Muktsar in Punjab, with a population of 1.5 lakh, is not a city one would think would be on the radar of India’s big internet companies that are helping restaurants deliver to homes through mobile applications. But it is. For two reasons. One, it is the city where online food delivery and restaurant discovery company Zomato’s founder & CEO Deepinder Goyal was born and brought up. Two, the city is witnessing a battle for market domination between Gurgaon-based Zomato and its Bengaluru-based rival Swiggy as they seek to penetrate the hinterlands.
Zomato is already in more than 165 cities and towns, adding 150 since July 2018. Swiggy expanded from 30 cities in October 2018 to 100 last week, a month earlier than its target of March end. Smaller rival Foodpanda, owned by ride hailing major Ola, is also delivering in 100 cities now. Uber Eats is present in over 40 cities.
“I believe in a country like India coverage can easily be 500 cities,” said Mohit Gupta, CEO of Zomato, adding that they will need to come up with more innovative models as they go deeper.
Muktsar is the smallest city that Swiggy has expanded to. Since launching there in January, it has already hit a peak of 1,000 orders a day. Zomato, which has been in the town longer, has been able to hit a peak of 3,500 orders on a Sunday. Bathinda, located about 53 km from Muktsar and with a population of about 3 lakh, hit orders of 4,600 on the first weekend Zomato launched in the city.
Much of the excitement in online food ordering in these cities is because of the discounts Zomato and Swiggy are offering. But both companies feel their business has enormous potential in small towns. Till two years ago, food delivery was considered a metro phenomenon.
Swiggy and Zomato, who have between them raised $2 billion since last year, are not showing any signs of slowing down this expansion. Both are adding new markets every 1 to 2 days.
For Swiggy, cities beyond the top 10 already account for about 20-25% of its orders and the contribution continues to grow. Zomato, which calls the cities beyond the top 15 as emerging cities, expects them to constitute 50% of the order volume by the end of the year. Both are doing about 30-35 million orders each a month.
Food delivery companies have been around for over five years. What has changed now is the deep penetration of cheap internet, which started with the launch of Reliance Jio in late 2016.
For Swiggy, which had started television commercials last year along with a major campaign during IPL, this led to an increase in brand awareness across the country. In June 2018, it was present in only 15 cities but had started seeing its mobile application being downloaded by millions across the country. That provided an indication of the potential demand.
“We have a database called registered, not purchased,” said Vivek Sunder, COO at Swiggy who was earlier with Procter & Gamble (P&G). There were 3-4 lakh people in this database.
The company matched downloads with demographic and income data of cities, besides inputs from partners like payment gateways and smartphone makers. They then started their expansion.
Zomato had launched a pilot in Nagpur in June, which convinced the company to start rolling out operations across the country. The company had tried expansion into smaller cities in 2015, but had to pull out of Lucknow, Coimbatore, Kochi and Indore by the end of the year because of lack of orders. Now it does 500 times the orders per month in these four cities than when it exited from them in late 2015. What has also changed for Zomato is the business model. It now has its own delivery fleet in these cities. It does not rely on the restaurant staff to fulfil orders.
Both these companies also now have deep pocketed investors who can fund the expansion. For Zomato, it is Chinese payments giant Ant Financial, and for Swiggy, it is South Africa’s Naspers.
The demand in the smaller cities have caught the players by surprise. Jaipur with a population of 37 lakh does about 45,000-50,000 orders a day across all food delivery platfor ms.
“They can very easily reach 1% of the population as against a 2-3% penetration in big cities in orders per day,” said Abhishek Bansal, CEO of Shadowfax, a third-party delivery company which works with food delivery and online grocery players. “The thinking right now is that whoever can capture these cities first will become the market leader in them because there is first mover advantage in food delivery.”
Companies have started signing up exclusivity agreements with restaurants and giving a minimum guarantee of orders. This is giving early entrants significant edge, according to company executives and analysts tracking the space.
Not A Flag–planting Exercise
The companies are also tweaking business models, relying more on technology and keeping the fixed costs low.
Swiggy has used a hub and spoke model, where a larger city like Chandigarh oversees operations in smaller cities close to it like Patiala and Ambala. So it does not need to hire a city management team, including HR and finance executives. It does not need an office in these towns. The company also used universities in Manipal and Varanasi as captive consumer bases and then started operations in these cities. It will be in 30 campuses by the end of the month.
Cost of delivery personnel is also lower in these cities by 30-50% and so is attrition. Distances travelled are shorter, leading to lower fuel costs.
“My unit economics in smaller towns is actually better than my unit economics in metros. My P&L (profit & loss) for the last 150 towns is better than for the top 15 towns,” said Gupta, who worked for a decade at online travel company Makemytrip before joining Zomato last year.
But one challenge in these towns is building supply – finding enough restaurants and making sure they can scale as demand picks up. Both players are working on bringing restaurants from other cities to the smaller towns. Zomato is also helping restaurants register with FSSAI to maintain hygiene standards.
Even as they roll out these initiatives, they are watching to see these don’t turn into vanity exercises – plant a flag for the sake of planting it, and being forced to pull it down later. They are also trying to ensure that if they are forced to shut, the losses would be small.
“What we need is ambition, tempered with very close monitoring (of how the business is shaping up),” said Sunder.
Volumes Bigger Than Online Retail
The dynamics of the industry are already changing. The top seven cities – Delhi-NCR, Mumbai, Bengaluru, Chennai, Pune, Hyderabad and Kolkata – used to contribute 85-90% of the volumes. This is now down to 65-70%, according to Redseer Consulting. The next set of 15-20 emerging cities – like Jaipur, Ahmedabad, Visakhapatnam and Coimbatore – have hit or are close to reaching 40,000-60,000 orders a day. Even etailing started with metros but now get the majority of orders from tier-II cities and beyond.
“There was a general trend of ordering from restaurants through phones,” said Rohan Agarwal, engagement manager at Redseer. It’s now moving to apps.
In 2018, there were 100-110 million users transacting via e-commerce platforms, and food delivery was only a quarter of it. Today, food delivery is bigger, with 2 million transactions a day, compared to 1.7-1.8 million transactions for e-tail, according to estimates by Redseer.
In total transaction value and geographic reach, e-tailing is still much bigger. But food delivery companies are pushing the envelope further. “After every 10-15 cities, we go 50 cities ahead, which we call the forward scout, and we watch them for 3-4 weeks. So far we haven’t hit a wall,” said Gupta. The latest experiment for Zomato is Tuni, a town in Andhra Pradesh with a population of just over 50,000.