Seventeen online food service and delivery startups shut shop in 2017. Not a bad year in a market that’s turned into a graveyard of new ventures.
That’s because of the 971 such ventures that started up in the last three years, 174 shuttered business. A lot of the rest are small local businesses that do not possibly classify as startups, angel investor Ajeet Khurana said. Zomato, the billion-dollar restaurant discovery platform, stays in the lead, betting on new revenue streams. Ordering and delivery app Swiggy is playing catch-up, and no other venture comes close.
The sobering phase comes after startups burnt funds on discounts and cashbacks to acquire users in a nascent market for two years. What drew a horde of founders to a crowded space is the size of the opportunity. India’s food services market was estimated at Rs 3 lakh crore last year with online ventures contributing only 2 percent, according to National Restaurant Association of India. It’s expected to grow to Rs 5 lakh crore by 2021.
When funds dried up, smaller ventures wound up first. The bigger names followed. Among them were TinyOwl, backed by Sequoia Capital; Dazo which had investments from Amazon India chief Amit Agarwal and Google India head Rajan Anandan; Spoonjoy, backed by SAIF Parners; and iTiffin with cricketer Robin Uthappa as one of the investors. The most recent to shut down was Yumist, which counted Ronnie Screwvala’s Unilazer Ventures, Silicon Valley investor Steven Lurie and Orios Venture Partners as investors.
The consolidation was much-needed, said Harminder Sahni, founder and managing partner at retail consultant Wazir Advisors. “Only serious players are in the sector now, which is helping them focus on the business more rather discounting to acquire customers.”
That’s helped Zomato for sure. The company said earlier this year that its cash burn fell 81 percent to $12 million in the year ended March. The startup, which has raised roughly $225 million so far, narrowed losses to Rs 389 crore from Rs 590 crore in the year-ago period, according to the annual report of its largest shareholder Info Edge (India) Ltd.
Losses widened for Naspers and Accel Partners-backed Swiggy, according to its filings with the Registrar of Companies. The pace has slowed down though. Delhivery Hero-owned Foodpanda’s losses too narrowed, according to data provided by the company. That’s after the food delivery platform scaled back its operations.
“The sanity in the market is because only two companies are left in the space—Swiggy and Zomato,” said Mohan Kumar, partner at Norwest Venture Partners, an investor in Swiggy. “They have broken out and achieved scale, and everyone else who tried neither achieved scale nor were able to raise funds.”
That’s partly because startups in the food tech space are bringing in newer revenue streams from both customers and owners, Wazir Advisors’ Sahni said. “And they no longer deliver free.”
Zomato follows a mix of restaurant-owned and Zomato-provided last-mile logistics, with a minimum delivery price set by restaurants. Swiggy has its own motorcycle fleet and charges a delivery fee for orders below a certain amount in select cities, with no minimum order value. It introduced a flat surge delivery fee on certain holidays. Foodpanda has its own delivery team and charges based on where a restaurant is located.
Customers are accepting the change, said Roshan Agrawal, engagement manager at RedSeer Consulting. The important point is surge charges and delivery fee neither had a negative impact nor did they affect startups’ costs.
There is also a greater focus on advertising. Zomato's advertising revenue grew by 58 percent year-on-year to $38 million in the year to March, the company said in a blogpost. In September, its CEO Deepinder Goyal wrote in a blogpost that the “core advertising business in India, Southeast Asia and the Middle East" is generating enough cash to cover for investments, and it is profitable.
Swiggy declined to comment on the initiatives the company has taken in the last one year. Zomato didn’t respond to emailed queries. Foodpanda said it’s growing on a par with the industry and has been focusing on per unit economics to drive profits.
Several new mini-kitchens that only take online orders have come up. Fasoos, Freshmenu, Box8, Holachef, Curefit, Twigly and InnerChef have increased competition.
Yet, costs of setting up multiple kitchens may make it difficult for these startups to scale up quickly, Roshan Agarwal of RedSeer Consulting said.
The numbers suggest so. Box8’s revenue rose 63 percent in the 12 months to March compared to Swiggy’s 500 percent jump. Moreover, Zomato and Swiggy have started their own cloud kitchens.
“Until they have a mix of content, aggregation and cloud kitchen, it will be difficult to make money,” Satish Meena, senior forecast analyst at Forrester Research, said. Standalone food delivery is not possible without access to funds, he said.
That hasn’t deterred well-funded new challengers from venturing in. UberEats is luring customers with one-dollar meals delivered for Re 1. Listings portal Quikr too joined the fray.
Wazir Advisors’ Sahni doesn’t see any of them coming close to Zomato. “I doubt if there is room for another unicorn.”
(Updates an earlier version to add statement from Foodpanda in para 11)