While talking with some of my friends and asking about how Swiggy and Zomato operate and how they are able to provide such a large discount?
The common answer I get is they have large funding from Investors across the globe and they operating on the cash burn model. This means they are using Investor’s money to give heavy discounts, In hope that customers will get a habit of using these food delivery apps then they can cash in this opportunity. But Indian consumers are price sensitive. Would the frequency of ordering food from these apps sustain if they stop giving discounts? Investors investing a huge chunk of money didn’t actually know these things?
To answer all these questions lets understand the actual business model of Swiggy/Zomato either of them uses the same business model.
They have three different verticals first is food delivery, second is advertising services, third is business consultancy services.
Let’s start with Food delivery on an average these apps are providing 30%-40% discount per order, here lies the catch if a dish is available on a restaurant for 100 then on these apps it will be already 15%-20% inflated so half of the discount is already being covered. If we ask a question to a restaurant owner that which case is more profitable to him people eating at their place or parcel(take away) system. The common answer would be take away as it saves electricity, waiter and other associated costs. So restaurant owner is giving a discount to these apps to increase their order frequency and at the same time reduce their cost. So coming back to a 100Rs dish example these apps would get that dish in 80-85Rs. This discount is treated as a commission from the restaurant.
So, by now we know these apps are not burning cash by giving heavy discounts it’s a practical business model, then how these companies are posting heavy losses. The losses come from the app maintenance charges, data storage cost, advertising cost, R&D cost, delivery boy charges as they are paying more than industry prices to retain their employees.
Let’s now talk about the second business vertical which is advertising service and priority listings. Apps give options for the restaurant to appear first when people are typing in a particular food, not only these restaurants have an option for promotion in between apps to increase their visibility. For these types of services, Zomato is charging heavy fees from these restaurants. Let’s look again at this if a restaurant is earning half of its revenue from Zomato which means they are heavily dependent on Zomato to earn more they will advertise more and Zomato will use this fee money to give more discount for that particular restaurants and this cycle will continue.
So, we finally come to the last and most interesting business vertical of these apps which is business consultancy service. With a lot of data about consumer purchase and consumer behavior they can help a new restaurant by sharing the relevant data, or they can start their own food house and cash on it as they knew everything about their customers. They knew which type of food is prevalent in which locality and by what time they order the most. With this data power, investors are so bullish on these companies.