The sanity in the discount-led growth in the foodtech segment is expected to be visible in 2020. This is likely to happen on the back of lesser discounts offered etc.
Even as the foodtech war in India intensifies between Tencent-backed Swiggy and Alibaba-backed Zomato with Uber Eats now out of the competition, the sanity in the discount-led growth in the segment is expected to be visible in 2020. This is likely to happen on the back of lesser discounts offered as the average discounts in the foodtech segment have gone down by 200 basis points since mid-2019 apart from expanding cloud kitchen to boost platform commissions by enabling restaurants with more business through this model, and optimising fulfilment cost by using bicycles for deliveries, according to a RedSeer report. This is expected to improve the negative unit economics in the foodtech business from minus 23 per cent in 2015 to minus 4 per cent in 2020.
“Profitability is the reason discounts will go,” Debabrat Mishra, Partner, Deloitte told Financial Express Online. Foodtech companies have been stressing on reducing losses and burns and optimising costs to scale. For instance, Zomato, in its half-yearly report last year for FY20 had announced a fall in monthly burn rate to 60 per cent from what it was six months ago. “We achieved tremendous results in optimising our costs, without affecting new product launches or innovation,” Goyal said in the report while claiming 225 per cent increase in its revenue from $63 million in the first half (H1) of FY18 to $205 million in H1 FY20 in its half-yearly report. From $45 million in March, the burn was down to $20 million in October 2019, Sanjeev Bikhchandani, Founder, Info Edge had told analysts in an earnings call. Info Edge is a prominent strategic investor in Zomato. Also, Goyal had earlier said that the company is expecting to be profitable by the end of 2020.
However, lowering discounts in foodtech segment will also bring down the growth in the number of orders. While the annual foodtech orders grew from 15 million in 2015 to 350 million in 2018, and 1,100 million in 2019, this year the growth will moderate to just 1,500 orders — declining to just 36 per cent from 205 per cent in 2019 and 171 per cent in 2018, according to RedSeer data. “This will have more of an impact in slowing growth in newer markets, for example, Tier II and beyond cities that are more discount dependent currently. The other reason is simply the base effect- the market is now 3x of 2018, so the same scorching pace of growth was anyway unlikely to continue,” the report said.
On the cloud kitchen part, both Swiggy and Zomato have been expanding it to boost their food delivery businesses. While Zomato had 663 kitchen units and kiosks across 50 cities till October 2019, Swiggy in November last year had claimed setting-up over 1,000 kitchens for its close to 1.6 lakh restaurants listed on its platform with an investment of more than Rs 175 crore. In fact, “foodtech startups will partner with restaurant brands to first, create innovative new brand collaborations thus increasing choice for customers. Second, to reduce overheads by moving from retail real estate to cloud kitchen models. This will help the industry move away from discounts and still grow. The future growth of foodtech will be far more stable and profitable,” said Mishra. Nonetheless, coming back to discounts, one may question as to what extent the industry could take away discounts or increase the price given the price-sensitivity of the market.