One year ago, the National Restaurant Association of India (NRAI) urged its members to stop partnering with food delivery giants Swiggy and Zomato. The objective was to eradicate the overwhelming control these food aggregators had and thereby put a halt to the alleged price monopoly these platforms were accused of creating, according to the association.
Despite launching several campaigns, including Swiggy and Zomato logout campaigns, Order Direct, and more, the association’s efforts to achieve their objective were unsuccessful.
As per their annual reports, both Zomato and Swiggy recorded significant growth in order volume in CY22 as compared to CY21.
After a year, restaurants affiliated with the NRAI have come together once again to explore alternative means of obtaining a significant share in India’s online food delivery industry. However, this time they have the support of the Open Network for Digital Commerce (ONDC).
Established on December 31, 2021, as a non-profit private company by the Department for Promotion of Industry and Internal Trade (DPIIT), the Open Network for Digital Commerce (ONDC) commenced its pilot phase in April 2022 across five cities, namely Bengaluru, Delhi NCR, Shillong, Bhopal, and Coimbatore. Additionally, ONDC has initiated its beta pilot in Bengaluru and certain Tier 2 cities.
Numerous restaurant owners and industry participants are of the opinion that the platform holds the capability to eliminate the duopoly that Swiggy and Zomato have established in the sector over the years.
At present, NRAI is collaborating with technology players and providing training to assist restaurants in joining ONDC with the objective of terminating the supremacy of Swiggy and Zomato in the industry.
ONDC has also enlisted the support of various restaurant networking partners. For example, Magicpin, a savings and discount platform backed by Zomato, has already partnered with 22,000 restaurants in Bengaluru and Delhi-NCR and intends to extend its reach to other cities soon. Similarly, DotPe, another restaurant aggregator, is also assisting restaurants in joining the ONDC network.
It is noteworthy that the current challenge to the dominance of Swiggy and Zomato in the $50 billion food services market is not the first one.
Previously, global e-commerce giant Amazon and mobility unicorn Ola attempted to secure a portion of the market share in the sector but were unsuccessful due to the supremacy of the two established players.
As per several reports, Swiggy is the leading player in the southern region, while Zomato holds a dominant position in the northern area, particularly in the food delivery segment.
Nevertheless, the dominance of these two players may be short-lived with the introduction of ONDC in the market. This is because the platform has been developed to promote healthy competition, ensure a level playing field for small merchants, and terminate the dominance of a few players.
How can the ONDC address the challenges plaguing the food technology sector?
Nearly all the players operating in the food and beverage industry bear significant expenses for customer acquisition and retention.
Over the past few years, experts in the industry have observed that Zomato and Swiggy have taken advantage of this situation by significantly increasing the commissions they charge their partner restaurants. These commissions were formerly between 2-5%, but have now risen to 18-24% of the average order value.
The reason for this is that Zomato and Swiggy have built up a vast user base comprising millions of customers, which they have chosen not to disclose to their restaurant partners.
To put it simply, your preferred restaurant may not be aware that you are a regular customer of theirs, as Zomato and Swiggy do not share customer information with their partner restaurants.
For restaurants, this becomes a significant issue since they may have been operating in the market for years, yet they have little knowledge of their end consumer’s identity due to the lack of customer information provided by Zomato and Swiggy.
The rating mechanism is another critical issue that food aggregator platforms face, as it is a crucial metric for customer retention.
According to Pranav Rungta, The Director of Mint Hospitality Ltd and The Head of NRAI’s Mumbai chapter, “The ratings system of online aggregator platforms is flawed. Although the customers are the ones who give ratings, the algorithms on Swiggy and Zomato change the game, putting restaurants at a disadvantage.”
Industry experts believe that ONDC has the potential to address the challenges mentioned above to a certain extent.
An example of how ONDC could alleviate some of the challenges mentioned is by reducing the customer acquisition cost (CAC) that restaurants often bear even for repeat orders. ONDC’s network may not require such costs, providing a more cost-effective solution for the restaurants.
One advantage of ONDC is that it has multiple buyer-side apps such as Paytm, PhonePe, Meesho, Pincode, and Magicpin with a significant number of existing users. Therefore, there won’t be a need for additional cash to be spent on customer acquisition as compared to other food aggregator platforms.
By being listed on ONDC, restaurants gain a natural advantage as they become accessible to millions of users who already use buyer-side apps like Paytm, PhonePe, Meesho, Pincode, and Magicpin, among others, without any additional cash-burn to acquire customers.
A recent McKinsey report points out that online food delivery aggregators attract customers by spending on marketing, advertising, and discounts, as well as by chasing faster deliveries and acquiring cloud kitchens, which are included in their customer acquisition costs (CAC).
The merchants/restaurants listed on ONDC will have access to the data of the customers who order food, which sets it apart from Swiggy and Zomato. This will enable them to understand their target market, customer behavior, and ordering patterns.
According to Rungta from NRAI, the rating systems of restaurants on ONDC will be based on customer feedback, rather than platform algorithms, which would lead to greater transparency in the food delivery space.
The culmination of all these factors is anticipated to be advantageous for restaurants, with the profitability of eateries and food pricing being the most crucial ones.
Can ONDC offer a win-win situation for restaurants and customers?
Currently, in the food delivery space, Swiggy and Zomato have complete control over the funnel, including pricing, logistics, discounts, payments, and more.
