Zomato increased their market share to 55% with this one strategy.

Last year, Zomato started losing market share to Swiggy after it acquired Dineout.

To fight back, they relaunched their Zomato GOLD for the 4th time

The crazy part? Their market share has increased to 55% reducing Swiggy's to 44%

Here's why they keep trying to eat each other:

Why do Zomato and Swiggy face off against each other, time and again?

To understand that, let’s try and understand the Indian online food delivery industry and why it’s such a bad business model.

Since the pandemic, the market has shown a year-on-year growth of 100%, but honestly, it kept on growing even before that. The industry attained a market valuation of $7.4 billion in 2022, and is expected to witness a robust growth in the coming few years.

But here’s the thing — revenues are ballooning and so are losses. Last year, Swiggy recorded a revenue of ₹5,704 crores while Zomato’s revenue for the same period stood at ₹4,687 crores.

However, Swiggy’s losses were also 3 times higher than Zomato’s losses in the same year.

In fact, their cumulative losses till date are ₹22,880 crores and ₹6,726 crores, respectively!

So, what plagues this industry?

👉 RAZOR THIN MARGINS

Let’s try and understand the unit economics with a best case scenario.A customer pays 100.

Out of which, 57 goes to the restaurant and 11 goes to pay delivery partners

— leaving a gross margin of 32.

Now, out of this gross margin, 16 covers delivery costs, 8 covers marketing costs

— leaving a profit of 8. And out of this profit, 5 covers IT and fixed costs

— leaving an actual profit of 3.Safe to say that this a difficult and risky business.

And the lower the Average Order Value (AOV) and purchase frequency, the more difficult it becomes to sustain this business.

👉 HIGH COMPETITION, LOW DIFFERENTIATION

One of the main reasons why food delivery companies all over the world are highly unprofitable is —Customer Acquisition & Retention Costs.

See, this is a highly competitive industry and to gain competitive advantage, differentiation is important. But most of these companies have a product that is largely undifferentiated.

If Swiggy offers a meal that you want at a cheaper price than Zomato, there’s hardly any reason for you to buy from Zomato. Which is why these companies offer incentives like deep discounts and memberships.

Along with that, they spend an unhealthy amount of their sales on marketing, further putting them in the red

👉LOW MARKET PENETRATION

Bengaluru is the largest regional market and accounts for almost 30% of the industry, followed by NCR, Mumbai, and Hyderabad!

What does that tell us? That Indian food delivery industry is at a nascent stage and has plenty of room to grow.In fact, our market penetration is only 7% compared to 50% in China and 35% in the US. But, not all is lost for Swiggy and Zomato.

One of them can still succeed in the food delivery business , provided they get these right:

👉CONSOLIDATION

Zomato currently has 55% and Swiggy has 44% market share in India.

In order to kill the competition, Zomato has made a total of 26 acquisitions and investments in multiple sectors, such as food tech and online grocery, while Swiggy has made 10.

We can clearly see that both these companies are aggressively trying to scale —

— acquiring whatever they can to eat each other’s market share. Because consolidation will reduce the need for the monopoly to incentivize customers, drivers, & restaurants so much, and help cut on marketing costs

— massively improving its profit margins!

It will also help increase the ticket value, making food delivery more cost efficient.

Simply put, consolidation in this market is the key to profitability.

👉 SPEED‍

Speaking of consolidation, speed is everything when it comes to dominating the market.

Tier 2-3-4 regions are a goldmine for big companies like Zomato and SwiggyThe speed with which they establish a presence in these new regions can be game-changing for their overall success

👉ADD-ON BUSINESSES

‍But what about growth? Well, that’s where add-on businesses come in

That’s another reason why Zomato and Swiggy have been acquiring like crazy and going vertical with businesses like Hyperpure, ghost kitchens, etc.

They’re trying to leverage their positions in order to become super apps.

Because increasing the amount consumers spend on a single transaction can further improve profitability. The best example of a company which has been able to pull it all off is

— Meituan-Dianping.

Similar to Amazon, it aggressively focused on expansion over profitability.

And turned profitable in 2020 after 6 years of cash-burning war in the crowded Chinese market. Currently, it accounts for more than 60% share in the Chinese market

— which has the world’s highest market penetration!

The company was quick to capture the less competitive market in lower-tier cities for less expensive acquisition costs. But it was Meituan’s Food Super App approach that played a critical role in improving its user retention and turning the business profitable.

As the number of transactions on their platform increased, order density also increased, and so the probability of grouping more orders together in one trip improved, which allowed them to further reduce average delivery cost per order.

Will Zomato dominate the Indian market in future, or will it be Swiggy? Or will they merge?

Maybe it’s too soon to say, or time will tell soon enough.