India’s food-delivery industry, brimming again with funds, will need to do much more to survive in the long run than just consolidate.
After an initial hype and a slump that followed, the last 18 months have seen a significant increase in mergers and acquisitions (M&A) in the space.
Most recently, on Aug. 02, the country’s leading food-delivery platform, Swiggy, said it had acquired Mumbai-based Scootsy for Rs50 crore ($7.3 million). Scootsy delivers food from premium eateries, and also other items like gifts and clothes.
This is the second acquisition by four-year-old Swiggy and marks the 11th M&A deal in the food-delivery space in India since January 2017, data from startup tracker Tracxn showed.
“Consolidation is happening as the big boys need more growth and smaller ones are looking to exit,” said Yugal Joshi, vice-president at Texas-based Everest Group. ”Hyper-local businesses (small food-delivery companies like Scootsy) may earn better revenue per order but they can’t scale up. They don’t have the economies of scale.”
A slew of other deals is apparently cooking, too.
Foodpanda, which was bought by Ola in December 2017, is reportedly in talks to acquire struggling food-tech firm Holachef. And earlier this year, the rumour mills were abuzz about a potential merger between the two food tech biggies, Swiggy and Zomato.
The heightened M&A activity is the outcome of funding returning to the sector.
Funding deliveries
Fund inflows to India’s food-delivery sector have been through the roof this year.
By Aug. 01, the amount raised in the food-tech industry (including delivery, produce and sell, restaurant review and table reservation) reached $480 million, over three times more than the $135 million the sector amassed in all of 2017, Tracxn data show.
A significant portion of this went to food-delivery platforms, including Swiggy, which raised $210 million from Naspers and Meituan-Dianping in June. In this round, the company was valued at over $1 billion, making it India’s 11th unicorn.
“The sector, on the whole, is seeing both consolidations as well as inflows of institutional money. Other than Uber Eats, all others have picked up something,” said Ankur Nigam, a partner at consulting firm KPMG.
Given such investor interest, the industry is all set to explode in the coming years. At $700 million, food-tech is among the country’s fastest-growing startup sectors, expected to reach $2.5 billion in turnover by 2021.
But experts believe companies that are just making deliveries are not yet set for long-term success.
Cooking up margins
Just getting food to customers from restaurants is not a sustainable business model, analysts warn. The costs run high while the margins are paper-thin as consumers won’t pay for deliveries beyond just a small amount.
Apart from salary costs, these companies also need to invest in uniforms and insulated bags, besides sharing revenue with restaurants.
“(That’s) not a solid business model to begin with,” Nigam said. “Add to that attrition levels of almost 20%-25%…and the cost of the team required to manage a hub, and you are deeper in the red.”
For the bigger players, it gets harder as they compete in an overcrowded market where several hyper-local companies are focused only on one or two cities. Across the country, there were over 400 food-delivery apps functioning between 2013 and 2016.
With entry barriers low, there is also always a looming fear of newer players coming in. Already, new firms like artificial intelligence-based Dishq and B2B player HungerBox are drawing in keen investors.
“What stops Amazon from entering this market? When Ola can enter through Foodpanda, no reason Amazon cannot,” Joshi said, adding that big internet companies already have a significant brand advantage and can crowd out others.
So, firms must find ways to set themselves apart. One such segment could be running the kitchens themselves, which the current big four—Uber Eats, Zomato, Swiggy, and Foodpanda—haven’t yet explored. Margins in kitchen-based food-tech businesses are upwards of 35%, Nigam estimated.
“The differentiated platforms that have taken on making food at scale, such as Faasos and Box8, have managed to remain independent and deliver true consumer and shareholder value,” said Sandeep Murthy, partner at venture capital firm Lightbox, a backer of Faasos.