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Customer side economics
What you see below in the image is the cost of two basic food items from a decently popular restaurant in Bangalore. The image on the left is the bill when we purchased the food items at the restaurant (irrespective of whether it is a takeaway or eaten there) ; the right side is the bill when we order the items from the same restaurant via Swiggy. Note: Nearly double the amount charged.



Replace this restaurant with any other restaurant in your location, and I'd make a fair guess the numbers will play out more or less the same.


Supplier (/restaurant) side ecomomics
A close friend recently closed his restaurant business. To my knowledge when I met him a few years ago, his business was doing roaring sales, and he had even opened up multiple outlets. When I met him recently, this is what he had to say about this business model

1. Swiggy demands a cut of 20% to 30% of the bill for its service. The actual figure depends on a mix of factors so let's assume 25%

2. Remember when you do a search for a particular food item or scroll through the restaurant list? That order of results shown is decided by Swiggy. Swiggy offers higher placement to a restaurant business for an additional 10% charge

3. Then there's the discounts offered to the end customer. Swiggy repeatedly recommends (read: pushes hard) the businesses to offer as much discount as possible. On an average, he had to offer 15% - 20% to keep up his sales (/growth).

And just like that, he was losing 55% of his sales revenue even before his own internal costs are considered. Swiggy itself was garnering 35% of this for itself. The situation was more or less same for Zomato too although he mainly worked with Swiggy apparently.

In his 2+ years of operating in this food business, he was only able to generate some basic level of profit once he opened up a retail outlet and in-person business (and very much profitable) picked up. But then Covid happened and the whole thing went for a toss; and he had to close shop. He just couldn't work on a model that only depends on restaurant aggregators.


- - - - - - - - - -

And then we hear news results like these

Swiggy FY22 loss doubles to 3628 cr

Zomato Q3 losses 346 cr

Now I'm pretty sure that many restaurants are doing a much better job in leveraging Swiggy/Zomato than my friend, but on face value, one would expect the aggregator to be best placed for gaining the most out of it. And yet the results are far away from it.

So where is the money going and who's making the gains? Any bhpians who are / have been active in this area or with knowledge of it can shed some light.

Considering that I order from Swiggy & Zomato very rarely, I may not be the best person to answer this conundrum. However I suspect that the additional money is largely being paid out to the delivery persons. I have had some discussions with some of them in the past and their commissions and incentives can be a pretty amount.

Depending on the number of deliveries done per day they could earn upto 50000 per month too. See link below.

https://www.livemint.com/Companies/c...ition-gro.html

Hence always better to order via the restaurant directly.

No useful insights to add, but have spoken to a couple of restaurant owners. Every item has to be marked up by 20-30% as that is the cut the aggregator demands. Beyond this all the actual aggregator charges visible to the customer adds up. The convenience fee, distance fee, tip to the delivery partner and what not. The end bill is atleast 40-50% more than what it would be if you directly ordered or went and picked up.

Of course that is the premium you pay for the sheer convenience and punctuality of the aggregators that has reeled us in and made us so used to it that it is hard to get out even knowing that we now pay insane charges for the convenience the aggregator model provides.

As far as I have read, the delivery partner incentives have only reduced.

So yes, volumes are up, margins are higher than ever, you have got the customer locked in, delivery partner incentives are only going down, so a fair question - Where is the cash burn happening then?

What the above articles don’t tell you is that Swiggy is valued at $10.7 billion and Zomato at $5.6 billion. This is despite the losses of Swiggy having doubled in FY 2022 and that of Zomato also increasing substantially.

The game is customer acquistion regardless of loss. This is done by extending huge discounts to customers that are funded by VC’s.

There is no way individual restaurants can hope to compete with them. Even large hotel chains are with them.

It is not just Swiggy and Zomato, but almost every aggregator business is at a loss with VC’s funding the loss and looking at the “bigger picture”.

The valuation of Swiggy increases with customer acquisition regardless of cost. So lets say, the current valuation of $10.7 billion increases to $15 billion in a year or two. A few VC’s would exit and new ones enter and the game goes on.

The business of the company is not a concern they are in the business of buying and selling stakes in companies.

Think UBER - loss making company since inception but a darling of VC’s

I am using Swiggy to order both my meals (Lunch + Dinner) on daily basis last 5yrs staying in Pune. All I will say is this:

+ Few places mark up rates for Swiggy / Zomato (Mostly the local VFM eateries). Most mid - high range places have same price as that in menu.

+ Newly opened cloud kitchens and other restaurants give deep discounts to attract customers. This way one can not only explore but save a lot on food as well.

+ Many places have big packing charge & taxes, however they are mostly offset by the discounts they provide.

+ Things are VFM only if the free delivery subscription is taken. I order at least 1-3 times a day so my yearly subscription save me a lot of $

+ Few places like Subway never gives discount or occasionally does. Then the markup of 20-30rs, is still cheaper than taking the car out, considering the value of fuel and your time.


