Hey,
This time we bring the curtain down on the series covering food delivery and food technology businesses. I lay everything bare with regards to this business and its model. Also, includes a pitch addressing how you can help this situation.
(If you like to read it in the browser, just press the heading on the top šš½)
In one of my previous post on Zomatoās perils, I wrote about the one-sided chakravyuh that Zomato entered into much to its desire for future growth.
Venture Industry is a great accelerator for many types of businesses. But, the core tenet is that it is always going to be an accelerator. Any business, planning to raise venture capital should be prepared to make profits at some point in time. The clock starts ticking once you are at the end of a fund return cycle, presumably around the 7th or 8th year of the fundās tenure. The investors are looking for exits in order to return to their own limited partners ( Investors).
Like I mentioned in the previous post, there has been a considerable concentration in the food delivery business as more and more startups started getting acquired or shut down. The private markets were happy to bet on the two-horse race as long as they both keep expanding the market of food delivery business overall. Or, if they expand their Target Audience market ( TAM) or any other parameter that shows growth at the end of the day.
Recently though, the two companies, Zomato and Swiggy, which seem to have become my obsession, tried launching different verticals in their apps.
Zomato went into making videos of all things food. This is clearly inspired by the likes of Tasty, which is a Buzzfeed brand that creates snack worthy food creation recipes which are watched for their pleasure rather than the recipe. Even Tasty has branched out to varying types of content that Zomato is clearly looking to replicate with its original video series.
Swiggy went the other way and started grocery delivery. Right in the alley of Grofers and Bigbasket. You can order groceries and even medicines from nearby stores and the swiggy rider will deliver it to your location, just like food delivery.
Structural misalignment
All of this pretext was necessary to bring you to the fault lines in the food delivery business I am going to cover in this post.
Plateauing of New Users:
Whenever a company shifts verticals and blurts things like āthis is the natural extension for our customersā and launches completely tangentially thing, exactly how Swiggy did with stores and Zomato did with videos, what they are actually doing is signalling to their investors that the market segment they cater to just expanded and the scope of cross-selling they can do to their existing customers has multiplied. This, instead of mentioning the decline in percentage of user growth.
This narrative is required to raise the next round of capital as the money coffers keep drying up in these loss making businesses. All of this is done because the users are not growing as rapidly as the VCās would have liked.
Selling a new narrative and generating a buzz:
Entities that rely on user behaviour and user orders need to continuously seek their attention. These launches provide the perfect opportunity for these companies to get free publicity to educate their adopters ( Heavy Users ) about the new thing and why they should try it out. Which is anyways the strategy these companies were banking on in the first place. A new source of revenue and a new market to tap provides them enough ammunition to control the narrative among the media, enthusiast and competition.
Cash burn model :
In order to create a new behaviour, the current trend is you subsidise the costs. In the food delivery business, it resulted in launching a new and convenient way to order food.
You look to make the unit economics right once you gain market share large enough that your suppliers are heavily dependant on you.
Now is the time for you to make the unit economics work for you. But, suddenly the suppliers cry foul the moment you look to take your cut to make this work. Like the current ongoing logout campaign between Zomato and NRAI.
Ignoring the Workhorses:
The food delivery is only possible thanks to the delivery partners/riders that these companies rely on to get the job done.
Many of the riders pick this job to get quick and easy money at their own schedules. But, when more and more people become riders, the share of the pie that everyone gets to share becomes smaller and smaller. This is great for the aggregators but not so great for the riders who make money by the order.
In the recent past, this has led to a resentment among the very riders that these companies flaunt as job creation opportunities.
The 4 points that I cover here are the basic structural problems in the functioning of the food delivery business. The incentives for each participant are being subsidised to not stop the growth trajectory required for justifying the cash pile set ablaze to make food delivery business a market in itself. These points need to be addressed by the stakeholders and the aggregators to make this work in the long term. But, before they could come to their senses and try working it out among themselves, we have the regulators knocking on the door.
Regulationās Angle
In the past month, CCI ( Competition Commission of India ) released its preliminary finding report on e-commerce businesses in India.
