Zomato, Swiggy's new strategy to drive profitability: Focus on core strengths

Food delivery majors Zomato and Swiggy are not only intense competitors, they are also known to borrow a leaf or two from each other’s playbooks. Recently, Swiggy followed in the footsteps of Zomato by announcing its exit from the cloud kitchen infrastructure business. Zomato had exited the space in early 2020. Despite making substantial investments into what was once touted as a great opportunity, both companies seem to have drawn the curtains on their cloud kitchen plans.

SoftBank-backed Swiggy has sold off its business, called Access Kitchens, to cloud kitchen infra operator Kitchens@ as it looks to dispose of non-viable business verticals. The share-swap deal will see Swiggy becoming a stakeholder in Kitchens@. 

There are many challenges in the space—from cracking the low expenses and high-optimisation model, to diversification of the cuisines, to achieving optimal utilisation of kitchens, building scalable and affordable brands, and creating brand recall. “It’s not a technology business... it is an intense operational business,” says a foodtech founder who wishes to stay anonymous. The founder adds that operators must have the DNA and experience of running a food and beverages business. “Experience matters when it comes to ensuring occupancy, effective utilisation of kitchen capacity, and selection of brands so that both kitchens and brands are profitable. The food delivery platforms lack all of these capabilities.”

Swiggy ventured into the space in 2017. The move allowed restaurant partners to establish kitchen spaces in neighbourhoods where they did not currently operate, with the goal of offering more variety and shortening delivery times for consumers. “This is not Swiggy’s core business. The company has its eyes on the public markets. As they prepare for an IPO, they want to refocus on their core offerings. They don’t want to be investing so much on these kitchen centres and employing so many people to run them besides managing the complex operational issues,” says the founder. Despite being a promising vertical that is anticipated to be worth $2-3 billion by 2025 (per Redseer), both Swiggy and Zomato have understood that running cloud kitchen brands in an exclusivity model doesn’t create a winning situation for either of the parties. In a duopoly, where one wouldn’t host the other’s brands, it becomes tough for their brands to thrive on a single platform.
Zomato had exited its cloud kitchen business called Zomato Infrastructure Services in 2018 and invested in Loyal 

Hospitality, the parent of Kitchens@, for an exclusive partnership. But Kitchens@ later bought out Zomato’s shares in the company to end the exclusivity deal in 2020. “We wanted to be [brand]-agnostic in the market, so we offered to buy back their shares. At the time, the competition was intensifying between the two players and there were several issues. We continue to have good relations with Zomato. Swiggy is purely a financial stakeholder in the company now; it doesn’t have any operational control or any exclusivity rights. All our brands are sold across online platforms, including these two,” says Kitchens@ Founder & CEO Junaiz Kizhakkayil.

With both Swiggy and Zomato pulling out of the space, it is clear that food delivery platforms would prefer to play the role of pure-play distribution channels than being kitchen operators themselves. And as the industry matures, each player in the sector is playing to its strength—cloud kitchen brands focussing on their speciality of good cooking, infrastructure firms offering complete kitchen services, and food delivery platforms improving and expanding delivery options.