Attaching receipts of food I have regularly on discount :

Local : Veg / Non Veg Restaurant




Goa Fish Resto


Pizza Hut


Irani Cafe


Box8

Most of the new-age startups are riding high on VC money. At this stage, their main focus is on acquiring market share, i.e, making the customer buy from them instead of the restaurant by offering deep discounts, convenience, and a smooth customer experience.
Zomato and Swiggy spend hundreds of crores of rupees every year on marketing, customer acquisition, and retention. Most consumers stick with one brand if offered a pleasant experience, which is the foundation on which any business is built.

So where is the money going and who's making the gains?

EVERYONE!

Consumers win because of increased competition. Honestly, we have more options than we need. The option of online payments sweetens the deal further. Unmatched convenience, isn't it?

The Rise of Cloud Kitchens
Who would have thought about running a restaurant business without even seeing your customer's face rl:
The money which would otherwise have been spent on expensive road-facing real estate can be used to attain visibility on the app.


With regards to Zomato and Swiggy, both have become multi-billion dollar companies with their founders becoming deemed celebrities :)

The key question, I think, is what are the fixed costs and variable costs for Swiggy/Zomato.

I assume that the delivery partners are paid a fixed amount + a variable based on distance, and not as a % of bill value. Basing delivery partner fee per transaction on the basis of bill value would be unfair because the delivery partner spends the same amount of fuel & time irrespective of the bill value.

Other costs for S/Z, like IT, Admin, Advertising, employee costs etc are fixed costs per transaction, i.e. doesn't depend on bill value.

In effect, if the bill value is low S/Z would be in loss for that transaction. To illustrate from your example, if you had ordered one paratha instead of two, I guess S/Z would be in a loss. When they expand to new towns, they would be in huge losses initially as they would also be paying base salaries to the delivery partners, even if transaction numbers and value are low. All these would compound the losses for S/Z.

I don't work in this industry. This is just my analysis and I may be totally wrong.

Hello,

I have some information that may answer your questions. According to available data, Swiggy reportedly generated around 6,000 crore rupees in revenue in 2022, but also incurred expenses of approximately 10,000 crore rupees. A breakdown of their revenue and spending can be found below.

On the other hand, Zerodha reportedly generated 5,000 crore rupees in revenue in the same year, but their expenses were much lower, totaling only 2,000 crore rupees. This is a good example of how a financially sound company's statistics may differ from those of other companies.

https://entrackr.com/2023/01/swiggys...-losses-up-2x/
https://entrackr.com/2023/01/zerodha...rofit-in-fy22/







I hope this helps answer your questions.

Best regards,
Dev

I know of at least one small darshini hotel owner in Bangalore who has refused to go the Zomato/Swiggy way. He patiently explained to me that he prioritizes making a good profit over expansion. Bottom lines and not top lines was his mantra. I couldn't agree with him more.

In the long run, they are going to cause permanent damage to the restaurant business. That is my belief since the very beginning. It is becoming more than a convenience and ending up skewing the pricing for everyone leading to a reduction in profitability and footfalls. Currently, sometimes, discount coupons bring the prices at par with self-pickup. If they mark up the prices, then they are making people comfortable with an inflated price without actually telling them. As they show the price with the name of the restaurant, it looks as if the price is being charged by the restaurant, when actually, it is not the case. This is not a very fair trade practice IMO, especially for items that don't come with an MRP.

On the other hand, if the restaurant pays Swiggy the commission from its margins without swiggy inflating the price on its app, it effectively means that the customers who pick up by themselves or dine in at the same prices are at a loss as they are paying the same amount even if the mediator is absent and the delivery service is not being availed.

Consider the Zomato Gold kind of program which is their next step. If the same stuff is available at the 1+1 offer, then if I walk into the same restaurant without a Zomato Gold membership, it means I am overpaying and in a way cross-subsidizing for the Zomato/Swiggy customer. The restaurant will be compelled to increase prices to avoid making a loss with the 1+1 offer. Customers without memberships will be paying highly inflated prices for the same service. I would rather choose not to visit that kind of place. This cross-subsidization will lead to lower footfalls and more people and restaurants becoming dependent on an unwanted mediator. I hope restaurant associations are wise enough to anticipate this. They will keep doing sweet talking to justify their presence between consumers and restaurants. Many-a-time, restaurants would ask me if I came through any app. If I came through Dineout, etc., I would get a discount. No discounts for being loyal and walking in there without involving Dineout. Then I reduced my visits to those restaurants as I didn't know how many types of discounts they were offering and on which apps.