According to NRAI and other industry bodies, this has created a captive ecosystem where restaurants have no control.
Moreover, the food delivery entry of ONDC is significant as it comes at a time when the valuation of both the food delivery giants, Swiggy and Zomato, has suffered a setback.
Swiggy and Zomato, the two food delivery giants, have recently experienced a significant decrease in their valuations. Invesco, Swiggy’s earliest backer, has marked down its valuation by 25% to $8 billion, and Zomato’s market capitalisation on stock exchanges is hovering around $5 billion, which is down 50% from its highest market cap since its listing.
In response to the decline in their valuations, both Swiggy and Zomato have been implementing cost optimizations and revising their pricing strategies. These changes include raising delivery charges and commissions from restaurants, as well as reducing deep discounts and free deliveries.
Swiggy has recently introduced a platform fee of INR 2 per order, regardless of the order value.
Furthermore, both companies have introduced loyalty programs such as Zomato Gold and Swiggy One, which provide customers with benefits such as free deliveries and discounts.
Zomato Gold, which was reintroduced by Zomato earlier this year, offers free deliveries within a 10 km radius, VIP access during peak hours, and cashbacks for three months to customers for a fee of INR 149.
SwiggyOne is another loyalty program that Swiggy offers. For a fee of INR 299, customers can get free deliveries across Swiggy’s platforms, Instamart and Genie.
Restaurants, too, are rethinking their pricing strategies and adopting tactics such as offering free deliveries to attract more customers.
According to sources within ONDC and NRAI, the commissions charged by buyer and seller side apps, as well as third-party logistics players, will be around 2-3% each on an average order value. In total, this commission is expected to be less than half of what restaurants currently pay to Swiggy and Zomato.
According to industry experts, the combined platform commissions and third-party logistics charges on ONDC are estimated to be around 8% of the average order value, which is significantly lower than the 18-24% charged by Swiggy and Zomato. As a result, restaurants on ONDC will be able to offer cost savings to their customers and retain their loyalty.
“The restaurants may even look at absorbing the delivery costs and pay third-party logistics players instead of passing on the whole delivery charges to their customers, which is the case with Swiggy and Zomato right now,” Pranav said.
In order to gain more insight into the commissions at stake and determine whether ONDC-affiliated restaurants provided free delivery, a comparison was done. It was discovered that a McDonald’s burger from the closest location was 158% less expensive when ordered through ONDC than through Zomato.
Another comparison of the prices between ONDC and Swiggy was done, keeping all key metrics, location, and timing consistent. The examination revealed that, even with discounts applied, Swiggy was 95% more expensive than ONDC.
It is worth noting that Swiggy and Zomato both charge a delivery fee, which they state is paid to their delivery partners. Conversely, the majority of deliveries on ONDC were free of charge.
Another noteworthy point concerns the discounts provided by Swiggy and Zomato. Initially, they offered significant discounts to attract customers; however, as their user base grew, the discounts provided were considerably reduced, while the commissions charged to restaurants were raised.
As per experts in the industry, this practice has compelled several restaurants to raise the prices of their menu items.
Meanwhile, ONDC has emerged as an alternative platform where restaurants can provide more appealing discounts than Swiggy and Zomato, and additionally cover a portion of the delivery costs, resulting in advantages for the end consumer, and enabling them to retain customers.
Therefore, the network has become a new source of optimism for numerous restaurants who desire the removal of the ongoing duopoly in the market.
Nonetheless, ONDC must overcome some obstacles to succeed.
Presently, an expanding number of ecommerce platforms, payment aggregators, and logistics companies, as well as physical stores and restaurants, are joining the ONDC movement.
It is worth mentioning that the ONDC model is presently operating exclusively in a few selected cities. The true challenge for the platform will arise when it expands to cities and towns beyond the metropolitan areas. The reason being that the platform might encounter difficulties in acquiring smaller players with limited technical proficiency.
ONDC is anticipated to enlist the support of aggregators and industry organizations to address this concern. However, considering the pace at which the network has grown in the last twelve months, this process seems to be time-consuming.
Currently, the government-supported ONDC has low awareness, and the platform needs to improve its approach to onboard additional merchants.
In the coming months, the network aims to tackle the challenge of enhancing the discoverability of food menus on the buyer-end apps.
PhonePe has recently introduced an ONDC-focused buyer-side app called Pincode to enhance the user experience, whereas sources suggest that Paytm is developing UI/UX designs to help customers navigate ONDC offerings.
Regarding the food delivery sector, an essential element to consider is logistics. Swiggy and Zomato have managed to secure a significant portion of the online food delivery market promptly due to their in-house logistics capabilities and several acquisitions, which have contributed to enhancing their operational efficiency.
It would be unreasonable to expect restaurants to compete with the logistics capabilities of Swiggy and Zomato. Therefore, there will likely be a natural reliance on third-party logistics players such as Dunzo, Shadowfax, Delhivery, and Loadshare to assist with food deliveries.
It will be interesting to see how ONDC enables these third-party logistics platforms and restaurants to work together in tandem, given the current scenario.
However, unlike Amazon and Ola, which were unable to sustain in this market due to high customer acquisition costs and unsustainable discounts, ONDC may have a better chance if it is able to onboard more players like Paytm and PhonePe.
