Investors continue to back food delivery platforms given the spread of the internet should boost online ordering.
Swiggy on Thursday gobbled up a billion dollars fed to it by Naspers and others in a deal enough to give the competition stomach cramps. Although the food delivery platform set up shop in mid-2014, it had attracted just about $500 million.
Persons close to the development claimed the business was now valued at an estimated $3.3 billion. For perspective, GrubHub in the US has a market capitalisation of $6.6 billion; its revenues in 2017 were $683 million, a 38% jump over 2016.
Swiggy could use the money given the business reported losses of `640 crore in the three years to March 2018, on revenues of close to Rs 600 crore.
Moreover, competitors Zomato and Foodpanda too are loading up on cash. Analysts say the surge in fund raising by both food and grocery delivery players has “materially altered the narrative in these spaces and that they are spending heavily on customer acquisition once again”. As they scale up, the losses could widen, at least in the next couple of years.
But there’s good reason for investors to hang in there. India’s food delivery market is a small fraction of that in the US where it is pegged at upwards of $250 billion. Analysts peg the takeaways plus deliveries segment at just about $3 billion, of which, online ordering market is a small fraction.
Since the delivery market is estimated to be about a fourth of the takeaway space and traffic on India’s streets isn’t about to vanish, the demand for deliveries, analysts say, cannot but go up. Another interesting data point shows that less than a third of India’s online customer base orders food on the internet. That’s partly because delivery companies service just about 6-8 cities.
Abneesh Roy, who tracks the internet space at Edelweiss, believes Swiggy will use the cash to set up dark kitchens, a strategy that should work well and, for some time, give quick service restaurants like Domino’s and McDonald’s sleepless nights. “The funds would also be used to advertise the service and also on discounts,” Roy said.
With the larger players getting big chunks of capital, consolidation in the sector is set to continue. A bunch of players has already fallen by the wayside or been swallowed up. Analysts say it is a very difficult business and takes years to scale up, increase the average value of orders and to reduce delivery costs.
“No player is breaking even as of now since the volume of orders is sub-optimal and the order values too are low,” said an analyst with a brokerage firm.
Avendus Capital was the investment banker for the transaction. Other investors who participated in the latest series of funding include DST Global, Meituan- Dianping and Coatue Management, along with new investors Tencent, Hillhouse Capital and Wellington Management Company.
The Bengaluru-based unicorn said the funds would be used to address gaps in supply through delivery-only kitchens. Additionally, Swiggy will use the capital to hire talent, especially for machine learning and engineering roles across mid and senior levels. The company will further strengthen its technology backbone and focus on building a next-generation AI-driven platform for hyperlocal discovery and on-demand delivery.