SynopsisSwiggy and Zomato are two sides of a coin if one looks closely at their business playbook. IPO-bound Zomato wants to be good at what it does best. Whereas, Swiggy wants to leverage its logistics prowess and experiment with multiple businesses. Side-hustles are good for growth. But as Swiggy continues to punch, will it remain standing before the bout ends?
Shane Warne and Anil Kumble are two of the greatest leg spinners to have played cricket. Both were contemporaries. Kumble kept it simple and subtle. He would knock out batsmen through shrewd changes in pace and bounce. Shane Warne had a wider repertoire – flipper, top-spinner, googly, massive leg break et al – and he used that to knock batsmen over.
If you think about it, you can apply the same analogy to Zomato and Swiggy, the two most storied food delivery companies in India. After a brutal seven-year dustup amongst UberEats, FoodPanda, TinyOwl, Runnr, TastyKhana, JustEats, Hungry Bells, FoodMonk, and Delyver finally the sector has its duopoly with just Swiggy and Zomato left standing.
Now, Zomato is largely a food aggregator and a delivery company. It has investments in Hyperpure (B2B supplies to hotels and restaurants) but it is rather nascent.
Swiggy is far more creative and doesn’t want to be just a food-delivery company. It has chinna chinna aasai of becoming a hyperlocal boss, an online grocery store, helping offline restaurants with tech and brand, and of course launching its own food brands through a network of owned “dark” or “cloud” kitchens.
Swiggy, like Warne, is experimental. It keeps trying new things all the time. Zomato is more like Kumble, tightly focused on a particular thing and making subtle changes around it.
Nevertheless, the big question is: how many of these Swiggy experiments are going to become USD100 million revenue generators?
Consider this: Swiggy has raised almost USD2.5 billion in external capital in the past six years and so it is not surprising that it wants to look beyond food-delivery.
There have been precedents in the form of Meituan Dianping and DoorDash.
Zomato itself has tried multiple products already – from a restaurant SaaS service to supply-chain vertical Hyperpure.
Interestingly, there isn’t much of a difference when one looks at the reported valuation of the two companies. Zomato was valued at USD5.4 billion in February 2021, and two months later, Swiggy raised a fresh round which valued it at USD5 billion.
Are current investors of Swiggy not attributing any significant present value to expected future cash flows from these new experiments? If they did, using the sum of parts method, the valuation for Swiggy should be higher by at least a margin.
The latter, dark kitchens, is based on the understanding of the data that Swiggy has from its mobile app on what people are ordering. The former is using the data and technology APIs to help restaurants go direct-to-consumer and grab their mindshare.
The second axis is the tremendous logistics capability it has built over the years. It uses the same delivery fleet to do hyperlocal delivery of goods and groceries. Here, it is shipping ingredients such as babycorn, mushrooms, rather than the finished product that is pasta or a pizza.
For hyperlocal deliveries, Swiggy went through several reiterations. It started with Swiggy Dash, talk of which started as far back as 2018. This was conceptualised as a separate app, but the plan never got off the ground. The nomenclature changed a few times, from Express to Urban Kirana, before the company settled with Stores.
In February 2019, Stores had a soft launch in Bangalore, and soon it entered other metros. Post pandemic, it became “grocery”.
A former employee closely involved with the pilot says, “Not everyone wants to eat out everyday. So, we had to find ways to make them come to the app everyday. Very early on, we shifted our mindset from food to convenience. Second, we would keep rechecking if a certain experiment would make money in the future.”
So you want to sell groceries online?
But “money in the future” is still a pipedream for many, and it was time to look back at lessons from old timers like BigBasket and Grofers, e-grocers who have burnt their fingers with the marketplace model.
Come 2020, and it was time for “Instamart”, where Swiggy held stock in dark warehouses and promised 45-minute delivery when it launched.
“Genie and Instamart help them unlock more value for the delivery fleet, but it doesn’t make sense if you have to pay stores commission. Which is why they restarted it with the dark stores model, like Grofers. And then you can throw in high margin items such as meat when the backend is the same,” the former employee mentioned above adds.
