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Why covid-19 has been a shot in the arm for online food delivery firms

The funding comes at a time when food delivery platforms such as Swiggy and Zomato are facing severe disruptions in their business due to the three-week lockdown.afp (MINT_PRINT)Premium
The funding comes at a time when food delivery platforms such as Swiggy and Zomato are facing severe disruptions in their business due to the three-week lockdown.afp (MINT_PRINT)

  • Cumulatively, improving demand for food delivery companies, which in turn would boost the GMVs along with a drop in the delivery costs, should lead to a gradual improvement in profitability

The initial stages of the covid-19 pandemic and the ensuing strict lockdown had an adverse impact on Indian online food delivery companies, broadly dominated by Zomato and Swiggy. Consumers had shied away from online food ordering due to apprehensions on safety and a general preference for home-cooked food. But things picked up later on and the recovery has been faster. Analysts reckon the pandemic has helped companies improve unit economics and add more consumers, as the frequency to dine out has dropped.

Analysts from Kotak Institutional Equities wrote in a report on 24 January, “We now see several covid-related tailwinds benefiting the industry: (1) greater propensity of restaurants to be available for delivery (several fine-dining restaurants have begun listing on delivery platforms), (2) generally a greater inclination by consumers to place higher value orders (evidenced by the fact that food delivery GMVs have recovered faster to pre-Covid levels than orders), and (3) sharply improved unit economics driven by greater acceptance of convenience/delivery fee charged by delivery companies." GMV is gross merchandise value.

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“Covid has acted as a catalyst as it helped good uptake in new users with low CAC (customer acquisition cost) & hence likely to stick longer," said BofA Securities analysts in a report on 13 January. The broking firm added, “The recovery post initial lockdown phase has been faster for the Food-tech industry with volumes back to pre-Covid levels by Oct-20 led by less dining out & festive season. Our Sept-20 survey indicated 69% of users were worried about eating out."

Cumulatively, improving demand for food delivery companies, which in turn would boost the GMVs along with a drop in the delivery costs, should lead to a gradual improvement in profitability. As Kotak points out, “This will drive Ebitda breakeven in the next 2-3 years, signaling a turnaround from the past two years when delivery companies incurred heavy losses. Per industry discussions, food delivery companies are generating positive contribution margins in FY2021 which can likely sustain." Ebitda is earnings before interest, tax, depreciation and amortization; a key measure of profitability for companies.

Analysts from Sanford C. Bernstein (India) Pvt. Ltd, in a report on 20 January said, “Zomato has recovered from Covid with GMV increasing from about 20% of pre Covid levels in March/April to about 125% of pre Covid levels in Dec-2020."

This augurs well, especially considering Zomato plans to go for an initial public offering this year. To be sure, a good deal of the optimism reflects in the soaring valuations of Info Edge (India) Ltd, which holds 19.3% stake in Zomato. For perspective: Info Edge shares have increased as much as 65% from its pre-covid highs seen in February 2020.

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