Disrupting the delivery game

The platform has the potential to challenge Zomato, Swiggy

The government-backed Open Network for Digital Commerce (ONDC) could shake up the food delivery sector in India, giving tough competition to market leaders Swiggy and Zomato, experts say. Touted as the e-commerce equivalent of UPI, the network created quite a buzz on social media after users discovered that prices of food items delivered through it were as much as 30-60% lower than what was being offered on other apps.

While the platform has been around since September of last year, the total number of orders has increased over 2.5x in the past couple of weeks, surpassing 25,000 a day as per estimates. The network is likely to increase digital consumption in India by over five times to over $340 billion by 2030, according to a report by McKinsey.

For the over $6-billion food delivery industry in India, set to grow to $9 billion within the next three years at a CAGR of 25%, ONDC’s rise could signal major disruption. The market is dominated by Swiggy and Zomato, who together take up around 90% share. The two however did not participate in the story. While Zomato refused to comment, Swiggy did not respond to queries by FE.

“ONDC can be a disruptor based on a take rate (commission) standpoint. Currently, take rates on popular food delivery apps are close to 22-24% for cloud kitchen operators and standalone restaurants/smaller chains, while they are between 14% and 18% for larger chains,”says Karan Taurani, senior vice-president, research analyst at Elara Capital. ONDC does not charge any commission currently as it is operating as a not-for-profit entity. However, it may introduce a minimal rate later.
Seller and buyer side apps, however, can charge a commission of around 3-4% each. Logistics partners can also charge delivery fees. According to reports, however, apps such as Paytm may be willing to forego the buyer app commission as the volume of orders increases.

Taurani adds that in the past few years platforms have hiked some prices in comparison to dine-in rates in a bid to offset restaurants refraining to pay take rates. ONDC’s entry could result in a win-win situation for the customer as well as the restaurants as the former would have to pay lower prices and the latter would benefit from the lower commission .
The issue of offering lower take rates could potentially cast a dent on other food aggregators as 70% of their revenues come from commissions and 30% from customers as delivery charges.

Adding to competitors’ woes, several restaurants have hopped on board the ONDC train and say they prefer selling there. Pranav Rungta, managing committee member and Mumbai chapter head of NRAI, says the network is a “step in the right direction”. “ONDC is the answer to several problems that we’ve been facing with apps such as Swiggy and Zomato. First, it does not engage in data masking, which is when we do not get any information about the customers we’re serving. We only serve as manufacturers and have no data about customer preferences. ONDC passes this data to sellers so we know who the customer is and we understand what sells.”

Swiggy and Zomato have enjoyed a competitive edge in this regard. “Since they function as intermediaries, Swiggy and Zomato collect large-scale consumer data and use it to inform their own business strategy. They use the data at their disposal to set up self-branded cloud kitchens that directly compete with restaurant partners,” explained Vinay Butani, partner, Economic Laws Practice.

NRAI’s Rungta adds, “ONDC also benefits us as it makes goodwill portable. If one switches from Zomato to Swiggy, ratings have to be started from scratch. However, we will not face this hassle in switching network partners on ONDC.”

Challenges galore

Despite its rising popularity, the network still faces several challenges. Taurani says a big issue would be scaling up and maintaining user experience. “Digital business is all about economies of scale so ONDC won’t be able to see efficiencies otherwise,” he said.

Moreover, ONDC doesn’t have last-mile control of how the product is delivered, he says. If the customer experience is poor, then they may not stay on because discounts are short-lived in nature. Food also needs to be delivered within a certain time frame, which is why experience is important. Therefore, a dedicated customer service portal is a must, points out NRAI’s Rungta.

Finally, while discounting is to continue till the end of the year, according to ONDC CEO T Koshy, caps have been put in place (` 50 per transaction) for a maximum of 2,000 transactions a day on an app. This may result in levelling up of the prices between various platforms. However, seller and buyer apps can still offer their own discounts.

The industry still has room to expand. Revenue can increase, especially due to inflationary pressures, and frequency and ticket value of orders also have the scope to grow as people continue to eat outside.


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