A senior executive of the company said that Swiggy had been planning a Dunzo-like makeover much before the hyperlocal play took off in March 2020. Swiggy Go, the pick-and-drop service had been in works since early 2019. Rechristened as Swiggy Genie, the vertical is seeing traction post incessant lockdowns, but now it faces the heat from Dunzo, besides startups like WeFast and Pidge.
How does Swiggy split delivery partners among standard food-delivery operations and on-demand pick-and-drop service?
“There is some demarcation within the fleet. The top 20% of the fleet would be used for Stores or Genie. Even though their efficiency would be less, they would get a bonus. This was the tradeoff for growth,” a former employee says.
Theoretically, Swiggy has successfully played catch-up with Google-backed Dunzo by covering all bases. However, while Dunzo has been playing around with words for some meme-worthy notifications, Swiggy has been caught up in the nomenclature and you’d be hard pressed to differentiate between the many launches thrown at you.
Hyperlocal will take all your cash
Hyperlocal delivery, however, is a long-haul game and we are far from figuring out how to make money from it. BigBasket had tried it with Express, but soon switched to slotted deliveries for better unit economics.
Pidge, another player in the game, has some insights on a better model. “We are the only radius-free on demand pick-and-drop service. So, we charge on the basis of kilometres covered. Since that is the common denominator, that’s how we compensate our riders, instead of taking the number of orders fulfilled,” says Ratnesh Verma, founder, Pidge, which offers radius-free pick-and-drop service.
“We received an email from Harsha (Majety) and Nandan asking us to think what we can do if a customer wants something, but no restaurant gives it to them.”
— Swiggy’s former employeeFor on-demand orders, it is more expensive because the first and the last runs to complete the delivery from point A to point B are dry runs. And more variable points means the business stands to lose more money.
Planned deliveries iron out these uncertainties, which is why they cost less to fulfil. According to Srinivas Madhavam of Exprs, a warehouse-tech company, e-commerce costs the least because the delivery partner can fulfil almost 50 orders a day. Since the originating point is fixed here, a higher number of orders are fulfilled at the drop point. Hence, dry runs are minimum.
Food-delivery costs INR35-INR40, with the partner conducting 18-20 orders a day. Here, technology can be used to determine possible origin points, and some clubbing of orders is also possible.
On-demand is most expensive, going up to INR100 per order in fulfilment cost, with just 15-18 orders in a day. The variables are the highest in this case, with two dry runs.
Many companies globally have tried to build workarounds to minimise this cost. Reef Technologies in the US built micro-warehouses out of parking lots to scale pick up points exponentially. Meituan Dianping tried to make grocery delivery work through the community group buying. Both methods either minimise or eliminate unfruitful dry runs. But it’s still early days for them, and it’s unlikely it’ll trickle down to India soon and make on-demand deliveries economically viable.
Apart from facing fierce competition and low margins on hyperlocal there are experiments around the core food business that Swiggy has attempted.
Mr Restaurateur I wanna hold your hand
In 2017, Swiggy built the New Supply division to identify regions where there is demand but existing service providers do not exist. This is where Swiggy would swoop in to establish itself as a service provider.
Access and cloud kitchens were brought under this initiative. Invite-only brands were now able to increase their delivery footprint by utilising the kitchen infrastructure that Swiggy set up for them. This plug-and-play network of dark kitchens saw early success, and at its peak, had over 1,000 kitchens at a cost of nearly INR200 crore.
As Swiggy gained intelligence of demand and supply in regions, it decided to take it up by a notch.
“We received an email from Harsha (Majety) and Nandan asking us to think what we can do if a customer wants something, but no restaurant gives it to them,” a former employee involved with the division said.
Swiggy had already tasted success with The Bowl Company by this time, and it was time to double down its efforts.
“They wanted to go for the occasion-play rather than the cuisine-play – that is what Faasos had been doing. For example, there were no one-bowl meals earlier – these could be Indian or continental,” a employee for the private labels team said.
