All That Glitters Is Not Gold: The Hard To Digest Economics Of Zomato, Swiggy & Co

All That Glitters Is Not Gold: The Hard To Digest Economics Of Zomato, Swiggy & Co


After the #Logout campaign, many restaurateurs are left wondering if online food aggregators are doing more harm than good. Is there really no such thing as a free lunch even in the food business?

The “golden decade” of dining out.

This is how Rahul Singh, the founder of Beer Cafe,  described the next 10 years while addressing India’s top restaurateurs and food industry bigwigs in Delhi in December 2018. Singh, who is also the president of the National Restaurants Association of India, credited Zomato, Swiggy and other food aggregators for changing the dining-out culture and driving up restaurant consumption.

But, nine months later, on August 14, Singh, along with 300 other restaurateurs, publicly pulled out of the popular Zomato Gold loyalty programme with the #Logout campaign.

In the next few days, over 2K restaurants across India joined the protest. As tensions rose on both sides, a toned down version of Zomato Gold was floated and immediately rejected. The debacle eventually resulted in a Twitter slugfest between Singh and Deepinder Goyal, cofounder and CEO of Zomato.

Tired of footing the bill for Zomato Gold, claiming that this was only encouraging discount hunting customers and Zomato’s popularity, restaurateurs such as Singh launched the #Logout campaign.

However, it was not the first time that restaurants protested against food-delivery and online reservation platforms which include Zomato, Swiggy, Uber Eats, Magicpin, Dineout, and Eazydiner. But it definitely was the most concerted effort from the restaurants to fight back on what they claimed were unfair contracts and high commissions; problems that were compounded by deep discounts — also borne mostly by restaurants.

To understand whether the relationship between foodtech startups or aggregators and restaurants is mutually beneficial or a toxic codependency, Inc42 dove deep into the numbers behind both industries. The picture only became clear when we spoke to investors, restaurant owners and both Zomato and Swiggy to understand business strategy, unit economics, and the emerging trends in this space.

Restaurant Economics: Between A Rock And A Hard Place

Zomato and Swiggy’s rapid ascent across consumers and restaurants boils down to a single factor — convenience. People are time-poor. Food delivery apps allow them to order food from across cuisines, track orders and pay seamlessly. A boon for India’s congested urban centres and their fast paced lifestyle.  

Meanwhile restaurants get wider reach, more orders, and very importantly, they get complex software to manage these orders, a delivery fleet for nothing more than a small cut of the order value. Sounds like a win-win situation for both right?

It was, till about a year back.

Many of the restaurants Inc42 spoke to said that the number of orders had jumped up by 20 to 30% after they signed up with Swiggy and Zomato. The market was young, and companies were focussed more on grabbing a share of it than worrying about profitability.

However, there was a small wrinkle. Restaurant businesses are traditionally run on wafer-thin margins. Of the restaurants we spoke to (which included a mix of delivery-only, fine-dining restaurants and cafes), all invariably said that even a very efficient setup could just about manage a net profit margin of 5-6%; anything in double digits is regarded as an exception. 

To illustrate the cost involved per order, here is a simple breakdown of a typical restaurant’s expenses on sales of INR 1 Lakh for walk-in customers: 


So, when customers come in, a restaurant would make on average between 10% of the order value, after deducting the overheads. Naturally, when the restaurant switches over to Zomato or Swiggy, that’s an additional cost. And these costs have increased over the years. Here’s what using tech platforms leaves restaurants with, for an order value of INR 1 Lakh on online deliveries. 


This does not include the capital required to set up the restaurant, such as commercial property deposit, taxes, registration fees, decor, cutlery, uniforms, accounting software and other unforeseen expenses.

Amit Chugh, founder of the Rolls Xpress chain of affordable fast food restaurants in Punjab and Delhi, said his restaurants have seen profits plunge by close to 60% after he signed up with food-delivery platforms, even though sales have shot up by 30%. 

Food Aggregators Too Are Bleeding Money

While food delivery is weighing heavily on the bottom lines of restaurants, it would be wrong to think that the food aggregators are laughing their way to the bank. India’s foodtech sector industry has whittled down from almost a thousand players in 2015 to a two-horse race (Zomato and Swiggy) by 2018 due to its own unforgiving economics.

We now lose INR 25 per delivery, compared to INR 44 per delivery in March’18. Our last mile cost per delivery is now INR 65, compared to INR 86 in March’18.                                                  – Deepinder Goyal, Zomato CEO

Goyal said this in Zomato’s 2019 annual report. At roughly 33 Mn orders a month, Zomato is bleeding close to $12 Mn every month on deliveries!

