Swiggy goes to the market

Table of Contents

1. Introducing Swiggy

2. Swiggy vs Zomato

3. Margin drivers

4. Future margin boosters

5. Headwinds

6. Tailwinds

7. Swiggy and Zomato in numbers

8. Conclusion

1. What is Swiggy and what does it do?

Swiggy is a hyperlocal commerce company in India. It is a B2C (business to consumer) focused marketplace that connects its customers to restaurants. It fulfills food delivery, quick commerce and parcel orders through a network of gig workers (delivery riders). It receives payments on the app and remits the required amount to its respective partners.

It began its operations in 2014 and has the following primary lines of business:

Consumer facing

1. Online food delivery

2. Quick Commerce (Swiggy Instamart)

3. Online restaurant bookings and events (Swiggy Dineout)

4. Hyperlocal couriers (Swiggy Genie)

It has also layered on a loyalty program called Swiggy One (2021) that offers discounts and deals. For payments, it has enabled Swiggy UPI, Swiggy Money prepaid payment instrument (wallet) and a co-branded Swiggy HDFC credit card.

From a financial reporting perspective, its business lines can be divided in five segments:

1. Food delivery

2. Out-of-home Consumption (including dining and events-- Swiggy Dineout)

3. Quick Commerce

4. Supply Chain and Distribution

5. Platform Innovations (includes Swiggy Genie, Swiggy Minis et al)

Fun facts: Swiggy started online food delivery before Zomato (2014 vs 2015). It also entered Quick Commerce with Swiggy Instamart (2020) before Zomato-acquired Blinkit (2021).

However, Zomato beat it to the public market with its 2021 debut and presently holds a valuation of $29 billion (as of September 29, 2024).

2. What is the difference between Swiggy and Zomato?

a) Customer acquisition

Swiggy runs a single app that serves customers who want to use its food delivery, Quick Commerce (QC), restaurant reservations, events and parcel delivery. Anytime a customer logs into the Swiggy app, they can access any of their offerings. This is their Superapp strategy.

Zomato runs the flagship Zomato app for food delivery, restaurant reservations and events ticketing. It owns Blinkit which serves QC customers in a separate app, and it will soon offer events ticketing and dining through a separate app titled District. This is their Superbrands strategy built through standalone apps.

b) Loyalty focus

Swiggy runs a Swiggy One membership since 2021 that offers benefits across food delivery, QC, parcel delivery, restaurant reservations and events. It offers this membership in two iterations: Swiggy One and Swiggy One Lite (with order restrictions).

Zomato runs a Zomato Gold membership that is the fourth iteration of its loyalty program. It only offers benefits across food delivery and online restaurant reservations.

c) Unit economics

In Q1 FY 2025 (April to June), Swiggy recorded a net loss of ₹ 611 crore. In the food delivery segment, it achieved ₹ 58 crore as adjusted EBITDA profit. Its QC arm recorded an adjusted EBITDA loss of ₹ 317 crore.

In Q1 FY 2025 (April to June), Zomato recorded a profit after tax of ₹ 253 crore. Blinkit (Zomato’s QC app) recorded an adjusted EBITDA loss of ₹ 3 crore, and is within touching distance of profitability.

d) Public market proximity

Swiggy just filed to launch its Initial Public Offering (IPO) with the regulator Securities and Exchange Board of India (SEBI). It has yet to deal with the quarterly pressures as a publicly listed entity. 

Zomato listed on the stock exchanges in India in July 2021. It has been building in public and is relatively accustomed to the market’s gyrations. In 3 years, it has seen its fair share of highs and lows, and its stock price is presently on a tear in 2024 (up 123% YTD as of September 29, 2024).

3. What are margin drivers for Swiggy?

My post on Quick Commerce in India (September 2024) includes margin drivers applicable to Swiggy. The company’s leading margin drivers include:

a) Product margins: As with grocery store owners, each product sold by a QC platform has an attached margin. With high sales numbers, QC operators can negotiate and drive better bargains in procurement of goods for B2C sales. Applicable for Swiggy Instamart.

b) Order fees: These charges include delivery fees, order processing/ handling charges, platform fees, late night fees and surge fees (high order times/ inclement weather conditions). Applicable for Swiggy Instamart/ restaurant reservations/ food delivery/ parcel delivery.

c) Loyalty programs: This program can be margin accretive if the QC/ food delivery/ restaurant reservations/ parcel delivery business lines offer savings in exchange for higher order frequency and high average order values.

As of Q1 FY 2025, the Swiggy One program has 5.71 million members (4x members as compared to 1.38 million members in Q1 FY 2024). The company should be careful to ensure that this program is not deep in the red because the higher revenue per Swiggy One member can be outweighed by cost savings delivered to these power(?!) users.

