As a strategy consultant, one of my requisites includes garnering knowledge and keeping myself apprised about the latest updates about different business sectors. This happens to be more true for tech-based companies and platforms which also happens to be my key domain of interest and focus.
However, there is one sector in particular which has raised the bars of my curiosity. The sector I am talking about is "food-tech". I will be giving the reasons for my elevated curiosity levels in a while.
First, I would like to talk about what just happened in this sector. This $1.5 billion sector in India has already hit the turmoil back in 2015-16 and is on the path of consolidation just like the online cab market or e-commerce sector. The predominant names or the emerging winners have been Swiggy and Zomato. Definitely, one can't deny the credit to their awesome tech and enhanced customer service.
However, credit should also be given to the enormous chunks of investments made by VCs to revive this sector. This is exactly what has elevated my curiosity levels. In a span of just 5 months, Swiggy has gobbled up more than $300 million in series F and series G funding.
If we look deeper then we might find that Swiggy's operational model is primarily that of a last-mile logistics company fused with a technology platform where the customers can order food from the list and categories of restaurants. Even Zomato altered the operational and revenue model to focus more on last-mile logistics.
So, the next big question, which arose in my mind is that this operational model would be generating shit loads of money for both the companies. I mean, that is exactly what VCs would have analyzed and charted out a growth plan basis their profits both these companies would be flying high. However, I gathered data and ran some numbers before concluding in my opinion. What I did find actually dazed me!!
Whatever the delivery food tech companies make goes out as operational cost immediately, leaving nothing as profit for these delivery ventures. Just to break even on their operational costs these delivery ventures will switch to the %ge model with a number around 25%(revenue/order) (but even if you break even as a business what are you worth? It’s Nothing). Also, 25% revenue sharing is a ridiculously high number.
I want to showcase my findings through an interactive case study (attached as a video). In this case study, I evaluated the option where the delivery ventures can try to reduce their operational costs and cater to maximum demographics in a given geography by outsourcing their delivery.
This option was evaluated against the option of having an in-house delivery team. However, the findings showed that there won't be any scope left for making any kind of profits. Further, once you start giving any incentives to the delivery executives (which Swiggy and Zomato already give) these companies would start making heavy losses.
Then I researched the option of optimizing the efficiency of delivery executives. This means that somehow if these companies learn the tricks of streamlining the deliveries from the very efficient delivery executives of Domino's in global markets such as the US (where per hour delivery rate=1.6), they can surely thrive and fight back at some point.
Again, the numbers confounded me. The paramount reason being that once we start optimizing the efficiency the operational costs would also start increasing. One might argue that we are increasing the number of orders as well. Even in that case, the scope of making profits would be null because the variable cost-factor starts to increase rapidly.
The only option left in this scenario is to increase the percentage cut which these companies charge from the restaurant per order. That number lies in the declamatory range of 25%-30%. That would be an enormous jump from the already existing numbers of (18%-20%)/order. In my opinion, no restaurant would be willing to share such a gigantic share of revenues.
Yet, these delivery ventures are not only thriving but have moved on to become unicorns in the Indian markets. This is also despite the fact that apart from the operational costs, these companies invest in technology costs, administrative costs, product management costs, marketing/brand building and various other cost heads under customer acquisition. So, what's the big bet? Why are the VCs happily pouring money into these startups?
1) These ventures will achieve such a high density and volume of orders that the same delivery boy will be fulfilling multiple orders to the same (and nearby) location to be picked up from restaurants that are also close by in the same time window.
That, in my opinion, will be farcical presumption considering the fact, how Indian consumers have been fickle minded about pricing. However, just like in the case of Ola and Uber, we might not be left with an option once the industry completely saturates. Afterall, the strategy is, "Too many options is a bad bad thing".
2) In this millennial culture, "Data is Oil". These companies can start monetizing the huge database of their customers for cross-selling.
3) These ventures believe that they will not be delivering just food. But instead, gradually expand into delivering anything and everything hyperlocal. The competition between the likes of Swiggy and BigBasket would be nonetheless very exciting.
Please note: Through my case study I have asked the viewer to solve certain questions and drive insights through them. Even though I have tried to be as pragmatic as possible, I might have missed something. Feel free to validate or give suggestions if you find any lacunas. Afterall, it's just a one man's opinion.