Uber Technologies Inc. has successfully battled regulators, drivers, delivery executives and others in dozens of countries to be the leader. But, in India, it had to finally cede its food delivery business to the customer, who is loyal only to discounts.
The sale of Uber Eats India to Zomato for $300-$350 million in an all-stock deal, after over a year of looking for buyers and haggling over valuation, underscores the challenge of building a sustainable food delivery business in India. More importantly, market leaders and incumbents Swiggy and Zomato have not cracked it either.
“The severe financial stress in Indian food tech is real," said an entrepreneur in the space, requesting anonymity.
Food delivery firms in India have come to realise that delivering food to customers is not profitable, a relatively late realization after burning more than $3 billion of venture capital in pursuit of market domination.
“There are no profits to be made in food delivery for anybody. This is why Swiggy is looking at grocery and non-rush-hour delivery as its long-term goal with Swiggy Stores; and why Zomato has a host of other businesses from the beginning—ads, dining, Zomato Gold, etc.," said a second entrepreneur in the space, also requesting anonymity.
The overestimation of food delivery’s profit potential can be seen across the board with Ola, India’s top cab hailing service, trying twice and failing (Ola Cafe and Foodpanda, across four years), and even Uber entering the market only in mid-2017, when the business-models were already settled.
“Swiggy came after Zomato, but provided a better user experience and was more focused on delivery. But Uber Eats had zero differentiation from the beginning. You can’t enter a market late, have no product differentiation, and still expect to sustain," said the second person cited above.
The eventual presence of only two large players highlights the struggle of food delivery firms to make money in India. The benefits of the latest deal would however accrue to both players, not just Zomato.
“For Swiggy, the competition reduces. They don’t have to compete with someone whose average order values were the lowest ( ₹170); and customers were the most discount-grabbing," the person added. Zomato’s acquisition also cannot be seen as them directly acquiring all of UberEats’ users, said three people close to the company, including the two above.
If the UberEats app tells people to switch to Zomato, some users may not do that, and if they like the Swiggy app better and get better discounts, that is where they will go, said the person quoted above. The initial excitement over India’s food delivery scene, which has now melted into concern, is also visible in the valuations of the companies themselves.
Both Swiggy and Zomato were valued at between $3-3.5 billion in December 2018. Where venture capital rounds generally see valuations double and triple frequently for market leaders, that has not happened in the last 12 months.
Uber’s acquisition of a 10% stake in Zomato as part of the Uber Eats deal has valued Zomato at $3-$3.5 billion.
Swiggy too is currently closing a $300 million round led by existing backers Naspers and Tencent at a “flat round", or the same valuation as the previous round, said the people cited above.
“In their last rounds, everyone got valued at 2x of gross merchandise value (GMV), which is not defensible. So now they are growing into their valuations, which have to be flat for sometime at least," said the first entrepreneur cited above.