Billions of dollars have been spent in a quest to build services that move fresh food from one place to another, yet many in the business wonder if they will ever get the economics right
The on-demand app-based ordering popularised food delivery options among busy urbanites and even in smaller cities. Rising digitalisation among millennials, an increasing proportion of working women, and the prevalence of double-income families who prefer eating out have driven online food delivery trends in India.
We have enough and more data that supports how the pandemic propelled online ordering through restaurant aggregator delivery applications, with sales predicted to reach close to $9 billion by 2025. On the face of it, such a surge in orders seems like great news for the restaurant industry, but the reality is much more complicated and painful.
In a country like India, where real estate is expensive, it gets murkier. The food industry’s already-thin margins are undermined by the often-crippling commissions (up to 40%) charged by third-party food aggregators. But how long will this regime of high commission rates exist?
If we had to look at it realistically, in the long run, the survival of the restaurants in this business model seems like an uphill task, that is bound to get more complicated. Let’s look at what some of the obvious issues are and how they can be addressed
What is the incremental value that 3rd party aggregators bring to the table?
The undisguised argument is that a restaurant that is already in business has a number of fixed costs including rent, utilities, Capex investment and other fixed overheads. If the on-premise sales are able to cover the fixed cost component, then there are better margins to play when it comes to off-premise orders. The argument is that the off-premise orders facilitated by the aggregator platforms are 100% incremental and not substitutes. Hence these orders bring in incremental revenue and margin to the restaurant and help better cover the fixed costs as well when needed. But this math does not make sense.
Online ordering sales just aren’t incremental anymore!
The reality of incremental profits falls flat as online ordering outgrows the on-premise dining growth. In most cases, the online orders are no longer incremental orders but are substitute orders and sales are not supplementing anymore. Most of the orders are now coming with up to 40% commission to the aggregator thus causing irreversible damage to the restaurant business. One of the ways to avoid the loss is to increase the menu price and thus the commission impact is passed on to the customer. Some restaurants follow this path. But again, this pricing policy makes them less competitive and thus they end up losing customers to the competition. Hence you see a polarisation of the partner base. The bigger chains would become bigger and garner a larger share of the pie and smaller restaurants fail to survive.
The entire story of discoverability that these aggregator platforms provide is also a big question mark for the restaurants. Recently the Competition Commission of India (CCI) on Monday ordered a probe into allegations of anti-competitive practices against food delivery companies Zomato Ltd and Swiggy.
Does this mean that third-party aggregators are not good for the food industry? Probably no.
Billions of dollars have been spent in a quest to build services that move fresh food from one place to another, yet many in the business wonder if they will ever get the economics right. And despite billions of dollars of investment, food aggregator space has not seen any disruptive innovation, other than delivery efficiency.
Imagine a low commission online ordering system or one that lets you pay a reasonable flat rate for unlimited orders. This will make it easy to grow your off-premise businesses profitably. This would also give more power to the restaurants to digitise operations and manage the logistics efficiently with 3rd party tie-ups. Hence the two most important problems the restaurants are facing in terms of technology and delivery are taken care of. Thus, this would create a level playing field for all the restaurants, get rid of the high commission rate regime and move to a more balanced profitable business.
*The author is Hariprasad Shetty, Co-Founder, Blend For Food
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