“Are you hungry, just order online”- has become a trendy catch line in today’s time. Technology has made our lives simpler and this holds true when it comes to food. The delivery of meals on a tap just reflects how technology is changing our lives. Technology has revolutionized nearly every industry on this planet. Food industry doesn’t remain unaffected by the technological revolution. The industry has the largest consumer base in the world. Despite the economic changes, the food industry won’t lose its consumer base, which makes it an attractive proposition for tech enthusiasts. Technology can revolutionize this industry as well. Digitalisation can help in production of food at a larger scale, improve accessibility and ensure sustenance of edibility. Food technology has already impacted in many ways- food tech startups like Zomato and Swiggy have become excessively popular.

In the last few years, the food technology (online food delivery) industry in India has seen significant growth in terms of regular order volumes (DOVs), revenue and financing. Although the market is rising for all players, losses are still being reported. A closer look at their financial and business models shows that the existing operating margins are very small, and much of the recent rapid growth has been driven by strong discounts offered by players to attract consumers. At present, the growth strategy is loud and clear: to draw new consumers, to enter new markets and to raise current market share at any cost. This raised the question whether such a model is sustainable in the long run, or is another technology bubble just waiting to burst?

Less than five years ago, the way Indians used food was entirely different. Eating out was often occasion-driven, whereas ordering food was restricted to calling local restaurants or ordering pizza from Dominos or Pizza Hut from their own websites. Online food ordering by applications was not at all part of the culinary vocabulary of consumers. However, this has been transforming over the last few years. There is a rising trend among Indians to order their food online through food aggregation apps. Today, Indian consumers, particularly in the metro and larger cities, order food online more than ever before. As a result, food technology has become one of India’s fastest-growing internet sectors with an amazing triple-digit growth rate in gross merchandise value (GMV) and DOVs in 2017 and 2018.

After an initial hype between entrepreneurs and investors in 2015, the food technology industry endured a recession and market consolidation in 2016 and 2017. Yet, in 2018, India’s food technology industry rekindled investors’ appetite for the sector with a massive spending surge. Driven primarily by increasing disposable incomes, fast-growing Internet and smartphone penetration, urbanisation, and a young and working-class customer base, India’s food technology industry stood at around US$ 700 million in 2017 and is projected to cross US$ 4 billion by 2020. DOVs rose to 1.7 million orders in 2018, from 0.2 million orders in 2016. The existing market is made up of four main players. Leaders Swiggy and Zomato currently have a combined market share of about 70%.

Although order volumes have increased dramatically in the last 12-18 months, the industry is still in its infancy considering its outreach and adoption rates across the country. Currently, online food ordering is available in just over 200 cities across India and contributes to just about 5% of the overall food delivery market. Moreover, the US$ 1.7 billion food technology market in India is comparatively limited compared to US$ 10.5 billion in the US and US$ 36 billion in neighbouring China. Out of the 90 meals eaten each month, Indians feed or feed less than five times a month compared to about 40-50 meals in countries such as Singapore, China and the United States. In short, food aggregators have just begun to scratch the surface in India, and there is a long road ahead for the industry to develop and expand further.

As a result of ongoing discounts and sales, the cost of attracting customers is currently very high. A closer look at the finances of Zomato and Swiggy shows that their monthly cash burn has risen five times in 2018, as they resort to aggressive discounts to expand further across the world. At present, both players are making losses. This is very popular also in the global food technology industry, where most of the players still have losses. For example, China’s Meituan-Dianping and ele.me are still a long way from achieving a break-even point, even after 10 years in business. The story is the same in established economies such as the United States and the United Kingdom. The aggressive cash-burning model requires food aggregators to keep raising funds at regular intervals in order to further expand and grow. This is a major issue raised by a number of industry experts. Another big problem facing all players is the inefficiencies in their activities, which have a direct effect on their economic unit and hence on their profitability. Although food distribution logistics is slowly improving, it is still a major part of the overall cost. Players are in desperate need of leveraging new technology and processes to streamline their logistics operations and make the most of their logistics infrastructure and assets.

For the Indian market, the current growth story of the food technology industry may seem to be a flashback to the ride-hailing industry, which really began in the early days. It looked like a win-win situation for everyone on the basis of strong discounts and enticing deals. In recent years, as cab aggregators have steadily begun to step away from discounts, while at the same time increasing tariffs for consumers, on the one hand, while reducing incentives for drivers, on the other, they have begun to experience difficulties both on the demand side and on the supply side of their market. 

Strategies such as price increases, fare increases, decreased driver wages and benefits, etc., have had an effect on their companies and have resulted in disgruntled consumers and drivers, unreliability in facilities, and tension with local organisations. Cab aggregators in India have not yet found the right balance to continue to develop without leaking revenue. Many industry experts believe that food aggregators will also face the same set of challenges in the coming years, as players will start moving away from discounts along with hikes in delivery charges and restaurant commissions to improve their operating margins. This is already becoming apparent as distribution partners from Swiggy in Chennai went on strike for wage-related demands in December 2018, while UberEats faced a similar situation in Ahmedabad in April 2019.

References:

  1. https://www.eos-intelligence.com/perspectives/tag/food-and-beverage/
  2. https://www.emia.org/news/story/6827

Read other articles in this series:

  1. The Hidden Economics In Fashion
  2. The coffee economics

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