STARTUP SPECIAL ......Foodtech startups revert to an old recipe for success: Earn, then spend

Foodtech startups revert to an old recipe for success: Earn, then spend

Orders have crossed 4,50,000 a day for food delivery startups and they’ve tightened their belts — they’re now looking forward to a feast after the funding famine of the past few years

Investors seem to have started 2018 with a healthy appetite for foodtech startups after going slow in 2016 and 2017. Earlier this month, Zomato received $150 million in funding from Alibaba’s Ant Financial, and Swiggy raised $100 million from South Africa’s Naspers and Chinese e-commerce company Meituan-Dianping last month. Cab aggregator Ola acquired Foodpanda for about Rs 40 million a few months ago to take on UberEats.

Money flowed to foodtech startups in 2014 and 2015, but in the subsequent drought, a number of companies such as Cyberchef, EatOnGo, Mealhopper, Yummist and Biteclub shut down. Even larger players like Zomato and Swiggy laid off staff and scaled back as they realised that unrealistic discounts and a high cost of customer acquisition made poor business sense. The ones that survived cut costs and improved their business model.

“In 2014-15, the foodtech space saw extreme euphoria and many people jumped on the bandwagon only to experience extreme distress in 2016. Now, the market is stabilising as entrepreneurs are focusing on core issues rather than banking on sentiment,” says serial entrepreneur and founder of Growth Story K Ganesh, who has invested in Freshmenu and Hungerbox.

POSITIVE SENTIMENT

Startups are now looking forward to raising big money, expansion and introducing product innovations. “This is one of the most exciting times to be in the foodtech industry. It is growing every year with a strong focus on the consumer. The industry is evolving and the market is growing,” said Pranay Jivrajka, CEO, Foodpanda India.

According to data from startup tracker Tracxn, the foodtech space saw investment worth $370 million in the fiscal year 2017-18 up from $70 million in 2016-17. That’s a growth of more than 400%. There are 990 food delivery startups in the country.

The daily order volume has increased from 2,00,000 in 2016 to 4,50,000 in 2017. An analysis by Red-Seer Consulting finds that unit economics for the industry is beginning to make sense with operating margins of around 7%.

This opportunity is the draw for founders and investors. The online food ordering industry grew at 150% year-on-year with an estimated gross merchandise value of $300 million in 2016.

“India is one of the most important markets for UberEats and is the fastest growing market in Asia-Pacific,” said Bhavik Rathod, head, UberEats India, which has 7,000 restaurant partners across the country.

It’s been a hard road for the startups that survived the funding famine of 2016, and they’re now focusing on technology and efficiency.

FOCUS ON TECHNOLOGY

Swiggy says it has reduced delivery costs by 35% over the last couple of years. It plans to invest a chunk of the recently raised money in leveraging technology for better customer service. A spokesperson said the company will improve its core technology platform, especially data-driven systems that use machine learning and artificial intelligence, to provide greater customisation and choice to customers while increasing speed and volume of deliveries. Similarly, UberEats relies heavily on technology to cut delivery time.

“We have tried to balance technology and human effort at every stage over the last five years. We have the best unit economics in the industry, which is fundamental to building a sustainable business,” said Jivrajka of Foodpanda.

Fatigue sets in quickly among customers. “If you are building a food brand, you must ensure you keep the romance alive by innovating,” says Ganesh. That’s why companies are creating new products and experiences such as loyalty programmes, which Zomato, FreshMenu and Swiggy have introduced.

“The idea of membership clubs is to raise more business from existing clients, turn them into brand ambassadors, and have them create new customers,” said Rashmi Daga, founder, FreshMenu.

IN THE KITCHEN

Startups also work with restaurants to improve kitchens. Last year, Zomato rolled out Zomato Infrastructure Service, where the company works with a restaurant to expand its business. “We experiment with products that provide affordable and quality food. Some new products might be launched in the next 12 months,” said Akshyant Goyal, spokesperson, Zomato. Swiggy is working on its cloud kitchen, The Bowl Company.

Though sentiment is positive again, Ganesh warns that succeeding in the food business requires a lot of cash and keeping a sharp eye on unit economics. “You’ll burn a lot of cash so ensure you have the capital to execute your plans for the first 12 to 18 months. Be clear about your value proposition and unit economics,” he says. “It’s a winner-take-all business.”

TOI 11MAR18