Food delivery fight grips small-town India10 min read . Updated: 01 Jul 2019, 11:13 PM IST
Chasing India’s next wave of internet users, Swiggy and Zomato take the battle to tier-II and III cities
Bengaluru: Four months ago, it was a homecoming of sorts for 25-year-old Ankush Mohanrao. For over a year, he had been working as a trainee engineer at a manufacturing company in Pune, some 500 kilometres (km) away from Amravati, his hometown in Maharashtra. Bored out of his wits with the nine-to-five routine, he resigned in February and returned home, but with another job at hand. Thanks to Swiggy’s entry into Amravati, Mohanrao is now a delivery executive. Being able to make more money, along with the privilege of staying with his family, the decision to be a delivery partner at Swiggy was a no-brainer.
In another instance, about 400km from Amravati, one can spot 23-year-old Jyoti Dewangan zooming around the city of Raipur on her Hero Pleasure scooter delivering food orders made through Zomato. She joined them in August 2018.
Dewangan was previously a teacher at a local girls college, but after discovering the job opportunity through WhatsApp, she decided to take the plunge. Ten months hence, Dewangan delivers 18-20 orders daily making up to ₹8,000 per week, a significant jump from the paltry ₹2,500 she was drawing previously.
Instances like these are the vanguard of a food delivery boom that is increasingly taking over small-town India. After establishing themselves in the metros as the go-to apps for food ordering and delivery, Swiggy and Zomato have, for the past several months, begun pitched battles to win over the country’s newest internet users residing in tier-II cities like Raipur, Cuttack, and Kolhapur.
In 2019 alone, Swiggy and Zomato have launched operations in 185 and 300 towns and cities, respectively. For Swiggy, the new cities form 15% of their business, while for Zomato non-metros contribute 40% of the order volume.
“The two players know that there is a demand in smaller towns, and this aggressive expansion is a race to simply tap into that demand," said Arpan Sheth, a partner at consulting firm Bain and Co. “The business model is definitely viable in smaller towns and cities where the population is around 1 lakh (100,000) but its sustainability beyond that is to be seen."
While the expansion has led to job creation, a proliferation of restaurants, and increased ease in getting home delivery of food in smaller towns, the push comes with its own set of unique Indian challenges—supply constraints, infrastructure, and culture, among other things.
Unlike the e-commerce expansion to the hinterland, which was fraught with fears of sales cannibalization of the offline incumbents, food delivery startups’ entry into smaller towns has been a trouble-free ride so far.
Swiggy follows a two-step process while expanding to a small town. First, it provides more laborious training to restaurants and delivery partners compared to their counterparts in the city. Second, it focuses on building scale in operations and increase the restaurant’s reach to a larger base of consumers— including optimizing kitchens, resource planning, among others. “In smaller towns, the biggest issue is that there are limited restaurants which means lesser supply," said the founder of a restaurant partner, requesting anonymity. “So, what platforms like Swiggy do in small towns and cities is that they partner with local brands, exclusively through Swiggy Access, which provides 10-12 kitchens a cooking space under one roof."
This is the playbook Swiggy has followed in metros as well, but experts tracking the food tech space believe that this will work better in smaller towns due to low competition. Swiggy claims to have around 110,000 restaurants live across 245 cities. In mid-2018, Swiggy was present in only 16 cities. “We’re expanding to one new city every day," said Vivek Sunder, chief operating officer of Swiggy.
For Zomato, which started expanding beyond tier-I cities during the summer of 2018, it was the success of their pilot in Nagpur that convinced them that smaller cities are ready to accept online food delivery. Zomato claims some smaller cities are already exceeding the metros in terms of orders per 100,000 population.
For instance, Patiala with a population of over 400,000 does as many orders per unit population as Bengaluru with a population of over 12 million. Similarly, Anand, a small city in Gujarat with a population of over 200,000, is already operating at three times the orders per unit population as compared to Delhi-NCR with a population of 22 million.
Given the pace of growth, “we expect these (new) cities to constitute more than half of the order volume by the end of the year", said Mohit Gupta, chief executive of food delivery at Zomato. Bhubaneswar, Mangaluru, Patiala, Manipal, Bathinda, Karnal, and Roorkee are other cities outpacing the metros in terms of growth.
Zomato calls this strategy of entering into small towns as the “forward scout" and has launched services in close to 407 cities, from 25 cities in June 2018.
“After expanding in the neighbouring 10-15 cities, we go 50 cities ahead, set up our operations there and watch it for three-four weeks," said Zomato’s Gupta. “This has helped us in determining the demand in that state fairly."
But expansion comes with its set of challenges. The most prominent one being inadequate infrastructure. “For instance, there is a high demand for delivery partner jobs in smaller cities but there is a lack of people with driving licences. While we are looking for ways to solve this by creating a fast-track registration programme for licences, we are also using this opportunity to encourage people to adopt manual and electric bicycles for delivery," said Gupta.
Swiggy, too, is using bicycles to deliver food. Around 20% of their delivery partners in tier-II and III cities use bicycles for delivery, and over 1.5 million orders are done on bicycles each month, as of March.
