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Food delivery goes on the boil

Players in this space have stayed away from splurging money on discounts, but the entry of Ola and Uber could change that

Saurabh Kochhar
“While everybody has learnt their lessons (on burning cash), it will be interesting to see how well they’ve learnt them” Saurabh Kochhar Co-founder, Foodpanda India
Alnoor Peermohamed Bengaluru
Last Updated : Dec 28 2017 | 12:15 AM IST
Indian start-ups got a lesson in business acumen over the past 18 months as they saw their food tech counterparts shed flab and focus on growth rather than throwing money to buy customer loyalty.

Financial discipline helped the three large food tech players in the market today — Swiggy, Zomato and Foodpanda — emerge as strong players in the meltdown and earn back the trust of investors.

Zomato raised $20 million from existing investors in April, followed by Swiggy raising $80 million in May. Foodpanda’s then owner Rocket Internet said it would invest a portion of the $431 million raised from Naspers in its India unit.

However, with Foodpanda India now being acquired by Ola, the country’s largest ride hailing app, experts fear that the practical lessons learnt by start-ups in restraint could be short-lived. With a commitment to invest $200 million in Foodpanda over the next few years, Ola wants to show it means business.
 
“It’s been one of the fastest growing industries this year and that’s going to continue next year as well. Unit economics for the sector was much better this year, but with Uber and Ola coming in that’s going to go for a toss. When large players are coming in late, they need to catch up and smaller players will try to guard their own base,” says Anil Kumar, CEO of RedSeer Consulting.

This year saw online food ordering and delivery turn into a business from being a proof of concept before. But just a year to 18 months of stability in the space could be too little for securing the future of some of the large players that have emerged. For Ola and its rival, Uber, now is the right time to strike.
“The food market is huge and is a sector where aggregation and delivery are big needs. It was only a matter of time — till customers developed a propensity to pay for such a service and companies understood their core needs — before discounting. The funding drought gave surviving players the opportunity to get into the business mentality,” says Saurabh Kochhar, the outgoing CEO of Foodpanda India.

“While everybody has learnt their lessons (on burning cash), it will be interesting to see how well they’ve learnt them” Saurabh Kochhar Co-founder, Foodpanda India

 
The ride-hailing cousin

Ola isn’t the only ride-hailing firm that is looking to disrupt the online food ordering and delivery space. Globally, all the large players — Uber, Grab, Didi, Lyft, Yandex — have dipped their feet into the food-tech space. While they’re not looking to redefine the way the food itself is made, they feel their vast experience and resources in getting things from point A to point B can disrupt the sector.

Both ride-hailing and food delivery share the same lowest common denominator — efficient local logistics. It also helps that ride-hailing firms have been among the most well-funded private firms on earth, giving them an abundance of resources to branch out and solve problems in affiliate sectors.

There will obviously be complexities, such as a far shorter range for making deliveries and how to maximise the number of orders a delivery agent can service on a single trip. But it is nothing that can’t be solved by throwing a few million dollars on a few star engineers to make tweaks to an already robust platform.
 
Ola’s plans of pumping $200 million (nearly Rs 1,300 crore) into its recently acquired India unit of Foodpanda, has already sent tremors through the food-tech sector. While a portion of that money will undoubtedly be used to upgrade technology, beef up logistics and conduct more door-to-door sales to sign up more restaurants, it is the hidden component of subsidies that scares everyone the most.


 
“While everybody has learnt their lessons, it will be interesting to see how well they’ve learnt them. In any sector, it always happens that one person stretching makes everyone else fall like a pack of cards. So far, it’s all good. There is a splurge of money, but it’s in brand building, discovery and technology, all places which I feel are good investments,” adds Kochhar.

But Ola wants everyone to calm their nerves. When it announced the acquisition of Foodpanda India, Ola boasted about its strong metrics and focus on building a sustainable business, which would benefit from its own learnings in tech and dealing with micro entrepreneurs.
 
“I am excited about our partnership with Delivery Hero as we team up to take Foodpanda India to the next level. As one of India’s pioneers in the food delivery space, Foodpanda has come to be a very efficient and profit focused business over the last couple of years,” Bhavish Aggarwal, co-founder and CEO of Ola, had said while announcing the acquisition.

While experts are almost certain that Uber and Ola will turn on the heat and through discounting will try and grab market share from Swiggy and Zomato, the resultant bloodbath could be very different from what was seen in the past. Apart from a proven business model, the sector is now seeing an influx of private equity investors as opposed to venture capitalists.

“The burn and unit economics will be bad, but it’s now known that once they stop subsidising orders, customers will pay and not run away. Private equity guys have a much more longer horizon and unlike VCs who become jittery with an unproven model, I don’t think that’s going to be a case any longer,” adds Kumar.