The Strong Growth of India’s Food Delivery Sector Will Likely Continue
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The Indian food market is massive. As of 2019, the organized food market that includes restaurants was worth $22 billion, of which online food delivery only made up about 15%. That shows the huge growth potential of the food delivery sector in the country. In 2020, India’s online food delivery market was valued at approximately $5 billion. The COVID-19 pandemic helped grow the sector, and it’s expected to reach about $21 billion by 2026 at a CAGR (compound annual growth rate) of nearly 30%. Growth is mainly concentrated in large cities such as Mumbai, Delhi, and Bangalore.
The top 7 to 10 cities make up about 70% of the business. The remaining 490 cities fill in the rest but are growing. In the past six months, these smaller cities have seen business double. We’ve seen an aggressive movement of people to smaller cities, and with the hesitancy of online food ordering decreasing, smaller cities are rapidly accelerating. There’s a lot more awareness in these places that people can get food delivered instead of going to a restaurant. Older parents, who are not the original target generation, are starting to place orders. More delivery-oriented brands are seeing opportunities to open.
Currently, the space is dominated by Zomato and Swiggy, and their market share is too close to call a winner at this point. For the past few months, Amazon has been operating in Bangalore — it’s currently a sub 1% player in the market.
Swiggy’s strategy is being the king of convenience. The company is looking for other things to be delivered to customers quickly and to offer convenience — hence why it expanded to grocery concierge services. The publicly stated vision of Zomato, which started out as a restaurant discovery platform, is that it wants to be a farm-to-fork company, with food delivery being a big part of it. It’s also launched a B2B grocery service for restaurants to get them integrated into its network.
At their heart, these businesses are very simple. There’s a customer acquisition funnel; a certain percentage of them will be retained or reactivated monthly. The market has seen acquisition costs as low as 200 rupees and as high as 4,100 rupees, with a large chunk of them in the 200-500 range. As the industry penetrates deeper, that number might increase, because while it’s easier and cheaper to acquire the early adopters, the subsequent users will require more investment to convert.
Here are the factors driving the Indian food delivery sector:
Indian Food Delivery: Business Model
Restaurants pay a percentage of the revenue coming to them as commissions to the platforms. Customers pay delivery fees for the service. Delivery fees are one piece that’s flexible. With customer education, communication, and product, companies can keep increasing fees over time. There are additional monetization measures in place, including leveraging visibility inside the app or leveraging the delivery fleet capability. There’s also levers when people place orders that nudge them to buy additional items, such as a starter or beverage, often with the promise of a discount.
The single largest cost to these companies is paying delivery executives on a per-order basis with a suite of incentives. Other models have been attempted, but approximately 90% of orders today are based on a gig economy format. The second-largest cost is promotions, which varies month to month; for example, India has a cricket festival, the Indian Premier League, during which discounts spike. The other two large costs are customer service, such as having to run a call center or chat-based support when orders go wrong, as well as refunds. Then there are small miscellaneous costs, such as for payment gateways.
Indian Food Delivery: Potential Customers
Remember, the penetration rate of the sector is currently low, as there’s a large chunk of Indian users who are just starting to come online with smartphones. This is one of the reasons why all the food delivery players went from a 10- to 20-city footprint at the start of 2019 to more than 400 cities by the end of that year. Clearly, a lot of people are coming on board for this concept.
Massive discounts are playing a large role in acquiring customers at this stage. The same customer is shopping across different platforms. Only between 25% and 35% of users continue to stick with the platform three months after they’ve been acquired. Companies are dumping money at the top of the funnel, and it’s leaking all the way through without retaining customers.
Indian Food Delivery: Retention Offers
Companies are putting a lot of time, effort, product development, and strategic thinking into retention. For example, Swiggy has a subscription program called “Super” that allows customers to make the delivery fee more affordable by buying packages for one month, three months, or a year. Zomato has Zomato Pro, a subscription/loyalty program.
Even before COVID-19 hit, these companies across the board had already started moving toward more sustainable unit economics and are pretty much in positive territory. Today, the companies probably have the best unit economics they’ve ever had.
Indian Food Delivery: Looking to a Post-COVID-19 World
The pandemic has had mainly two impacts on this industry: order volume, which went down and up, and profitability, which saw a huge upswing.
There are possible tailwinds still to come. The overall health of the economy will likely have an impact on discretionary spending of people over a longer period. If the country recovers well, this won’t be a problem. The second is restaurant mortality. Having a good assortment of restaurants is a non-negotiable for the category to grow. The flip side of that is with the closing of traditional restaurants with large dining spaces, there’s an aggressive shift toward delivery-oriented infrastructure. That means a lot more ghost kitchens, which scale very fast. Big chains are opening more and more outlets during this time to take advantage of the fact that they have the money and staying power. As more delivery-oriented supply exists, that’s only good for consumers in terms of the assortment options.
Both companies also offer good benefits to their delivery executives, such as life insurance and group accident covers, so if anyone is injured at work and hospitalized, they get cashless cover. These benefits are already in place, so at no additional cost, they likely bring peace of mind to delivery executives.
This industry will likely grow as India’s social and economic climate improves and street food vendors and their ilk move into the organized food space. The rate of growth of the restaurant market could vary over time, but it would certainly grow faster than the overall food delivery sector itself.
This food delivery industry article is adapted from the GLG Remote Roundtable “Evolution of India’s Food Delivery.” If you would like access to events like this or would like to speak with food delivery industry experts like Anirudh Vijayaraghavan or any of our more than 900,000 industry experts, contact us.