feels that it is imperative that businesses take larger control of their digital landscapes to protect their long-term interest,” it said in a statement.

NRAI president Anurag Katriar said, “We have been in constant dialogue with the food service aggregators over the last 15-18 months to resolve critical issues impacting the sector. However, despite all our efforts, we have unfortunately not been able to resolve them with the aggregators. The needle hasn’t moved much on these issues.”

After months of frustration, the association decided to take the issue up with the Competition Commission.

According to ICICI Securities, the food tech industry in India has witnessed a drastic consolidation with almost 400 players in 2016 reducing to a duopoly of two companies, so formidable that it sees limited likelihood of disruption by the entry of new players like Amazon.

“Swiggy and Zomato are now the two last men standing in a tough industry, which witnessed ruthless consolidation over 2015-18,” said ICICI Securities in a blunt statement.

With both Swiggy and Zomato enjoying key competitive advantages such as a well-established pan-India network, robust last-mile delivery and insightful understanding of consumer behaviour, it will be difficult for new entrants even with deep pockets to compete with these two giants, it said.

Acknowledging their enormous presence and influence, Katriar told NNA that his association continues to be in talks with the food-tech startups to find mutually beneficial solutions.

However, with businesses struggling to recover from pandemic lockdowns, association members cannot put all their eggs in one basket.

In fact, the association has already partnered with Google-backed fintech startup DotPe that offers an independent 'Order Direct' business model. The company helps restaurants to build their own smart and engaging digital platform while providing a delivery solution for their food.

Katriar said almost every member-restaurant has started adopting the DotPe model.

However, the association is currently not encouraging restaurant owners to abandon the big aggregators while creating their own online platform to spread their presence in order to survive better in the difficult market, he told NNA.

Concurring, Gauri Devidayal, a restaurateur, and a member of NRAI, maintained that DotPe is an alternative partner, and not a replacement for Zomato and Swiggy which cover huge swathes of India, especially populous cities and booming towns where lockdowns have fueled a spike in food delivery to residents since last year.

“We recognize the positive aspects of what the aggregators are offering us at present and to our customers too, but this relationship is no longer a partnership but rather is one built on dependency. And that’s what we are working to change,” said the restaurant owner recently during an event organized by NRAI.

The Lalit Hotel, one of India’s well-known luxury hotel chains, also tied up with DotPe in June to boost its home delivery business.

Rocky Kalra, corporate general manager, operations and development at The Lalit Hotels, said, “The DotPe platform already has a strong network of delivery partners, which makes the overall delivery process easy and hassle-free for us. So far, the response from our customers has been great.”

Consulting firm RedSeer said India's food service market, which is now worth about $65 billion (4.5 trillion rupees), is set to grow to $110 billion by 2025.

RedSeer attributes the robust growth to more disposable income of a growing affluent society and shift to online food ordering especially among millennials looking for new food experiences and discounts.

Capitalizing on this, Zomato and Swiggy have sought huge financing for further expansion throughout the country.

Backed by Chinese billionaire Jack Ma's Ant Group, Zomato became the country’s first new-age unicorn to list on India stock exchanges in July.

Headquartered in Gurugram, it raised $1.3 billion in its initial public offering (IPO), which saw investor frenzy oversubscribing by about 38 times.

On its stock market debut on July 23, Zomato’s market capitalization crossed the 1 trillion rupees mark in intra-day trade, elevating the 12-year-old startup to the prestigious club of big boys like Tata Motors, Shree Cement, Indian Oil Corp. and Godrej Consumer Products.

S. Ramesh, managing director and CEO of Kotak Investment Banking, said, “The stellar debut of Zomato’s on the domestic bourses after attracting robust subscription is a testimony to the fact that investors are willing to bet big on new-age technology companies which have the characteristics of a disruptive business model.”

Global e-commerce giant Amazon, which already has a big online retail presence in India, has also set its eyes on the country’s online food delivery market with the soft-launch of its delivery business in IT-hub Bengaluru last year.

Experts say Zomato, Swiggy, and Amazon are beefing up their capabilities and expanding their presence in the country to stay dominant, dwarfing smaller food delivery players such as cloud kitchens players like Rebel Foods and quick service restaurants Dominos, McDonalds and Pizza Hut scattered throughout the country.

While both Zomato and Swiggy have entered over 500 Indian cities, Amazon has increased its presence in Bengaluru significantly while trying to woo restaurant partners by charging low fees.

Brokerage firm ICICI Securities noted that Amazon is charging commissions of 7-12 percent, which is roughly about half of Zomato and Swiggy commissions, to grow its network.

Zomato, which operated under registered DC Foodiebay Online Services Pvt. Ltd is expected to continue to lead the market.

It started as a restaurant review website in January 2010 before growing into a food service platform with four major segments offering both business-to-business (B2B) and business-to-consumer (B2C) services.

It is currently present in 525 cities in India with 389,932 active restaurant listings.

Apart from food delivery and restaurant booking, it also offers a B2B service which provides ingredients and kitchen products to restaurant partners via direct sourcing from farmers as well as a paid membership loyalty program for customers.

The company employs about 161,600 active food delivery ‘partners’ or staff who use bicycles and motor bikes to deliver orders. It also has footprints in 23 countries outside India.

According to brokerage firm Prabhudas Lilladher, Zomato is diversifying into the online grocery segment following its 9 percent acquisition of Grofers for 7.5 billion rupees and will use IPO proceeds to ramp up its operations.

Other analysts expect Zomato to continue investing in talent and delivery vehicles as it expands its delivery partner base and grows its presence in more places.

Swiggy, which started in 2014, has expanded its operations aggressively and diversified into areas such as cloud kitchens and delivery of consumer goods.

On July 20, Swiggy announced it has garnered an eye-watering $1.25 billion in a fundraising round led by Japan’s SoftBank Group Corp’s Vision Fund 2 and Prosus.

Swiggy said it will use the money to “further accelerate its multi-year strategy of growing its core food delivery business and building new food and non-food adjacencies in 2021 and beyond.

It is now able to compete neck and neck with Zomato with its presence in over 500 cities with over 130,000 delivery partners.

“Swiggy will enhance its capabilities in technology and AI (Artificial Intelligence), and strengthen teams across engineering, product, data science and analytics as well as in business and supply chain for its newer initiatives,” the company said in a statement after obtaining huge funds.

Seeing the scope of food delivery in India as “massive”, Sriharsha Majety, CEO of Swiggy said the company will continue to invest generously to grow this category.

“Our biggest investments will be in our non-food businesses that have witnessed tremendous consumer love and growth in a short span, especially in the past 15 months of the pandemic,” said the CEO.

“I believe the next 10-15 years offer a once-in-a-lifetime opportunity for companies like Swiggy as the Indian middle class expands and our target segment for convenience grows to 500 million users,” he added.