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We all LOVE food. Be it cooking at home watching Youtube channels or ordering food online. From the time that these online food delivery apps have started, fine dining has definitely taken a hit. People have definitely started order online instead of cooking at home after a tiring day at the office or seeing substantial discounts at your favourite restaurants. But have you ever wondered that how Zomato and Swiggy give away so heavy discounts? And if Zomato and Swiggy do give discounts, how do they earn money and what is their business model?

Let’s answers 3 basic questions today-

  1. How Zomato and Swiggy give away such heavy discounts?
  2. How long will they be able to give away these discounts?
  3. Last but not least, how do they EARN money?

A common question- How Zomato and Swiggy give away such heavy discounts?

So, many will give their opinion on it just lamely that they have a huge funding base. Investors have invested a lot of money in these two companies, and the money is being burned to give away discounts. But the question still remains that why are investors investing their money here? India’s best investors, as well as global investors, have invested in both Zomato and Swiggy. And the valuation of both these companies is about Rs. 25000 crores. This is a considerable number even when these companies haven’t earned profit till now. They are currently running in losses. Then why is the valuation Rs. 25000 crores and the company is burning investors money every time you order food from Zomato? Valid question – RIGHT?

To this question, people may answer – to acquire customers. Users develop the habit of using Zomato and Swiggy. But is it that simple? Just think it over once that Zomato gave you discounts and you developed “a HABIT”. Later, when these discounts go away, then Zomato and Swiggy will earn profits.

Let’s take an example:

Suppose you order twice from Zomato every day. (You must be wondering who does that. People are there who are currently working over 10 – 12 hours a day and don’t want to enter the kitchen after working that long. Some have their companies paying for their food as well. Of course, how can I forget about food lovers and food bloggers getting heavy discounts?) Now let us suppose that this 40% discount is removed by these online delivery apps. They charge you with Rs. 50 as delivery and packing charges, will you still order the same amount of food you were ordering before? Most people won’t! So, today Zomato and Swiggy are growing faster because we all are using it a lot – for the discounts. Discounts decreases, the number of customers will definitely decrease. So don’t the investors know about this? – That their cash is being burned to give away discounts and acquire customers.

Investors are obviously aware of it. This surely isn’t their GAME PLAN. I guess we all know India is a very price-sensitive country and most won’t pay more for the same quality of food.

So let’s understand what the REAL business plan is!

Zomato or Swiggy -REAL business model

Let us take Zomato as an example. (Though this is applicable for Swiggy as well) So, Zomato has 3 business segments

  1. Food Delivery Service
  2. Advertising Service
  3. Business Consultancy Services

Now on an average Zomato or Swiggy provides 30 – 40% discounts (from 2 years back. Now it’s about 10 – 30% depending upon the restaurant). So, is this 30 – 40% discount coming from investors money? If a dish is about Rs. 100 in the restaurant menu, it will be about 15 – 20% overpriced on these food delivery apps. So, the 15 – 20% margin is covered in this itself. Where is the rest coming from?

Now if you ask any restaurant owner that does it cost more for him to make a customer sit and serve food versus a person just takes away a food parcel? The restaurant owner will definitely say that at a restaurant, one needs to engage a waiter for the customer, wash the utensils, most importantly, time lost when a customer occupies the table for lengthy. Anybody else can’t come and sit plus various overheads of interiors and air conditioning etc. etc. So, if there is a method by which customers coming to the restaurant lessens but the number of food delivery orders increase, i.e. people have the food at home, the restaurant owner is happy to give away 15 – 20 % discount. That is Rs. 100 food parcel is given away at Rs. 80 – Rs. 85 to the delivery services. This 15 – 20 % discount is taken by Zomato and Swiggy from the restaurant owners as commissions.

Let us understand again then. A biryani costing Rs. 100 on a restaurant menu is listed at Rs. 115 – Rs. 120. The restaurant is giving the food to Zomato at a discount of Rs. 15 – Rs. 20 which Zomato accepts as commissions for providing orders and delivery services. After this, even if Zomato gives away 25 – 30 % discount coupon or offers it is not incurring losses because Zomato is getting the food at already 30 – 35% lower price than listed on the app. So, ultimately it is not running on the cash-burn model instead operating on no loss no profit till now.

Then where is Zomato incurring losses?

Because Zomato has other expenses (places where cash is being burned).

