The battle for dominance in India’s fast-growing online food delivery market is back to being a two-way affair between Swiggy and Zomato, as ride-hailing majors Ola and Uber have sharply reduced focus on the cashguzzling sector.
After a year of frenetic cash burn by Ola’s Foodpanda and UberEats, both the mobility companies have rolled back investments in their food business.
While Ola’s pullback is more drastic, Uber has halved the annual allocation for its food-delivery business in India to $90-120 million, sources in the know said.
Uber, which recently debuted on the New York Stock Exchange, has also significantly slashed customer incentives since February. This comes one year after the San Francisco-headquartered cab aggregator earmarked its highest budget globally to the India market to scale up its food business, three people in the know said.
An emailed query to Uber did not elicit a response till press time on Sunday.
‘A Low-margin Business’
ET reported earlier that Ola had pulled the plug on ramping up Foodpanda as a marketplace with plans to largely concentrate on building its private label brands, which include The Great Khichdi Experiment, Lovemade and FLRT.
India’s food delivery market is expected to hit $2.5-3.5 billion by the end of 2021, according estimates by RedSeer Consulting.
Uber’s decision to cut spends comes at a time when talks to sell its food-delivery business in India to Swiggy fell through on the back of its IPO plan, which entailed costcutting by management. Uber’s stock market debut recently turned out to be disappointing, as the stock posted the biggest firstday dollar loss in US IPO history.
“Swiggy and Zomato have deep pockets to burn cash on customer discounting for the foreseeable future, and in this environment, Uber doesn’t believe the current unit economics of the delivery business will be viable to double down in India,” said a person familiar with Uber’s plans.
After stemming cash burn, growth in terms of number of orders has flattened to 13 million orders a month, compared to a few months ago when the business was growing at least 25% every month. In contrast, Zomato and Swiggy clock about 30-35 million orders a month, industry observers said. Foodpanda’s orders are about 3-4 million a month, sources said.
“Last-mile logistics is an operations-heavy, low-margin business. I simply don’t see how the market can sustain so many parallel micro-logistics networks,” said Kartik Hosanagar, professor of technology and digital business at the Wharton School.
A top executive at Uber, however, said with the core ride-hailing business slowing, food delivery was a growth driver for the company in India. “The intent with Eats is to invest rationally and grow the marketplace business, not walk out of the market,” the executive said. For both Ola as well as Uber, ride hailing growth declined to an annual pace of 20-30% to 3.5-4 million in 2018, against 57% growth seen in 2017, industry analysts and company executives said.
Uber’s private label brand Home Cravings, in partnership with cafe chain Café Coffee Day, has also scaled up rapidly, he said. “We continue to be leaders in Indore, Pune, and Ahmedabad; Hyderabad, and Mumbai markets and are neck-and-neck with competition.”
In October, Jason Droege, the global head of UberEats, said it had grown seven-fold in order volume terms in the past six months in India. UberEats is currently present in 37 cities.
Swiggy, Zomato-more attractive
Uber entered the food delivery business in 2017 when the two largest players in the market, Swiggy and Zomato, had already exclusively tied up with major restaurants and chains. Uber then relied heavily on discounting to acquire and retain users. Last year, however, Zomato and Swiggy raised big funding rounds, which gave them a war chest to fight the new players.
“In India, our UberEats offering competes with Swiggy and Zomato, each of which has substantial market-specific knowledge and established relationships with local restaurants, affording them significant product advantages,” Uber cautioned investors in its IPO prospectus. As a result, they may be able to respond more quickly and effectively to changing opportunities, technologies, consumer preferences and regulations, which may make its products less attractive, it said.
“While UberEats established its lead against Foodpanda, Uber will need a lot more capital to fight Swiggy and Zomato,” said another person who has worked closely with the ride-hailing firms.
UberEats has been hit globally by negative contribution margins, which were highest in India, said chief executive Dara Khosrowshahi at an all-hands meeting last week.
Some restaurants that have been working closely with Uber to offer curated menus and offers told ET that sales have slumped in the last two months after customer discounts were cut. At its peak, Uber was offering discounts of up to 60-70%, while Ola’s Foodpanda was running one-rupee campaigns to lure customers.
“This brought in orders, but did not drive repeats, which in this business is largely dependent on restaurant selection and delivery experience,” said an investor who has tracked the segment. “At the same time, Swiggy and Zomato too were offering discounts, so consumers were benefiting while no player was winning.”