What does the ONDC launch mean for food delivery in India?

Delivery apps undercut eateries on pricing while also charging them to be listed on their platforms, a practice restaurateurs have long complained of. What about the government-run ONDC app, then, stands out?

In early May, a Twitter user shared a tweet that said, “Sitting at Starbucks - coffee for 400. Zomato deal for same coffee 190. Ordered Zomato with address of Starbucks. The Zomato guy picks up and gives me to my table at Starbucks. ये वाला business अपनी अक्ल से completely out of course है।” While there’s no way to fact-check the story, it points to the incentives that delivery apps in India offer, undercutting eateries on price while also charging them to be listed on their platforms. 

Restaurateurs have long complained of this practice, but have had little choice, given how the COVID-19 pandemic changed people’s habits, especially when it comes to food and drink. Apps such as Swiggy and Zomato have become synonymous with food delivery. However, they charge brands anywhere from 7-18 per cent plus GST of sales to get listed on the app, and then take a percentage of every order as well. They also don’t share customer data with the restaurants, making it impossible for hospitality brands to build their own database. That means a restaurant is paying these aggregators a customer acquisition cost (in the form of fees, in-app ads and more) on every single order, sometimes to the tune of 45 per cent of an order’s value. It is also necessary for them to discount their prices to be shown on the first few pages of the app—a necessity to bag orders, which leaves them at a loss. 

An unfair share

For eateries though, it’s a necessary evil. It is estimated that Zomato has a 55 per cent market share and Swiggy the other 45 per cent. Companies like Thrive and brand-specific apps like McDelivery or Domino’s make up a negligible share. Over the years, the size of the home delivery market has grown exponentially, with one report stating that it has tripled to US$5.30 billion since 2018. The same report expects a compound annual growth rate of 33 per cent for the coming years, till the market is worth an estimated US$29.33 billion in 2028. 

Nachiket Shetye, co-founder of Kytchens, a cloud-kitchen company that offers plug-and-play solutions to existing delivery brands at locations in and around Mumbai, says, “Swiggy and Zomato both are, first and foremost, fighting with brands to increase commissions. Because they themselves as an industry are not making money.” Zomato’s finances back this up, having reported a loss of Rs 188 crore for the year ending March 2023. As a result, they’re working to squeeze out of their restaurant partners.

Riyaaz Amlani, CEO and MD of Impresario Handmade Restaurants says, “ If they [food delivery apps] stop growing, they’re going to die, because they’re not making profits at the unit level, so they’re continuously trying to push discounting as a mechanism to grow transactions.”

Betting on alternatives? 

A few platforms are trying to work with restaurants to give them access to customer data, and allow for more control of the home delivery experience. Open Network for Digital Commerce (ONDC) is the newest. It is a government initiative, “aiming at promoting open networks for all aspects of exchange of goods and services over digital or electronic networks. ONDC is to be based on open-sourced methodology, using open specifications and open network protocols independent of any specific platform.” Earlier this year, it kicked off food delivery in New Delhi, Bengaluru, Bhopal, Shillong and Coimbatore, with plans to expand over time.

In a report titled ‘Democratising Digital Commerce in India’ by McKinsey and Company, it states that of the country’s 450 million online citizens, only 165 million transact digitally, and it is hoped that ONDC will be a step towards changing that. Much like COWIN and Aadhar—it is a digital public infrastructure that is hoped to underpin the growth of Micro, Small and Medium Enterprises online in all spheres—from food to financial services, agriculture to fashion. It is the technology that underlies food orders on the MagicPin app for now, but it is hoped that its decentralised platform can serve as the back-end for diverse apps like PayTM, Meesho, MyStore and PhonePe. Incidentally, Zomato invested $5o million (about ₹ 372 crore) in MagicPin in 2021, for an approximately 16 per cent stake in the company. MagicPin doesn't have an app or interface of its own, but instead, is a platform on which companies can build their own interface. Restaurateurs, and the National Restaurant Association of India (NRAI) specifically, are hoping to see competition for Swiggy and Zomato, given their multiple grievances with the platforms. Amlani says, “It can become a counterbalance to the dominance of the aggregators, and the stranglehold they have over the industry.”

Sagar Daryani, the CEO of Wow! Momo says his brand gets orders through the ONDC platform. “We’re currently doing around 50,000 orders monthly via the platform,” and adds, “It’s more profitable; that’s a big difference.” He notes that the commissions per order are between 4-6 per cent, one-third of those charged by the two bigger aggregators—Swiggy and Zomato. Once on the platform, it also makes building their app easier, and that’s something that Daryani plans to launch in August. With Wow! Momo, on ONDC,  Daryani believes there’s no need to build an entire back-end for the brand.  

Another aggregator is Thrive Now. Dhruv Dewan, one of the three co-founders of the company says, “We felt we needed to launch a commerce product which is essentially like Shopify for restaurants.” The onset of the pandemic in March 2020 forced them to pivot from their marketing business, which involved working with a lot of hospitality brands. In the years since its launch in 2020, Thrive Now has seen Coca-Cola India and Jubilant Foodworks take a stake in the company. It charges a 3 per cent commission but for its new app, it raised its commission to 14 per cent for new customers. Like MagicPin, it doesn’t have its own fleet of drivers, but it does share data with restaurant brands, and doesn’t cross-sell data (for instance, your order for Dominos won’t be shared with another pizza brand or other restaurants on the app.) It has seen significant growth, much like MagicPin, which noted in a press release dated 15 June, that it has breached the mark of 30,000 orders a day. 

The way ahead

The question, then, is: Where does this leave Zomato and Swiggy? Swiggy’s CEO Sriharsha Majety wrote a blog post in May, stating that the company’s food delivery business had turned profitable (minus Employee Stock Option costs, or the equity compensation granted by a company to its executives). Zomato’s food delivery business is also profitable after adjusted-EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) for the January-March 2023 quarter. Both have taken to creative metrics to showcase a profit for their food delivery business. However, it is telling that in Swiggy’s case, two investors—Invesco and Baron Capital—have written down the value of their investments in the company in May. It should also be noted that all the four tech companies mentioned (Swiggy, Zomato, Thrive Now and MagicPin)  are currently loss-making. 

While changing consumer habits isn’t easy, the diversity of options is something that restaurant owners are grateful for. As Dewan says, “The way food ordering today works is it's very bundled. You, as a restaurant, pay a certain commission not knowing whether it is for logistics, or discovery, or for a repeat user. So, we’ve really broken this up. It’s not about charging a restaurant more or less. The idea is to charge fair and be transparent.” Daryani echoes this sentiment and says, “You can derive a larger value for your product and can price it better, which benefits everyone from the restaurateur to the consumer.”This is something that will benefit both diners and eateries, and hopefully the incentives change enough that a customer at Starbucks is encouraged to place their order in-store, without any external discounts. 

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