Zomato, Swiggy: Has the tide finally turned for India’s food delivery platforms?

With food delivery platforms nearing profitability or already achieving it, has the tide turned for the industry or will ONDC’s entry into the segment make it tougher for the incumbents?

The realm of online food delivery, widely regarded as one of the most well-funded domains in the Indian startup landscape, is finally witnessing a glimmer of profitability. Swiggy and Zomato, the market leaders in this sector, have recently announced their foray into profitability within their respective verticals, marking a significant turning point for the industry.

Sriharsha Majety, the Co-founder and CEO of Swiggy, expressed this milestone in a recent eloquent blog post, elucidating that the company’s food delivery business has achieved profitability as of March 2023, after factoring in all corporate expenses except employee stock option costs. In his own words, he stated, “This is a momentous occasion for the global food delivery industry, not just for Swiggy. We stand among the rare few global food delivery platforms to attain profitability in under nine years since our inception.”

Shortly thereafter, Zomato declared that its core business, excluding quick commerce (Blinkit), has achieved ‘adjusted EBITDA positivity’ in the March quarter. This signifies that the company’s operating earnings, excluding specific non-cash expenditures and one-time charges, exceed its operating expenses. Zomato credits this achievement to its food delivery business, which contributed a commendable adjusted EBITDA of Rs 78 crore during this period.

In a missive to shareholders, Deepinder Goyal, the Co-founder and CEO of Zomato, expounded on the remarkable progress made in the food delivery segment. He conveyed, “Over the past five quarters, we have substantially improved our profit margins while simultaneously solidifying our market position in the food delivery domain. We intend to maintain this trajectory as we strive to enhance the adjusted EBITDA margin (currently at 1.2 percent) and reach our stated objective of surpassing 4-5 percent of the gross order value (GOV).”

Industry experts attribute this remarkable turnaround to the persistent and fruitful efforts of both platforms to increase their take rates or commissions from their restaurant partners. Moreover, the successful implementation of a differential menu pricing strategy, whereby delivery menu prices are adjusted in relation to dine-in menu prices, has contributed to improved profit margins. Substantial reductions in discounts have also played a significant role in bolstering the financial outlook. Karan Taurani, Senior Vice President & Research Analyst at Elara Capital, affirms, “Rather than pursuing customers with low order values, they have focused on enhancing customer retention and increasing order frequency among high-value customers. These factors have been instrumental in improving unit economics.”

Taurani further suggests that the amplified emphasis on profitability ultimately aims to enhance valuations, both for Zomato in the public market and Swiggy in the private market. Zomato’s market capitalization, which peaked at over $15.5 billion in late 2021, has declined by more than half since the beginning of 2022. Swiggy, too, has witnessed valuation markdowns from its investors Baron Capital and Invesco in recent weeks.

Furthermore, the advent of the Online Nutritional Delivery Chain (ONDC) poses a potential threat to the duopoly enjoyed by Zomato and Swiggy in the food delivery space. Although ONDC does not pose an immediate challenge, it does provide restaurants with a certain degree of bargaining power, curbing aggregators’ ability to periodically increase commissions.

Presently, private and public market investors evaluate companies based on their prospects for profitability. Taurani explains, “While GOV growth may hover around 15-20 percent, revenue growth must exceed 20 percent, possibly reaching 25 percent, in conjunction with a consistent path to profitability. This combination should facilitate a reevaluation of valuations, both in stock exchanges and private markets.”

As the Indian food delivery sector witnesses the dawn of profitability, industry players strive to navigate this new landscape, propelled by the desire for sustainable financial growth and increased market valuation.

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