For context, in Q1 FY 2025, each Swiggy One member ordered 7.40 times as compared to the platform average of 4.50.

d) Fintech focus: Swiggy tied up with HDFC Bank for a co-branded credit card in 2023. As of January 2024, HDFC bank had issued ~120,000 credit cards. Depending on the card usage and tie-up commercials, the platform would earn revenue from this offering.

e) Ad platform for QC/ food delivery/ restaurant reservations: Innovative performance and brand marketing ad solutions work well with 15.99 million monthly transacting users on the Swiggy app (as of Q1 FY 2025). Specifically,

i) DSA for financial products: Cross-sell high margin financial products including personal loans and credit cards.

ii) Sponsored product listings: Retailers can pay for shelf space in traditional high-footfall grocery outlets. The same format repeats on ecommerce platforms including Amazon where retailers can pay to be shown on top of the page as sponsored listings.

As with traditional retail and ecommerce, sponsored product listings extend well to food delivery, QC and restaurant reservations.

iii) Ad format experiments: Brands can leverage banner ads on track order screens and delivery rider animations with sponsored products. Food delivery, QC platforms and restaurant reservations are only limited by their ingenuity in carving out ad packages for incumbent and upcoming brands.

4. What can boost margin for Swiggy?

a) Family subscription plans: At present, users can leverage one subscription or user login across devices to place food delivery and QC orders on Swiggy 

With a Swiggy One subscription, the primary and secondary users jointly benefit from discounted or free delivery. Like with OTT, family subscription plans can be offered at a higher price for continued access across multiple devices.

b) Increased handling/ processing fees: The user base has accepted order handling/ platform fee/ processing fee. Blinkit’s growth has not been hindered even as it charges a delivery fee on almost every order.

Swiggy has to learn from this and walk away from the incentive of zero delivery fees to boost its unit economics. In food delivery, it allows free delivery for orders above ₹ 149 while Zomato allows users free delivery above ₹ 199.

In QC, Swiggy allows free delivery above ₹ 99/ ₹ 199 depending on the tenure of your Swiggy One plan. Blinkit has no such incentive and is still the leading QC player in the country.

c) Launching private labels: QC Platforms can offer private label brands in fast moving categories with the combination of higher platform margins and lower prices for customers. Zepto presently offers products from its meat & seafood brand Relish and fresh food/ beverages from Zepto Cafe, an F&B play.

Swiggy QC can experiment with launching private label brands in high demand categories. Blinkit in its earlier avatar as Grofers retailed private label brands.

d) User insights for brands: QC platforms have amassed order history and brand preferences for user cohorts. These anonymized data sets can be leveraged by brands in targeted product launches for a fee.

Further, these platforms can be easily leveraged for paid brand surveys and sampling initiatives.

e) Fees per payment instrument: In the race to be profitable, it would help Swiggy if they levied fees on credit/ debit cards (except for their co-branded card to drive greater adoption).

This can nudge users to buy discounted gift cards which have a double benefit of retaining users and saving payment processing charges. Alternatively, users might opt for UPI as a payment mode which is supremely cost-effective.

5. What can hold back Swiggy?

My post on Quick Commerce in India (September 2024) also referenced headwinds applicable to Swiggy Instamart. Specifically, Swiggy faces the following:

a) Competition coming thick and fast

i) Zepto raised $1 billion in 3 months (June to August 2024). The company is presently third in market share as per March 2024 estimates and will battle harder with the incumbents Swiggy & Zomato.

ii) In June 2024, Zomato made a regulatory filing to share it would invest ₹ 300 crore in Blinkit. With plans to expand its QC store count to 1,000 stores by March 2025 and 2,000 stores by December 2026, it is not slowing down.

iii) Flipkart Minutes launched in August 2024, and Amazon is rumored to launch its competing version in Q1 2025. The fourth ranked player in market share, BBNow announced it would fully pivot to QC from September 2024.

b) Numbers in the red

i) Swiggy Instamart recorded ₹ 403 income from a Gross Order Value of ₹ 10,189 crore in Q1 FY 2025. This resulted in an adjusted EBITDA loss of ₹ 317 crore for the same period and a take rate of 3.96%. 

This stands in contrast to Blinkit (Zomato’s QC app) recorded ₹ 942 crore income from a Gross Order Value of ₹ 15,455 crore in Q1 FY 2025. This resulted in an adjusted EBITDA loss of ₹ 317 crore for the same period and a take rate of 6.01% (50% higher vis a vis Swiggy Instamart).

c) Increasing regulatory focus

i) The authorities are starting to take a stricter view of QC throttling orderflow of local kirana store outlets. This could halt the expansion of existing players and prevent legacy ecommerce platforms from starting/ scaling QC initiatives

ii) Food delivery is a stated duopoly between Zomato and Swiggy. The government backed a protocol titled Open Network for Digital Commerce (ONDC) aimed at breaking the stronghold of leading ecommerce, food delivery and mobility platforms in India and creating an open ecommerce platform. It is still early days but this is a threat on the horizon.

iii) A regulatory focus on social security plans for gig workers can impact the already subpar take rate for Swiggy and its peers. As per the draft plan, food delivery aggregators would have to contribute with a % of their revenues toward social security funds. 

d) Superapp or go home

Swiggy is fully committed to its single app Superapp strategy. Depending on the technical layout, if the app suffers a downtime, its numerous services can be hit and may impact public perception.

