Swiggy, India’s largest online food-delivery platform, is seeking to raise about $900 million on the back of unprecedented investor interest at a $2.5-3 billion valuation.
The company, which is currently in talks to raise funds, posted revenue of ₹468 crores in the year ended 31 March with losses nearly doubled to ₹397 crores, compared with ₹146 crores of revenue in the previous year with loss capped at ₹205 crores, showed regulatory documents from business intelligence platform Tofler.
Bengaluru-based Swiggy leads the online food delivery market in India with a 35-38% market share, followed by Zomato at 25-30%, according to a recent report from RedSeer Consulting, an internet-focused consulting firm in India.
Today, we decode the business strategy of Swiggy, its latest move to Cloud Kitchens and rerouting and the associated dynamics of the Online Food Ordering industry.
Swiggy majorly earns revenue from its restaurant partners by way of commission. Typically, these range from 15-30% of the delivery amount depending on multiple factors like standing of the restaurant, size of bill and nature of relationship. The restaurant is promised a better brand standing and customer outreach using Swiggy’s model however, it comes with a caveat. Swiggy does not share user data with the restaurant partner. While this protects Swiggy’s advantage in the relationship, giving it leverage over the partner, it harms the long term business interests of the restaurant partner as the only advertising medium that the partner has to reach the consumers, is Swiggy.
This gives Swiggy an exploitative arbitrage, and the bigger the size of the book grows from Swiggy, the more powerful it makes the brand. Moving away from Swiggy after a sizeable chunk of the business is derived from it hence makes the restaurant less and less powerful as opposed to size contributing to growth of power. One might argue that the restaurant, if it pulls out, will cause loss of revenue to Swiggy. While that is true, the amount of value of that relationship is much higher for the restaurant as a consumer is much more likely to retain usage of the platform of Swiggy and change restaurant and food combinations than specifically putting in effort to access the same restaurant. This inertia of at least 66.9% (age group of 25-64 years) of the market of OLO erodes long term value for restaurant.
This is what leads us to the next concept i.e. rerouting. Reports have indicated the Swiggy is using the aforementioned leverage to drive consumers from their brand partners to their own brands. The classic case of the same occurred recently in Bangalore’s hotspot where Swiggy’s own The Bowl Company preyed on the consumers of the existing business partners of Swiggy. This runs counter to the reason of why partners joined Swiggy in the first place, to bolster revenue. With Swiggy preying on the consumers it generated for the partners, the partners have grown wary of the relationship.
The two key components of this rerouting strategy are Data and Restaurants. The company is leveraging the data of orders fulfilled, terms searched and other parameters to plan for offerings under its subsidiary restaurants effectively. This mapped consumer presence offering is exactly what a regular restaurant will not be able to achieve whereas the subsidiary firms will be agile and provide faster response to changing demands of consumers.
In terms of market access, Swiggy has partnered with a lot of restaurants in multiple areas but they are trying to tap into newer markets, these two markets will prove pivotal to its growth strategy as they will require less alteration and serve as key revenue streams.
Swiggy is eyeing college canteens and office canteens for further expansion of operations. The business model here is quite unique. The firm is not partnering with colleges on a tender basis but instead seeking students to market its ready to eat meal packets. This avoids bureaucratic costs and employee costs as the employee manning these stations is none other than a college student! The corporate canteens run by Swiggy are on a pilot basis. Its main aim is to reduce waiting times and streamline order flows.
Swiggy is also running a new model, of cloud kitchens. Under the same, labeled as Swiggy Access, the firm is offering restaurants a chance to use ready to move in kitchens, free of rent and overheads but with only their equipment. This comes with two conditions, the kitchens will be delivery only and Swiggy will levy higher charges on these restaurants. Swiggy is using its data analytics to recommend specific partners for certain areas which ensures order frequency and profitability of restaurant partners. When consumer tastes alter, the restaurants can easily move out, or stop operations and newer restaurants can take their place. This allows restaurants to not continue operations or face high exit costs.
On the flip side, the cloud kitchen partners will be extremely dependent on Swiggy. If Swiggy were to change terms or anything of the like, the costs of and the impact on the partner will be drastic as they will have no alternatives to continue serving in the area. Swiggy will further be able to tailor its own brands to the area requirement based on the kitchen model and grow the subsidiaries.
Swiggy has also launched the Swiggy Capital program to provide interest free loans to partners. This will help them sustain in days of low operations or incur no working capital financing costs.
Swiggy currently pays driver partners for delivery based on the kilometers driven. The vehicle and the costs of operation of the vehicle are fully financed by the rider. Currently, rider partners earn anywhere between quarter and half a lakh rupees per month. These, noticeably so, are extremely high salaries. Swiggy is using the same strategy as Uber and Ola did, paying higher salaries in initial days and reducing it over time.
Swiggy has also taken cognizance of the bleeding and is trying to make local hotspots for take away, ideally removing delivery charges in the process. Zomato successfully exploited this; however, it doled out huge discounts in the process to make consumers move to take food. All that would eventually matter in this case is the marginal utility derived from not expending delivery costs.
The bigger issue is however with Swiggy offering huge discounts. While today these discounts are effectively bolstering profits and revenues for business partners of the firm, they also are making the consumer more and more averse to paying for food. The consumer today has associated the discount with the actual pricing of the restaurant’s offering thereby lowering its perceptive value in the consumer’s eyes. This will have a very detrimental impact for smaller firms who offer these discounts regularly as consumers will refuse to pay retail prices for those offerings. Hence, once this discounting ends, there is a high chance that the propensity to pay will have reduced and Swiggy’s own offerings, priced based on order data will only survive this bloodbath.
Long term, while Swiggy as a delivering service may not be able to earn enough by way of profits, the utility of the plethora of data at its disposal and positioning of restaurants and cloud kitchens will ensure the growth of the firm.
Collegiate Entrepreneurs' Organization, Delhi University 