Flush with funds that are being used to create infrastructure and acquire customers, food delivery players are scaling up rapidly. From a 15 million run rate order in March 2018, orders are up at around 65 million, according to Kotak Institutional Equities (KIE). This growth has been primarily driven by Swiggy and Zomato, which are currently the two largest food delivery companies. Foodpanda and UberEats are also scaling up operations rapidly.
Given the potential, companies are moving into Tier II cities; encouraged by the success of incumbents, players such as UberEats have entered the fray. KIE estimates continued investments and changes in lifestyle could lead to a five-fold jump in the gross merchandise value (GMV) of food delivery in the next three years. The increasing number of internet users would be a key catalyst for the higher frequency of ordering given the convenience and affordability.
A bigger scale of operations should help the economics of the business driving down last-mile delivery costs though customer acquisitions costs also need to go down. The economics of the food delivery business is dependent on average order values (AOVs), commission rates, cost of delivery and customer acquisition costs. However, despite a significantly higher scale in China, delivery companies are unable to make money thanks to the intense competition and consequently high promotion costs.
KIE believes promotion costs could remain elevated for some time in India as companies invest to expand the market, as well as gain share in what is now a four-player market. Food delivery companies may eventually enter into adjacent businesses—Zomato, for instance, intends to enter into the food events space, while Swiggy intends to enter into other hyperlocal delivery businesses.
A key driver of further scale-up of these businesses is availability of capital. We believe at current scale and commission rates, these companies are making operating losses. They are also spending on customer acquisition in order to grow their target market.