Under this report, they covered the food sector as well. Here are the findings of the commission :
The fundamental problem of the commission report is its labelling of food delivery service businesses as platforms. Why I have a problem with it is covered extensively in my previous post, Platforms VS aggregators.
I would like to meet in-person the bright intellectuals of E&Y who used word āplatformā to describe these food delivery businesses. And then proceed to give them a course on digital business 101, which probably they wouldnāt have gotten in their illustrious MBA institutes.
The findings from the report are factual and might portray the current fault lines in the business models we have come to associate with the delivery businesses. But not using the apt words to describe the stakeholders is nothing but stupidity. Also, they completely ignored that in this food delivery business there is another stakeholder as well. The riders who are actually getting the job done. Not counting them also shows how misguided the views of the CCI are.
All of this shows the incoherence of the CCI in understanding the dynamics and incentive structure required to make this food delivery space work more sustainably for everyone involved. So, we can comfortably rule out that the intervention from the government is going to help us over here. I just hope it doesnāt make it worse.
āAlright, you have been rambling about this for few posts now. Is there anyway we can change it? If yes, who of us need to do it? Can you get to the point, please?ā
All of the words and thoughts spewing out of Bheemās mind at the moment. The funny thing is that there is only one way out and that is us, customers paying the hidden costs.
The Way out
If the core services that Zomato and Swiggy provide are of value to you, then it is on you to show them some love by parting ways with your money.
How to do that ?
Order food that is not on discount all the time. This leads to an increase in order value, which is healthy metric for them to make their unit economics work.
When looking for a restaurant to dine, donāt use Zomato gold and also leave a review telling how was your dining. This shows engagement and conversion on Zomatoās part to their restaurants. This is as good as it gets for making them profitable.
But, if you are like why would I leave money on the table? You actually are not !
Because, Swiggy will continue to allow itās restaurants to fudge their menu rates in their app so that the percentage cut the Swiggy takes from the restaurant is inadvertently charged to you. Next time you order from a regular restaurant, check the rates when you eat there and when you order.
It will use the data generated from its customers to build its own cloud companies to undercut and undersell its suppliers ( restaurants). Directly hurting your favoured food joints.
The other thing they do is add some opaque packing charges which if you parcel yourself wouldnāt be charged in the first place.
Or Zomato keeps promoting gold even more as it has now extended it to deliveries as well. This results in restaurants footing the bill of the subsidies for the 1+1 offer in your order every time you use Zomato gold. Which in effect makes the restaurants bottom line a loss making proposition.
Do you want this to continue?
The people working for Zomato and Swiggy are not out there to rip you off or the restaurants. They are taking all these steps because their investors need to see growth and you are not paying enough to cover the costs involved.
All of this leads to where we started this whole journey into food delivery business, incentives. None of the incentives required to make this business run profitably are in place at the moment. But, it doesnāt need to be this way.
The Pitch
Convenience has a cost. You donāt get the convenience of getting your food home with a click of a button at no cost, someone is footing the bill for that. Unless you start , these companies have to resort to these hidden techniques to get some money out of your pocket.
Donāt get me wrong when I say that it is up to you and me to tell these companies that it is okay to charge us for the service they provide. If we donāt do that, the regulation will butt in and do it for us. And things are presumably going to be worse, as the elite MBA grads of E&Y have shown us how much they understand food delivery business in the first place.
The people working for both Zomato and Swiggy are some of the brilliant engineers, designers and operation experts we have come to witness. The intuitiveness in their design and the robustness of their applications are commendable. But, the bottom line of the business needs to be green at the end of the day. Like we have seen in the previous posts, if the bottom line is not healthy, one or the other of the stakeholders, mostly suppliers will be short changed with things like Zomato gold and Swiggy Bowl.
If we donāt start now, they will have to use all of their intelligentsia to pay themselves by hurting everyone, also the workhorses, our delivery partners by squeezing out more and more deliveries out of them.
Pay for what you get or else you will be ripped off one way or the other.
Regards,
Vivek
The Duologue is an effort byĀ VivekĀ andĀ BheemĀ to have a dialogue about varying topics.Ā
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