  1. Zomato and Swiggy compensate delivery boys at higher than the market rate. If the same delivery boy had been doing some skilled job, he would be earning around Rs. 12000 – Rs. 15000 /month. But a typical earning of a Zomato and Swiggy delivery boy before the pandemic was about Rs. 25000 – Rs. 30000 per month. Zomato is paying delivery boys higher so that they never have a shortage of delivery boys. If you as a customer are ordering food online and there’s no delivery boy available to deliver then your ordering experience will be wrong. Zomato ensures that delivery boys available is always higher than required, thus not hampering the end-user experience. So here Zomato burns a lot of cash.
  2. Building the app and maintaining it.
  3. Data Storage
  4. Customer support
  5. Research and Development costs

So, why are you still allowing them to burn cash?

Here we come to Zomato’s 2nd business segment, i.e. Advertising and Priority listing. This means that if you are serving biryani, then Zomato gives you the option to list your restaurant above all. Zomato takes fees for this priority listing. Similarly, if there is a new restaurant opening and the owner wants to promote his restaurant, he can do the same in between the restaurant listings via a sponsored ad.

For this advertising and priority listing, Zomato is already taking charges. How intelligent is this, Just Imagine! Let’s say if a restaurant’s business is mostly coming from Zomato, i.e. 50 – 60% of total sales, then it will be totally dependent upon Zomato for its food orders. Later the restaurant will pay to list his/her restaurant to get listed in the first 3. And using this advertising fee Zomato will use it to give 30 – 40% discounts on the same restaurant. This, in return, increases the number of food orders for the restaurant. This circle will go on, and Zomato will continue to earn more money.

Now let’s come to the 3rd segment- Business Consultancy Services

Zomato and Swiggy have an abundance of data now. It knows that

  1. Which area in Bangalore, which restaurant gets the most orders for South Indian cuisine?
  2. In Rajasthan which dish in which restaurant runs at what price point?

For example- Paneer Pizza at Rs. 150 – Rs. 200 price point is in demand in North Delhi whereas Mexican pizza at Rs. 250 – Rs. 300 price point works well in South Delhi. Zomato and Swiggy already can figure out which part of the city and in which area what cuisine runs the best. Basically, all your food habits are recorded with them. So, Zomato provides this service advisory that in which area of the city one should open which restaurant cuisine and what should be in the menu at what price point? They can share all this data with you and prepare a perfect business plan for you and help you run your restaurant. In short, whatever advisory a franchisee does fundamentally. In return, they will charge you a hefty consultation fee.

This is the 3rd aspect of Zomato and Swiggy.

But wait there is the 4th aspect also to this whole story which Foodpanda did.

Should you still think of starting a restaurant/cafe of your own?

Foodpanda, based on these data, launched it’s own food brands. Similarly, in future Zomato and Swiggy can start its own restaurants across India in every city, precisely what the demand is based on data. In each and every Tier – 1,2,3 towns, it can know the customer preferences and offer the same through their own restaurants and kitchens (Cloud kitchen concept). Again marching towards the franchisee business model eliminating other competitors.

This is what the investors are paying/investing. Two things can happen here-

  1. Either no restaurant can run without Zomato and Swiggy.
  2. Or Zomato and Swiggy will eliminate other restaurant competitors.

This is why investors are bullish about these two companies.

Click here >>>Zomato business model for MBAs

Whatever I have shared here, maybe Zomato and Swiggy are already following it or are yet to introduce in a big way. Let me know in the comments did you think of starting a restaurant/cafe as well? Which area and what cuisine exactly and have you tried Zomato business as yet?

2 Comments

  1. This is some amazing clarity on a business model in the food sector.

    I have been a frequent user of Zomato! But never knew, I was giving so much to them in the form of commissions only a get almost no recognition for the efforts that I indirectly make for them! Haha!

    Being an avid foodie and a traveller, hailing from the state of Bengal, the restaurant business has always been there in my mind. But your insights has forced me to relook and consider other alternatives of a sustainable as well as a scalable business before taking the call.

    Looking forward to more such insights. I am sure this will benefit many. Keep the great work up.

    • SOMSHUBHRA MAITY Reply

      Yes absolutely.. we all including myself have always thought of opening a restaurant sometime in life.. bt while researching I understood that the game is definitely changing.. and its not that easy as it seems.
      Glad it had some it cleared your doubts and many others in the process..

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