The online food delivery industry, which is highly funded and prominent in India, is finally starting to become profitable. Zomato and Swiggy, the market leaders, have recently announced profitability in their respective sectors, marking a significant turning point for the industry.
According to Swiggy’s Co-founder and CEO, Sriharsha Majety, in a recent blog post, the company’s food delivery business has become profitable as of March 2023 when considering all corporate costs, excluding employee stock option costs. He emphasized that this achievement is noteworthy not just for Swiggy but also for the global food delivery landscape, as very few platforms have achieved profitability in less than nine years since their establishment.
All About the Zomato and Swiggy’s Journey to Being Profitable
The following day, Zomato revealed that its business, excluding quick commerce, has turned “adjusted Ebitda positive” in the March quarter. This means that the company’s operating earnings, excluding certain non-cash expenses and one-time charges, exceed its operating expenses. Zomato attributes this achievement to its food delivery division, which yielded ₹78 crores of adjusted Ebitda in that timeframe.
On the other hand, experts attribute this impressive turnaround to the continuous and successful endeavors of both platforms to boost their take rates or commissions from their partner restaurants. Another contributing factor is the successful implementation of a differential menu pricing strategy, where delivery menu prices are higher than dine-in menu prices. Significant reductions in discounts have also played a crucial role. By focusing on higher order values, improving customer retention, and increasing order frequency from high-value customers, Swiggy and Zomato have enhanced their profit margins.
The heightened focus on profitability primarily aims to enhance the market valuations of Zomato in the public market and Swiggy in the private market. Zomato’s market capitalization, which reached over $15.5 billion in late 2021, has more than halved since the beginning of 2022. Swiggy has also experienced valuation markdowns from investors Baron Capital and Invesco in recent weeks.
Additionally, the emergence of the Open Network for Digital Commerce (ONDC) poses a threat to the duopoly enjoyed by Zomato and Swiggy in the food delivery sector. Although ONDC does not pose an immediate danger, it grants restaurants a certain degree of negotiating power, thereby constraining the aggregators’ capacity to regularly raise commissions.
Currently, private and public market investors value companies based on their prospects for profitability. According to Karan Taurani, Senior Vice President & Research Analyst at Elara Capital, these companies will need to surpass 20% revenue growth, possibly reaching 25%, along with a consistent path to profitability, in order to experience a re-rating of their valuations in both stock exchanges and private markets.