Additionally, with limited screen space, the various offerings (QC, food delivery et al) will always compete for on-app marketing and entry points, and this can result in a poor customer experience.

e) Maxing out handling fees: The order handling/ processing fee started with food delivery platforms and made its way to QC platforms. It is presently ₹ 4 for Blinkit/ ₹ 10 for Zepto and ₹ 7.67 for Swiggy Instamart.

This customer facing fee will have to be continually hiked to improve its unit economics.

f) Low order frequency: For Swiggy Instamart, as QC platforms expand their dark stores network, they will inevitably bump up against the order capacity of customers. The math may still work for customers in metro cities with high average order values (AOV), order frequency and disposable incomes. The true test lies in expansion beyond the top cities.

g) Failure to scale AOV: In Q1 FY 2025, the Swiggy QC AOV stood at ₹ 487. Every QC platform is aiming to lift the AOV and drive profitability per order. For the same period, Blinkit led with an AOV of ₹ 625. 

This focus on lifting AOV industry wide in QC has led to Zepto launching a service called SuperSaver to incentivise bulk orders in September 2024.

h) Curse of category expansion: For Swiggy Instamart, every QC platform began with a desire to serve daily grocery needs including fruits, vegetables, bread, milk, butter, oils and eggs. This evolved into higher margin category expansion including sports goods/ toys/ electronics/ cosmetics/ apparel et al.

Not every category will work and every unsold SKU continually takes up space in a dark store. It will be imperative for QC platforms to continually roll back low-selling categories.

6. What can propel Swiggy?

a) Fund infusion: Swiggy has filed for its IPO with plans to raise ₹ 3,750 crore as a fresh issue. There are plans to raise this fresh issue size to ₹ 5,000 crore in an extraordinary general meeting in the first week of October. 

The company has already identified investments of ₹ 982.4 crore in their QC arm to give them greater firepower in the race to expand across the top cities.

b) Growing market: As per a joint report by Swiggy and Bain & Co in July 2024, the online food delivery market is estimated to grow at 18% YoY through 2030. From an ₹ 66,000 crore online food delivery market size in 2023, it is expected to reach ₹ 2,10,000 crore by 2030.

As per a report in September 2024 by financial services firm Chryseum, QC expanded by 73% in FY 2024 and the market size is now upwards of ₹ 27,000 crore. This is projected to triple by 2029.

c) Headroom in ad revenue: Swiggy has considerable headroom in expanding its take rate across offerings by leveraging self-serve advertising solutions. 

Advertising income offers high double digit margins and its fast scale-up can be the biggest factor driving the company’s profitability.

d) Delegated UPI payments: The launch of full/ partially delegated payments on UPI circle can further aid adoption of QC and food delivery platforms by house help, elderly parents and teenagers. Swiggy leads with its implementation of Swiggy UPI and its co-branded HDFC credit card compared to Zomato’s payment offerings.

This can increase the order frequency and boost GOV for Swiggy.

e) Automating top-up orders: With 4/8/12/26 week product subscriptions, Swiggy can lock in user orders for QC staples including bread/ milk/ eggs/ diapers/ detergent et al.

This upfront user lockin strengthens its negotiation ability with suppliers and simplifies order fulfillment. Furthemore, Swiggy has sufficient data on food delivery trends per customer and should leverage this to better incentivise users to pick their platform over competing platforms.

7. Swiggy and Zomato in Numbers

Key metrics for Swiggy and its competitor Zomato (and Blinkit) include the following:

8. Conclusion

We scoffed at food delivery through an app when it first began with Swiggy, Zomato and other companies. We could just call our favourite restaurants on their landline numbers, recite our orders and pay in cash with the exact change at our doorstep.

We started liking the convenience and assortment of restaurants on the apps. It became harder to collect restaurant menus in a wooden drawer and rifle through them to order. Restaurants preferred the food-making to the food-delivery. They started encouraging you to use the food delivery platforms instead of calling their landline numbers.

The discounts on the apps were too good to be true. If there were no discounts, why would we ever order from them? If they would dare to test a delivery fee, we would boycott them. No concept of minimum order for free delivery existed. Every order was delivered for free. We could order for ₹ 50 and for ₹ 500 and ₹ 1,500. We were spoiled. Restaurants were spoiled by the convenience brought about by delivery partners.

With the inflection point of a pandemic, the habit grew stronger. We stayed indoors but we missed the food outdoors. We ordered a lot. We kept ordering even as the world opened up.

With quick commerce, we initially felt the same reluctance. We had our neighbourhood kirana stores, our relationships and their landlines/ mobile phone numbers. We couldn’t imagine paying any fee till we received that first order in 10 minutes. 

We couldn’t believe that QC was a business till we realized we were ordering more often than we ever ordered food. It was a need and a want and a game. It was joyful. The platforms started charging fees- platform/ handling/ processing/ delivery. We grumbled but we paid. With each order, we kept paying, and we kept ordering more and more. The habit grew stronger in a shorter timeframe than food delivery.

Everything can come to your home with quick commerce. It began with grocery and no one knows where it stops. And this is why Swiggy’s race has only begun. The food delivery duopoly is unlikely to be replicated near-term in QC and this makes Swiggy’s ascent into the public markets perilous and momentous. Time will tell.