While an exact breakdown of the unit economics of food delivery platforms is hard to come by (Swiggy and Uber refused to reveal their numbers while Zomato’s reps were still collecting current data at the time of publication), a blog post by Goyal in 2016 showed the hard road that foodtech players are treading:

(Snippet from Goyal’s blog post on Zomato’s unit economics in 2016)

Both Swiggy and Zomato’s losses have mounted over time while smaller players like Uber Eats and Ola’s Foodpanda have been virtually run out of the business. Swiggy posted a net loss of $54.12 Mn in 2017-18, on a revenue of $63.77 Mn, and Zomato’s net loss was a whopping $500 Mn, albeit on a much larger revenue of $206 Mn in the same year. These losses were due to the nature of the food delivery business in India, Zomato had said.  

That amounts to $550 Mn in loss between the two dominant players in one year. To get some perspective, the amount invested in the restaurant segment, including in categories such as quick service, casual dining and fine dining in the last five years was $843 Mn, according to the NRAI.

So if neither the restaurants nor Swiggy and Zomato are making money on food delivery, why is everyone, including some of the biggest venture capital investors in the startup ecosystem so keen on pouring in vast amounts of hard cash into the foodtech market? 

The short answer: Network Effect.

No Such Thing As A Free Lunch

Network effect is the phenomenon where every new user added to a platform makes it more valuable to every other user. The platform which has more choices of cuisines and restaurants will attract more customers, which in turn will attract more restaurants to join. This virtuous cycle creates the network effect.

Once a company achieves a network effect, users won’t find much value in the relatively smaller networks offered by competitors. Swiggy, Zomato and the investors backing these firms know this all too well.

The foodtech startup ecosystem has attracted about $3 Bn in funding since 2014, according to DataLabs by Inc42, of which almost $1.5 Bn has been raised in the last year itself. This is largely due to the funding arms race between Swiggy and Zomato. Currently Swiggy is said to be in the last stages of finalising a $700 Mn round, while Zomato has been in talks to raise a $500 Mn – $1 Bn funding round from Alibaba’s investment arm Ant Financial and its digital payments unit Alipay.

According to Vivek Durai, founder of business intelligence platform, foodtech isn’t attracting investors as much as a single company – Swiggy. Meanwhile “Zomato faces an uphill task convincing investors that its two-focus play is a better use of capital that a pure distribution play such as Swiggy,” Durai added.

Industry watchers believe that for now investors are looking at foodtech only as a high growth market  that they want to be part of. These bets could also get early backers the much sought-after high returns exits during late stage rounds.

The network effect also means that every time Swiggy or Zomato raises more money, venture capital investors find it less attractive to back the other. In other words, the scramble for funds is not a means to an end but the end itself. An all-out war to strangle the competition of cash.

A partner at a venture fund, which has invested in multiple foodtech startups, said “I don’t know if people have thought through that far with these business models as they tend to be land-grab situations.” 

The situation is not unique to foodtech either, and applies to ride-sharing and ecommerce as well, the investor told Inc42 on the condition of anonymity. “Investors who get into these are looking at a longer horizon and want to establish massive scale first and then figure out a way towards better unit economics and profitability.”

Postscript: Death By Amazon?

At the time of restaurants’ protests against Zomato and Swiggy, ecommerce giant Amazon and Ola are partnering up. Ola has confirmed that Amazon will be powering Ola-owned Foodpanda’s  revamped cloud kitchen and food delivery services. A restauranteur confirmed to Inc42 that Amazon has already started approaching restaurants in Bangalore and is promising to charge much lower commissions than Swiggy and Zomato. 

The entry of Amazon into the food delivery business has given hope to restaurant chains, who have reportedly claimed that Amazon’s entry will give them additional leverage while negotiating terms with Zomato and Swiggy. That’s also thanks to the lower commission that Amazon says it will charge restaurants for deliveries. 

With its frighteningly in-depth knowledge of customer buying choices, the move highlights Amazon’s appetite for stretching its tentacles into new businesses such as consumer electronics, online video and music, cloud services, groceries, and more.    

As the empire Jeff Bezos founded grows, companies are forced to adapt or close. Amazon already has a food delivery service in the US and its lower-price model and vast warehouse network in India can be easily adapted to food delivery as well. While Amazon’s entry will make foodtech investors jittery and ordering food even cheaper for customers, will the business itself ever become a profitable one?

In the words of Zomato’s Goyal on the subject of profits in 2016: “This might have needed explaining in 2015. Not anymore.”

(Additional inputs and infographics by Naga Jayadeep Akula)

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