Even now, Homely and The Bowl Company continue to be the crowd pullers, besides several other brands including Heaven N Hell, Telugu Vantillu, Bong-O-Rosh, Breakfast Kitchen, and Freshery. Swiggy also acquired 48East, a delivery-only food brand focussed on Asian cuisine.
With new launches, come great responsibilities and movements at the executive-level.
Co-founder Joseph Cherian joined the New Supply team as COO, while chef and co-founder Nabhojit Ghosh became the Head of Culinary Innovation and New Brands at the same vertical. The New Supply division was helmed by Vishal Bhatia for three years before he left in November 2020.
While there was pushback from restaurants who believed that this meant Swiggy’s own brands had a disproportionate advantage on the platform, Swiggy responded by saying that it was only filling gaps that the current partners did not service.
Not all Access experiments turned out successful, despite all wisdom on cloud kitchens suggesting so. Case in point – Vasudev Adiga’s.
Vasudev Adiga’s popular food brands from Bangalore launched takeaways in Delhi-NCR under Swiggy’s Access initiative.
“You can’t simply bring a brand to another city and expect it to work. You need to bring in the infrastructure beyond kitchens as well. If the food has to be standardised, you need a central kitchen or commissary that ships to the pods (cloud kitchens). And these commissaries have to be customised for every kitchen. That was a huge investment for Adiga’s. These modalities did not work,” said a former executive closely involved with scaling Access beyond Bangalore. “It can probably work for fried foods that have a longer shelf life, but not for ready consumption items,” the person added.
There was also BrandWorks, which is supposed to help other brands build restaurateurs build more brands to ship more orders per kitchen and achieve efficiency. Swiggy claims to have co-created over 100 brands through this partnership.
However, the pandemic put an abrupt halt to this promising start. “After the initial lockdowns, it was difficult to predict what would happen. So, the first instinct was to preserve cash and not open more kitchens. Access was where they spent most money anyway,” a former employee who previously worked with the vertical said.
Swiggy could have used this opportunity to double down on its kitchens and make themselves indispensable to restaurants (if not replace them completely), but clearly that is not what transpired.
I see your Gold and raise you to Super
Tangential experiments aside, Swiggy also had to build additional layers to its core so that it can increase the order volume and make money with scale. The first obvious step in this direction was building a loyalty program.
Swiggy launched Super in July 2018. The membership waived off delivery fee and surcharge for INR99 a month. This coincided with Zomato introducing Piggybank, which rewards users with “Z coins” for repeated ordering and it allowed for future redemption. Both attempted to create stickiness, but it was clear that they didn’t do it very well, Piggybank was worse than Super.
When Super did not make much of a splash in its earlier form, it made a quiet re-entry with a “Gold” makeover. After extreme backlash and a widely followed Log Out campaign, Zomato was forced to make changes to its blockbuster product.
The new version, Pro, is a shadow of its former self. It offers discounts ranging from 10% to 40% (with an upper limit on the maximum discount). The main hook of Gold had been the 1+1 dish proposition on dining out.
Restaurants, already miffed with the deep discounting, did not take it well when the 1+1 offer was extended to home delivery as well.
Incidentally, Super has now taken over the mantle of 1+1, for delivery. The new three-tiered Super subscription program starts at INR99 a month, offers limited free deliveries along with the 1+1 offer on select restaurants.
This begs the question – why is Swiggy taking the path where Zomato faced a dead-end?
Every quarter, Swiggy tries a “Big Bet” that would help improve its unit economics. This is how Swiggy defines it – Big Bet is a sharp initiative that we estimate can be done within a quarter with a visible impact on our bottom line. The idea is to have all teams focus on these chosen, few important projects each quarter and make them successful.
Swiggy’s bets are coming in thick and fast, but the odds of winning do not seem to be improving fast enough.
Both Kumble and Warne went on to take more than 600 and 700 test wickets respectively. Kumble through simplicity and Warne through variety.
Swiggy will need to take its experiments out of the lab and turn them into marketplace money-spinners.
For the record, former English cricketer Mike Gatting and the world know what Warne was capable of, but then you have to be a Warne first.
(Graphics by Sadhana Saxena and Mohammad Arshad)
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