Space for food startups in India has been hotly contested in the last 5 years. The chief contenders include Swiggy, Zomato, FoodPanda, and Uber Eats. While there was a huge downpour of investor money and thereby soaring valuations, there were always profitability concerns and the aim was to cover fixed costs and past investment (burn) by earning a low gross margin on a huge number of orders. However, all that money burnt to gain market share and expand to hundreds of cities has come crashing down due to CoVid and the model seems to be evolving.

Problems for Food Startups in India

Problems for food startups in India started when FoodPanda first landed in trouble much before CoVid because of some wrongdoing of the partners and some employees and was sold to Ola. While Ola tried to gain market share by pumping huge money into giving sweets and ice creams at ridiculous prices (Re 1, 9, etc) – that kind of backfired in the long run because most of the times the item were either stock out or could not be fulfilled and hence the Customer experience went awry. So while the customers did order at throwaway prices, but did not stick along. Hence just 17 months after acquisition in mid-2019, Ola shut down FoodPanda delivery operations to focus on cloud kitchens under private brands, leaving the big stage to Swiggy, Zomato, and UberEats.

UberEats was the next to give in by selling its operations to Zomato in Jan2020 and acquiring a 10% stake in Zomato. With this, the number of players went down to 2 {while Amazon food was just around the corner}

Move toward profitability

It seemed that companies were dampening their aggression to move toward profitability. This move toward profitability was also warranted because the entire market scenario had changed after Uber IPO and We Work debacle and investors were getting more concerned about the bottom line.

CoVid Troubles

Amid profit aspirations, food startups in India also faced revenue losses when CoVid hit, and due to lockdown and hygiene/infection concerns, the order volumes fell off the cliff. The volumes shrunk as much as 70% for these players and many restaurants – small and even big chains – closed shop or were hurt badly. Amazon also launched Amazon Food in May 2020 – so the number of players again became 3.

Food Startups in India

P&L Analysis of food startups in India

So there is a lot of pressure for food startups in India, in terms of – shrinking volumes, increased competition, decreased supply, increased quality requirements (hygiene, etc to limit CoVid spread). Let’s look at the sample P&L for these players and try to understand as to how much profit can be expected and why investors think that this is such a lucrative opportunity.

3 major sources of revenue

  1. Commission from Restaurants: These players charge around 20% of commission from restaurants. It can be lower or higher, basis the relationship {lower commission for exclusivity on 1 platform} and bargaining power {legendary restaurants will have lower commissions} of the parties involved or the stage of launch in the city {in early days, lower commissions to onboard restaurants quickly} etc.
  2. Delivery Fee from Consumers: This is another source of revenue – like we pay 25Rs per order in Bengaluru. It can be more because of the distance of the restaurant, rains, dependent on the city, etc. There are programs like Super which can waive off this fee for a subscription which after netting off can be a revenue item or a cost item
  3. Advertisement Revenue: Apps like Swiggy or Zomato are a great platform for Ads for restaurants because there are a lot of customers and most are at a high intent of immediate purchase. It makes a lot of sense to advertise to them because the conversion rates would be much higher than any other place. Hence this can be a significant line item for the players. Apart from the restaurant ads – there can be other types of Ads – like we see credit card ads on the tracking screen.

    Also because of the rich data, there can be other forms of monetization which I believe that these platforms have not started doing till now. Like – since you have the address and time of day of order – you might give a coupon for an offline store to your customers and get a lead generation fee from that business. This however has to be married with the customer experience so that it does not happen that Zomato starts pushing hardware purchase – but maybe pushing for a gourmet sauce for Pizza lovers might just work wonders.

5 major costs

  1. Cost of Delivery: This forms the most significant part of the operating cost for the company. The most important challenge for any company to succeed at any scale is to reduce this to the minimum possible level.
    For example: If you cannot deliver at better costs than a local restaurant – they will deliver themselves and just pay a lead generation cost to the platform which will be way lower than the current commissions. On the split side if you become so efficient that you can consistently deliver at lower costs without harming customer experience then even chains like Dominos can use your fleet for completing their orders (B2B) – which in turn will improve you more {economies of scale}
    All else being same, this cost generally decreases with increase in order density since an executive can deliver more than 1 order in a single run – given CoVid this must have become more challenging, however, this can be offset by giving lower payments to the delivery personnel and also relaxing delivery times to increase no. of orders per run.
  2. Cost of Discounts: This is or rather was another large cost item on the P&L. However, off late we have seen that the discounts have come down drastically. This seems to be the result of investors’ focus on profitability and consolidation in the sector.
  3. Cost of Marketing: Generally startups constantly see a lot of churn of users that are acquired. Hence there is always a push to acquire more and more new users to fuel the top line. Hence there is huge marketing money at work – digital marketing, TV, outdoors, etc. Also, new users are given higher discounts to lure them to try the service for the first time. Historically, many companies have also seen frauds from bad actors when discounts become very high.
  4. Cost of Customer Experience: This includes the refunds either given when the customers cancel the order (but the company has to pay either the restaurant or delivery exec or both) or when there is some issue in the quality and the company has to foot either part of the full cost of refund. This also includes the customer service team’s cost.
  5. Cost of Salaries for Employees, Rent, and Digital Infrastructure: This is a large line item below the unit economics (gross profit), and companies, therefore, need a large scale or huge unit economics margin to offset this cost and still turn a profit.

Now let try to put some steady-state numbers to get a sense of what can be steady-state numbers for these line items. Considering a low burn scenario for an average of Swiggy and Zomato – around 1Mn orders each per day.

Final words

The average valuation is ~22 times the annual net profit (which is also steady-state). In the words of Kevin O’ Leary from Shark Tank – these valuations are out of planet Earth. Hence either we are going to need a disruption in the business model/ metrics post-CoVid world (reduced orders) or we would see lower valuations going forward.

What do you think about the sky-high valuations of startups in India – even those who are yet to show a profit ever. Let me know in the comments.

Do note that this talks only about the food delivery marketplace and the other business lines have been ignored in its comparison. The numbers are from publicly available data and the trends that I foresee or just my estimations.

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