Smaller competitors such as Uber Eats are present in 38 cities with an increased focus on tier-II and beyond as they believe they still have a chance to compete with top players that are well-established in metros. “As more and more smaller towns urbanize, we’re seeing exponential growth in these cities—several of these tried food delivery for the first time on Uber Eats," said Bhavik Rathod, head of Uber Eats.
Ola’s Foodpanda, on the other hand, has shut down its marketplace operations as it expands its in-house brand of kitchens.
While in the metros, ordering-in is the new going out, things are slightly different in smaller towns. Most people still prefer to go out and eat, said several experts Mint spoke with.
For instance, Burger Singh, which gets 70% of its business though deliveries in Delhi-NCR, gets only about 40% of business through deliveries in Nagpur, and this share has shot up from 20% over the last six-eight months as food tech companies have become more aggressive in smaller cities.
“In smaller cities, delivery orders have gone up disproportionately over the last six-eight months," said Kabir Jeet Singh, founder of Burger Singh. “But, this doesn’t mean dine-in has come down in small towns. This just means that the food delivery companies are being used (for the first time) by new internet users."
There are also instances where one family member would head over to the restaurant to purchase takeaways for the entire family. In such cases, the families have now turned to food delivery apps. Other kinds of users in small towns, who have turned to ordering online, include the ones who used the “tiffin" services.
A married couple residing in Bhubaneswar now orders food through either Swiggy or Zomato at least once a week since their launch last year. The food-ordering apps have replaced their habit of going to a restaurant to pick up a takeaway or send someone to fetch it for them.
“It could be something as elaborate as a dinner or just a milkshake from Keventers," said the 50-something couple cited above, requesting anonymity. “What’s great about Swiggy and Zomato in our city is that it’s feasible to get food delivered from restaurants that one wouldn’t be able to visit due to the long distance."
There are also instances of “class dynamics" cropping up for delivery partners in small towns. A few months ago, Providence Mall in Puducherry was in the eye of the storm when a video of an on-duty Zomato delivery personnel getting insulted and kicked out of the mall went viral.
“People like you cannot enter this place," one of the management staff is seen saying in the viral video. The delivery partner sporting a Zomato T-shirt is seen arguing with the authorities over not being offered parking space, and not being allowed direct access inside the mall despite frequent trips to pick up food at the mall’s store.
“If you remove this (Zomato) T-shirt, the respect you get will be different (and then you can enter the mall)," the mall authorities are seen saying in the video.
Similarly, even Raipur’s Dewangan feels that she is “not valued as a delivery partner" by customers. These smaller cities largely untouched by the chatter of startups are still very much in touch with their societal prejudices, say some of the delivery executives Mint spoke with.
But women like Dewangan remain resolute about making the job count.
As for the delivery executive in Puducherry, Zomato had to intervene. “Zomato engaged with the mall authorities and worked out a solution where the delivery partners would park their vehicles in a space close to the mall," said a person familiar with the matter, requesting anonymity.
Both Zomato and Swiggy are convinced about the opportunity they are creating. Swiggy claims to have India’s largest delivery fleet with over 200,000 monthly active delivery partners (made deliveries in the past month) during June. As for Zomato, of the 230,000 delivery partners, almost 40% are based in the new cities, up from 12% in September 2018.
Viability of business model
All the consumer internet firms—from e-commerce to food tech—have shifted focus to tier-II and beyond to capture the next wave of internet users. But analysts believe that among all the internet commerce businesses, including grocery or product commerce, food tech has proven to be one of the most promising business models in India—especially with respect to viability, scope and depth of the market. “People are still questioning if online grocery will be sustainable, but with food delivery, it is more than clear now," said an investor in one of the food tech firms, requesting anonymity. “Even as metro markets continue to grow, both (Swiggy and Zomato) have started focusing on smaller cities, where the growth opportunity is much higher."
The food tech market has witnessed stupendous growth over the last few years riding on the back of discounts and aggressive expansion. Online food delivery gross merchandise value has increased to $1.7 billion in 2018, from $750 million in 2017, according to RedSeer Consulting. This is expected to go up further by three times.
And the top two contenders have recently raised a high amount of funding—with Swiggy securing $1 billion in December and Zomato receiving almost $40 million in February. While the firms started expanding to smaller cities by offering discounts, analysts and the companies clarify that the discounts in smaller cities are the same as the ones being offered in the metros.
“Discounts are merely a mechanism to encourage user participation and cannot explain the phenomenal demand we have witnessed in these cities," added Zomato’s Gupta.
That said, experts tracking the food tech space ring warning bells on the viability of a business that is largely based on markets with low purchasing power, leading to low average order value coupled with equal or high logistics and customer acquisition costs.
“The two firms seem to be creating the market in these areas and a large part of their growth is coming from beyond the metros," said an investor tracking the food delivery space, requesting anonymity.
“But, in smaller towns, the average order value could be 20-30% lower when compared with metros. So, if they are making less money with the same logistics and customer acquisition costs, I am not sure how sustainable this can be."