Then there are cloud kitchens which totally rely on these aggregators. Once I tried to pick up myself as the kitchen was close to my home but to my horror, I saw that there was no discount given and the same price was charged as was visible on the apps. Had I ordered via Swiggy, I would have paid the same amount and the item would have been delivered home. In fact, after applying coupons I would have actually paid slightly less. After that, I stopped ordering from there as their swiggy prices were close to premium restaurant dine in prices.

A few years back, the big restaurant chain - Paradise in Hyderabad, published a different menu for delivery. For a long time, both, the takeaway and delivery menus were available on their websites and a substantial difference was visible in the prices. Then, it was not only removed from their website, but from all over the internet. Now only the delivery menu (and dine in menu) is seen online and the takeaway menu can only be seen if you physically visit the restaurant pick up counter to order and pick up the food. Looks like delivery companies pressurised them to remove the takeaway menu as it was detrimental to their business. Going forward I won't be surprised if they start charging the delivery prices for takeaway as well. They already introduced some Swiggy specific items and combos.

The crux is that they are causing significant changes to the business model and restaurants are becming more and more dependent on them. Whether this skew will be fixed or not only time will tell.

Interestingly, the same restaurants say their card machines are not working and insist on payment by cash or UPI to save the 2% credit card charges, but swiggy customers pay through the card on the app. Dineout used to give hefty discounts if the payment was routed through their app. It was not Dineout's business to be present between a dine in customer and the restaurant in the first place.

I, for one, never felt that this kind of business will do anything remarkable or create value for anyone in the long run. IMO they are not solving any problem to begin with, just doing a minor broker's job and trying to justify their presence by making every customer (delivery or dine in) go through them even when they are not welcome. I never even cared to read Zomato's DRHP during its IPO for this reason.

This was not always the case though. I remember ordering from both Zomato and Food Panda in their early days and the discounts were genuine. The cost was less than directly ordering from the restaurants. There were no delivery or packing charges either.

Things went downhill probably once the VC money started pouring in, and competition intensified with Swiggy. At the moment, both seem to be in a race to get as many people on their platforms as possible. Probably to improve their valuations and get more funding. Sometimes I wonder, to what end? It will be interesting to see how (& when) they will turn profitable.

I don’t have any of these apps on my phone anymore. Prefer to walk and pick up directly from the restaurant. Due to my laziness, that’s not too often, so end up saving money, and eating better at home. :D

I suppose Swiggy and the like should find a way to make hospitals give them a commission. Or maybe hospitals are secretly investing in these companies already.

The dishes are different. The addition of the "ka" by Swiggy has pushed up prices by 200% :D

On a more serious note, even I wonder how do restaurants make money on these deliveries. With high commissions which provide last mile connectivity and a wider scope of business, is it even profitable for these restaurants?

I am ok paying a delivery/ convenience fee over the in-dining menu but these high difference in prices is a bit mind boggling. I would have ordered from Swiggy only 3 times so far. Don't plan to increase the frequency anytime soon.

Things are not as simple or in black and white as people make it out to be.

Lets all acknowledge that there has been a shift the eating habits and people like to order in to home or office. ( earlier it was only Pizza that was delivered ). Given this, the restaurants have 3 options:
1. Keep only dine-in/personal pickup and loose all delivery orders.
2. Keep delivery orders and "employ" their own to deliver the food to customer - not scalable for peak times and also a fixed cost for employee salary.
3. Use the services of Swiggy/Zomato and pay their commission ( in lieu of salary in option 2 )
I guess most will just decide to go with option 3. If the restaurants are confident on the dine-in only model, they can always exit from S/Z.



As a customer, I wouldnt mind paying additional charges for the convenience of S/Z, if the pricing and charges are transparent. I think they separated the delivery charges because of some Govt. intervention. Ideally the bill can have 4 sections:
The cost of the food ( same as dine-in or lesser )
The cost for S/Z
The charges for delivery ( based on distance and not order value )
Tips (optional )

The discounts can also be clearly marked if its from the restaurant or from S/Z.

Honestly, I doubt the outside food intake would reduce if these aggregators shut shop. It'll come down to the individuals (like us) to make that informed decision to give a proper thought on what negatives we are considering acceptable in lieu of "convenience".


Thank you - it does help answer a part of the question. That spend on marketing is huge!

Fair points :thumbs up
I believe @iradevanad's graphics helps answer the losses of these aggregators to an extent (at least at a high level).

I figure the restaurant I referenced jacks up the price of the items on online aggregator sites just to make sure they don't lose revenue to S/Z. And hence the end consumer finds the same item priced nearly 150% - 175%. Basically the restaurant is getting 100% price of the item from the customer; and S/Z take care of the rest.

So in the example I quoted of 2 parathas, with regards to the Swiggy bill of 331Rs

a) ~175 Rs goes to the restaurant
b) ~155 Rs goes to Swiggy which is used to cater to delivery fees, platform usage fees and the revenue cut %

I the customer end up paying an additional ~90% surcharge (not accounting for any discounts) for "convenience".