Amazon aims to grab larger share of India's $4.3bn food delivery market

Competition in India's online food delivery sector is heating up, with market leader Zomato planning a public listing this year, while Amazon makes a push to grow its fledgling restaurant delivery service in the country to grab a larger slice of the pie.

The sector is currently dominated by Zomato, Jack Ma's Ant Group-backed venture, which was launched in Delhi in 2008. Bangalore-based Swiggy, which counts Prosus Ventures among its investors, is another major player.

“Amazon's entry can have a massive effect on this industry,” says Nitin Shahi, the executive director of Findoc Financial Services.

At stake is greater share of a fast-growing food market, driven by rising smartphone ownership, internet use and an expanding middle class.

The size of India's online food delivery market reached $4.35 billion last year. It is projected to witness a compound annual growth rate of 30.11 per cent over the next five years, according to market research company Imarc Group.

“It's becoming extremely convenient for people to order food online,” says Siddhant Bhargava, co-founder of Food Darzee, a healthy meal delivery service in India. “It's a great time to be in this market. India's extremely large. I think for the next three to four years there's space for everybody to grow in this industry.”

The food delivery sector received a further boost following the pandemic, which saw India entering into one of the world’s strictest lockdowns.

Despite easing of pandemic-related restrictions, people avoid dining out and prefer to order food online, as Covid-19 cases continue to rise in the country.

There are plenty of online food delivery options for them to choose from.

Amazon, which is investing billions of dollars in its e-commerce business in India, joined the fray last year. It launched its food delivery service called Amazon Food in May in parts of Bangalore, the country's tech hub.

This month, Amazon expanded its service to 62 pin-codes across the city, with more than 2,500 restaurants and cloud kitchens signing up on its platform. It is gradually increasing its presence and experts say the global tech company is testing waters to see if the food delivery sector in India is worth investing into. Amazon ended up shutting down its restaurant delivery service in the US in 2019 after four years of operations because of limited success.

Amazon has deep pockets and could disrupt the Indian food delivery business, analysts say.

To get a foothold, the company is charging a delivery fee that is half that of its rivals, while its Prime customers are not charged for delivery at all.

The move could affect its competitors Zomato and Swiggy, which are both burning cash to maintain their market share.

“Both Swiggy and Zomato are currently in losses and with Amazon's entry, their [plans] to be in profits will take a hit,” says Mr Shahi. “With severe competition, the market will consolidate more in the coming years.”

The food delivery sector in India is at an early stage of growth and companies need to burn cash to attract customers and build a loyal customer base.

Although profitability still far off, burning cash right now is worth the risk in a country with such a massive population and an enormous room for growth. The potential returns are significant, analysts say.

“Losing money at a net-income level is acceptable in the short term for a start-up as long as it is gaining in users and traction,” says Utkarsh Sinha, managing director of Bexley Advisors, a Mumbai-based advisory firm. “Amazon’s large [existing] customer base positions it well to have lower customer acquisition costs ... which will [certainly] ... trickle down to the net-income level.”

Amazon has already shaken up the e-commerce space in India, where it is battling Walmart-owned Flipkart and Mukesh Ambani's Reliance Industries for dominance.

“Customers trust Amazon for all their unique shopping needs across categories,” says Sameer Khetarpal, director, category management, Amazon India. “With the expansion of Amazon Food in Bengaluru (Bangalore), we continue in our endeavour to offer unmatched convenience and value.”

As Amazon adds a new business vertical in India, Mr Sinha says that Amazon “has unparalleled scale at its disposal which gives it the freedom to lose money at a service level that it will more than make up from the command on the consumer wallet”.

To fend off the competition from Swiggy, and now Amazon, Zomato has been building a war chest ahead of its initial public offering, with the process for listing on an Indian stock exchange expected to kick off as soon as next month. In December, Zomato raised $660 million in a financing round from investors including Tiger Global and Fidelity.

Zomato's fundraising efforts have already been delayed by the pandemic but the start-up nevertheless managed to raise $250m last month. This takes the company's valuation up to $5.4bn, according to a stock exchange filing by Info Edge, which holds an 18.4 per cent stake in Zomato.

There has already been some consolidation in the industry. Last year, Zomato acquired Uber Eats in India in an all-stock deal, which gave Uber 9.9 per cent ownership of Zomato.

The Indian start-up's IPO will be critical given the increasing competition. The company may look to raise $650m and could complete the listing by September, according to Bloomberg.

“Competing with Amazon will be tough for any competitor and for this purpose proceeds from the IPO will be required,” says Mr Shahi.

A spokesperson for Zomato said that the company was “in a silent period” and declined to comment on the potential listing.

Restaurants in India that are signed up on the platforms, however, are happy with more competition in the food delivery business, which can potentially help them to grow their revenue.

Chai Point, a major chain of cafes in India, already has its Bangalore branches on Amazon Food's platform.

Amazon's presence in this space “will definitely benefit us”, says Amuleek Singh Bijral, chief executive and co-founder of Chai Point.

“Online delivery has been especially important during the pandemic wherein it became 45 to 50 per cent of the overall stores' revenue.”

Vineet Manocha, senior vice president culinary at Lite Bite Foods, which has more than 30 restaurant brands in its portfolio including Punjab Grill, says “more players will definitely lead to overall growth of the market”.

The company has tied up with all of India's major online delivery firms, including Amazon Food.

But, like many other restaurants, they are concerned about the charges.

“The listing fees or marketplace commissions currently are extremely high which need regulation or rework,” says Mr Manocha. “The operator also spends on delivery charges and visibility on the platform”

As a result, Lite Bite Foods is developing its own food delivery app, called “Foogo”, he says.

“Food delivery is definitely going to play a massive role in the future of restaurants and these are exciting times for those who want to explore this segment,” says Mr Manocha.

In India, the average spend on delivery is about $4, while in the US, it is $33, according to research by RedSeer Consulting.

Companies are working on addressing this challenge.

During the pandemic “both Swiggy and Zomato took the opportunity to focus on improving profitability metrics by charging higher delivery fees to consumers, cutting down on discounts and marketing spends and saving on other operating expenses”, according to research by Mumbai-based investment banking firm JM Financial.

Amazon's plans to take a bite out of the market, however, could scupper these efforts.

“While no market leaders will concede ground to Amazon without a fight, it is going to be a serious contender for a top podium finish,” says Mr Sinha.