How does foodtech work, anyway ?
( Following are the learnings about the on-demand foodtech space from my experience working with a food delivery startup in Mumbai. )
Foodtech is a notoriously dirty word today and for some very legitimate reasons. People in the name of foodtech invented every conceivable business model under the sun which had very little to do with ‘food’ while their ‘tech’ couldn't stop getting more emphasis. If the funding frenzy hadn’t stopped in 2016, I was sure I would live to see a company, SpaceOwl, rent from Elon hundred of his Falcon 9s to deliver Chicken Tikka Masala from a Dhaba in Delhi to California in under 50 mins. Even then I can imagine a certain American being irritated by the delivery boy - “Sir me pahuch gaya location par, aap kaha ho ?”
I will talk primarily about two models in the foodtech sector that have worked and will sustain in the long run and are worth knowing about. Let’s learn more about them.
Type I: Delivery only Model
Ganesh, in Mumbai, solves his unemployment problem by being enterprising. He brokers deal with 4 restaurants in his neighborhood offering to fulfill their home-delivery orders at INR 50 each. With 12–15 orders a day, he makes over 16000 a month which covers his tel-co fees, bike fuel and maintenance costs. Over time, he becomes a mini brand in himself taking orders directly from users over Whatsapp. When restaurants find they lose money on low value orders, Ganesh adopts a commission based model (10–25%) based on AOV (average order value) of that restaurant and charges a reasonable delivery fee (INR 10–50) to the end user based on the order amount and distance. Now to his surprise he is making 2k-5k more money than before bringing his monthly income to INR 20k.
The fundamental unit when studying the unit economics of a food delivery business model is Ganesh. And his surplus of INR 2k-5k is your profit after accounting for his fixed monthly salary and other expenses.
When this business is scaled from 10s of riders operating in small delivery area to 1000s of riders encompassing a whole large undivided region/city with the help of a mobile app, the fundamental unit/fixed costs now grows to include the salaries of delivery fleet and customer support, AWS, payment gateway and telco fees.
You have a business but with very minuscule margins when revenue from commission and delivery fee from each order is just a little more than INR 55 which is roughly the fixed cost per order. Therefore, the goal is to continually keep cutting down the fixed cost bit by bit to improve the profit margins bit by bit. Let’s find out how this will happen.
Total addressable market for online food delivery is huge. Consider this, we have roughly 30mn households(A) earning between 6–30 lac per annum and 70mn households(B) earning between 3–6 lac per annum. With even extremely conservative assumptions, say, every type A household makes atleast 0.5 orders and type B households makes 0.25 orders a month, we have a total of 33mn orders a month from both the organized as well as unorganized sector.¹
Total number of orders fulfilled today by all the food delivery companies combined is 14mn a month. Moreover, the Redseer report predicts the total monthly orders to touch 60mn by 2020. Meaning, still many millions of transactions are yet to go digital.²
Better profit margins will emerge when your platform is doing a million orders a day. How?
- With improved delivery routing algorithms and increasing volume of orders from the same sub-regions, batch orders will increase while dramatically reducing delivery cost per order.
- Data collected over 6–7 years will give a clearer picture of how many riders are required for each hour of each day of a week. This will allow for optimal utilization of the delivery fleet during the lean hours by giving them ecommerce, groceries, medicine deliveries etc, further bringing down the delivery cost per order.
- Significant automation in customer support will considerably lower the support + order processing costs incurred per order.
- Higher commission rates can be charged to restaurants whose revenue from online orders have demonstrably increased upon joining your platform.
- Set up central kitchens in underserved areas serving cuisines which are in demand but not fullfilled for lack of restaurants.
- Another source of revenue will be ad sales when there are many food brands competing with each other to boost their discoverability on the platform.
- At scale when the demand of orders and supply of riders hits a equilibrium or grows at a predicted rate, rather than hiring riders on fixed salary, delivery platforms will find aping the Uber model to be more economical wherein riders can log in/ log out at their whim and get paid for each order delivered.
Side Observation:
For enterprising folks today, starting a food making biz is considerably less riskier and less capital intensive compared to just a decade ago thanks to discovery platform like Zomato and delivery platforms like Swiggy which enables your business to go live under a month. Many such folks around the country are renting small places in cheaper neighborhoods to set up delivery only kitchens. They spend a modest sum on marketing once they are live on these platforms to get the initials orders flowing and over time perfect their offerings with quick feedback given by their users. This allows them to grow a trustworthy brand at a steady pace before expanding to a bigger space with dining or opening multiple such kitchens.
Type II: Kitchen + Delivery model
Here, companies identified gaps in the growing organized food sector which were not met by the traditional giant players. They learned that the target consumer driving growth in the organized food sector is a millennial who is tech-savvy with rising disposable income, well exposed to global cuisine and comfortable with experimenting beyond pizzas and burgers. Seizing the opportunity, they identified the correct trends and adapted desi and international cuisines into QSR based central kitchen models owning last mile customer delivery.
Millions of users aren’t required to see if this model works. This is a plain food making business which works as long as your food isn't shitty. Technology is a auxiliary component which in today's context is necessary to make customer experience seamless.
Owning the entire end-to-end process from procuring raw materials to preparing food to making the last mile delivery gives not just higher margins (upto 60%) but also mitigate many operational inefficiencies by several orders of magnitude. The fundamental unit is the store and the fixed costs now include real estate rent, staff salaries, raw materials, monthly utility expenses etc. Break-even is generally achieved at 50–70 orders a day.
By bringing about standardization and pricing food wee bit on the expensive side, this model allows for scaling to tens of outlets at a time. Morever, the margins enjoyed are as high as 50–60% which allows it to absorbs delivery charges if AOV is atleast INR 200. Preferably, the goal is to do all the deliveries by the in house staff but during peak hours, a chunk of orders are outsourced to third party logistics partners. Corporate tie-ups and party events are another major sources of revenue as they are high volume bulk orders.
Long story short, the on-demand delivery only companies, contrary to initial skepticism, not only have a working business model but are poised for immense growth once enough market penetration is achieved. The organized food sector is bullishly growing to accommodate many more food brands who are innovating their offerings and embracing technology to stay relevant to changing consumer tastes.
I don't find it far fetched to imagine five years down the road where online food ordering becomes the norm and as affordable if not cheaper as cooking at home.
