Swiggy teases doubling platform fee, likely to offset losses ahead of planned IPO

Bengaluru-based food delivery aggregator and grocery shopping unicorn Swiggy is testing a possible doubling of its platform fee from ₹5 to ₹10 per food order, as per a Moneycontrol report. The move is seen as a strategic effort to reduce losses as the company gears up for its upcoming initial public offering (IPO) later this year, it added.

Swiggy has started hinting at the potential fee hike on its app, targeting a “small set” of users. This follows a similar move in April 2023 when it introduced a nominal fee of ₹2 for a few customers and later expanded it to all customers. The current fee is set at ₹5.

“Swiggy has not changed its platform fee and has no plans for a significant increase in the near term. We're always running small experiments to better understand the consumer’s choices. This was one such experiment, and we may or may not scale it up in the future if it doesn't meet our goal of serving our users in the best way possible. We're always looking for ways to make our platform more affordable, and our latest offering, Pockethero, is another example of that. Pockethero is designed for budget-conscious consumers, and we're expanding it across the country right now,” a spokesperson for Swiggy said.

Challenges in a Slowing Market

The move by Swiggy comes at a time when the food-delivery market is experiencing slower growth. Co-founder and group CEO Sriharsha Majety highlighted the importance of Swiggy Instamart as a growth driver, highlighting the company's efforts to make itself more affordable, as seen in the introduction of Pockethero.

Swiggy's push to increase its user base aligns with its IPO plans later this year, as revealed by Majety. The competitive landscape includes Zomato, which initially stated no intention to introduce a platform fee but later followed Swiggy's path. The move to levy a fee reflects the challenges faced by food delivery companies in a dynamic market.

As the industry continues to evolve, analysts emphasize the need for caution in implementing higher platform fees, considering customer sensitivity to pricing. Both Swiggy and Zomato have experienced success with nominal fees, and finding the right balance is crucial to maintaining customer satisfaction and order frequency.

A Continued Pattern

The company often follows a pattern of teasing higher amounts, offering discounts initially, and then gradually increasing the fee. A Swiggy spokesperson told Moneycontrol the ₹10 fee is part of ongoing experiments to understand consumer preferences.

Earlier in October last year, Swiggy hiked the platform fee on food delivery orders to ₹5 per order, also marking a 50 percent jump then, first implemented in Hyderabad and Bengaluru, but later expanded to all areas of operation across the country.

The Bengaluru-based food delivery aggregator has been applying platform fees on food orders since April 2023. Notably, platform fee is considered as a measure to improve unit economics – a reference to the revenue generated by an entity from each unit of sale or order. Companies such as Uber, BigBasket's BB Now, and Zepto have been imposing this charge on each order.

A Tale of Valuations

US-based asset management company (AMC) Invesco, on January 4 raised Swiggy's valuation to $8.3 billion, for the second consecutive time, as per a regulatory filing.

According to the exchange filing, the valuation of the company is as on October 21, 2023. By the end of this month, Invesco held 28,844 shares in Swiggy, with a total value of $147.6 billion. This equates to a valuation of $8.3 billion for the investment.

The investor holds approximately a 2 percent stake in Swiggy, according to Tracxn, a private markets data provider. Regulatory filings indicate that the cost of acquisition for this stake was approximately $190.5 million.

This marks the second consecutive instance in which Invesco has elevated Swiggy's valuation. In October 2022, it increased Swiggy's valuation by 42 percent, reaching $7.85 billion. It's noteworthy, however, that this adjustment occurred after Swiggy experienced consecutive decreases in valuation.

Even with Invesco's approximately 6 percent increase in Swiggy's valuation, the latest assessment suggests a reduction in the company's worth compared to its valuation of $10.7 billion in January 2022 when it raised $700 million in a funding round led by the US-based AMC.

Investors commonly reference public market valuations when assessing private market companies, and Swiggy is no different. The latest valuation update for Swiggy, at $8.3 billion as of October 2023, reflects a slight increase.

Additional investors in Swiggy, including Baron Capital based in the United States, have recently recalibrated the company's valuation. As of March 2023, Baron Capital has lowered the fair value of Swiggy by almost 40 percent, establishing its valuation at $6.5 billion.