Between Swiggy's hyperlocal and Zomato food focus, who has the edge?

Even with the meteoric growth spurt during pandemic-induced lockdowns, poor unit economics continued to haunt food delivery players Swiggy and Zomato.

The inherent issues of low average order value (AOV) and high cost of delivery were going nowhere and it was inevitable that food delivery marketplaces step outside food to other verticals for profitability. These market realities led the start-up giants to strategic crossroads, forcing them to make bold moves that reaffirm or redefine the nature of their businesses.  

Since its inception, Bengaluru-based Swiggy has maintained a hyperlocal focus. While it did try its hand now and then in other areas such as private labels in the food and a marketplace model for grocery delivery, market realities forced it to commit fully to its original principles.

Also Read: Why Swiggy and Zomato love grocery more than food?

The result was a renewed focus on the "neighbourhood convenience economy", which is something of a new parlance for hyperlocal. The primary driver of this approach is its express grocery delivery service, Instamart.

Launched as an essential-goods-delivery service in the thick of the pandemic in 2020, Swiggy realised its worth in the convenience economy and doubled down on it. Instamart gave the Sriharsha Majety-led company a much deeper understanding of neighbourhood granularities and helped it build supply chain management and just-in-time inventory capabilities. And the bet is paying off.

Instamart, now available across 23 cities, accounted for about 20 per cent of Swiggy's revenues of Rs 2,547 crore in FY21. Industry sources put that share at about 25 per cent today. According to top Swiggy executives who spoke on condition of anonymity, the management expects Instamart to outgrow food delivery in the next 18 months.

With a commitment of $700 million to grow its express delivery business, Swiggy is aggressively building dark stores across the country. (A dark store is a micro-fulfilment centre where e-commerce firms store inventory for rapid online order fulfilment.) As it adds more SKUs (stock keeping units) across its expanding network of dark stores, the AOVs are bound to increase, helping it improve margins. The company targets to clock an annualised GMV (gross merchandise value) run rate of $1 billion in the next three quarters with Instamart. 

So, with food and grocery, Swiggy has created two strong revenue streams, which are not feeding on each other. But there's more. The company is gradually building out its pick-up and drop (courier) service, Swiggy Genie; subscription-based daily grocery delivery service, Supr Daily; and a meat delivery vertical called Meat Stores. Today, the Prosus-backed company delivers food across 520 cities, does local courier service in 68 cities with Genie, and offers daily essentials in six.

The 'everything delivery' model helps Swiggy reduce discounts across its platform, and allows it to plug all its riders into a single unit, which enables better utilisation of its delivery fleet. According to the company, it delivers products in under 20 minutes in its key markets.

Also Read: CCI orders probe into Zomato, Swiggy biz models

As deliveries become fast and spread across the day, riders can fulfil more orders per hour, which allows it to reduce the incentives paid per delivery without affecting a rider's earnings. "You get a high open-rate for the application when the customers have more than one reason to open your application. You open Swiggy for your food, for groceries, or to send a courier within the same city. This solves the unit economics and rider optimisation, to an extent. Once you crack hyperlocal logistics, you can build food and grocery very easily, which is what Amazon, Flipkart and Reliance will all do," says a food-tech company founder who wished to remain anonymous.

Zomato, on the other hand, has always been a food services company. It has stayed true to food all through its many pivots over the course of its journey that started in 2008 as a restaurant search and discovery platform, all the way to going public in 2021 as a full-stack food services company. "Our goal remains to be the preferred food company in India," Zomato's Founder and CEO Deepinder Goyal asserted in a recent blog.

With restaurants as the fulcrum, Zomato has been experimenting with several products to create an ecosystem beyond food delivery services.

Products such as Hyperpure, which provides ingredients and other supplies to restaurants; and the recently announced, ambitious 10-minute food delivery, are steps towards expanding its food horizon. As per its December quarter results, supply-chain business Hyperpure grew by 168 per cent year-on-year (YoY) and 40 per cent quarter-on-quarter (QoQ) to Rs 160 crore. Present in nine cities, the company said it supplied to over 27,000 unique restaurants in the third quarter. 

'Zomato Instant', the 10-minute food delivery service, is being piloted in Gurugram. The company is currently setting up a network of 'finishing stations' or mini-kitchens in close proximity to high-demand customer neighbourhoods, similar to Swiggy's dark stores. These finishing stations will house bestseller items (about 20-30 dishes) from various restaurants based on demand predictability and hyperlocal preferences.  

Beyond food, Gurugram-based Zomato's first big expedition is grocery delivery, where it had failed twice earlier in a span of two years. Now it is trying to resuscitate that dream. Zomato is in the final stages of acquiring Blinkit, the SoftBank-backed quick commerce platform, in a deal worth $700-800 million. 

Zomato hopes to leverage Blinkit's years of grocery business experience and club it with its delivery capabilities to join the quick commerce party without having to build the capabilities in-house. 

A potential merger offers multiple synergies including better cross-selling between food and grocery products, and effective optimisation of delivery, besides helping Zomato improve its top line, which is growing at a slow pace. On a sequential basis, its revenue rose just 9 per cent for the October-December 2021 quarter. 

It's not clear how Zomato is going to integrate Blinkit with it. However, running two different platforms for groceries and food is not going to help its cause. 

Tracking data from two different platforms and making a single consolidated address for every user to derive meaningful insights on time is a herculean task. Both services not placed within the same platform kills cross-selling opportunities. 

Swiggy, on the other hand, it's a unified interface. The company enjoys granular hyperlocal data, gathered and mined for insights from two hugely popular use cases, which gives information on the purchasing power of a locality, eating preferences of a household, shopping practices and more.

It helps them decide where exactly to set up dark stores, stock what products at which pin code, and decide what to promote in each micro-market. Swiggy may bring many more verticals into the app, thus becoming a super app of hyperlocal deliveries. 

Like every other e-commerce segment, grocery, too, is a long-term play, and a sizeable investment over many years is needed to capture a meaningful market share. Zomato has $1.7 billion cash on its balance sheet, but its ability to take risks is far lower today than a year ago when it was not listed, while Swiggy, also with a similar war chest, is likely to build as much as it can before it hits the bourses.  

Both companies, meanwhile, are deep in the red. It is clear that Swiggy sees its delivery fleet as its main resource and strives to improve its utilisation to bring profitability, while Zomato sees its restaurant network as its main asset and is building products around it to move out of the red.

Swiggy, with an 'everything delivery' approach focussed on the neighbourhood convenience economy, seems to be nearing market maturity faster than Zomato's dedicated, but futuristic food ecosystem play.

(For details on the Swiggy-Zomato face-off read the May 1 issue of Business Today magazine, now on stands.)