India’s online food delivery sector draws foreign investors

This significant segment of e-commerce has been attracting sizable FDI as Government eases norms for doing business

June 28, 2018

Swiggy and Zomato have collectively attracted funds exceeding US$800 million in the last few months; Sensing opportunity, cab majors Uber and Ola, too, have jumped into the fray

Aided by the latest funding, Swiggy has become one of the few unicorns in the Indian startup ecosystem; It is now valued at US$1.3 billion, ahead of rival, Zomato’s US$1.1 billion

India’s food delivery market is expected to touch nearly US$2.5 billion by 2021 as more diverse section of people start using smartphones besides accessing the internet for ordering food

According to Assocham, helped by the fast increasing data consumption and improvement in logistics across India, over 120 million new consumers are expected to shop online in 2018

The online food delivery industry in India has never had it so good, judging by the way it is attracting foreign funds. Witness, therefore, the manner in which two of the major competing firms in the business, namely, Swiggy and Zomato, have collectively attracted funds exceeding US$800 million in the last few months. This signals a renewed push in the sector that was nearly written off recently.

Swiggy, for example, saw foreign investors such as Naspers and Yuri Milner’s DST Global, pumping  over US$210 million in June this year to boost its operations, barely three months after the company got more than US$100 million in Series F funding from the Chinese e-commerce and hyper-local giant Meituan-Dianping. In the process, the online food delivery firm has become one of the few unicorns in the startup ecosystem which is now valued at US$1.3 billion, ahead of rival, Zomato’s US$1.1 billion.

Incidentally, Zomato, which has also seen a furious flow of foreign investment, is now aiming to up the ante by negotiating for a further tranche ranging between US$200 million and US$400 million. In February alone, Zomato raised US$150 million from Ant Small and Micro Financial Services group.

These are but two of the many such firms whose foray into an exciting e-commerce business segment is bringing rich dividends as they tap the growing demand for online delivery of food. This market is essentially driven by the upwardly mobile, double income urban middle class families. College students, office goers and single men and women, whose average age ranges between 18 and 40 years, form an equally significant consumer segment. This age group accounts for a major chunk of India’s 1.2 billion people.

Uber and Ola join the party

Swiggy and Zomato are not alone. Ride hailing majors such as Uber and Ola, too, have jumped into the fray, sensing the opportunities in the virgin market which is expected to touch nearly US$2.5 billion by 2021 from about US$700 million at present, according to a sectoral review in The Mint newspaper. In fact, the online food delivery market is reporting a quarterly growth of 15 per cent.

While Uber-run UberEats is already in Mumbai and other metros, it has plans to drive into smaller towns as well. Ola, on its part, recently re-entered this space following its acquisition of FoodPanda, an existing venture. It has plans to infuse over US$200 million to expand this business. Significantly, Ola had earlier closed its food delivery business which it was running under the Ola Café brand.

According to Assocham, helped by fast increasing data consumption and improvement in logistics, over 120 million consumers are expected to shop online in 2018

Considering the huge potential, e-commerce giants such as Flipkart and Amazon, too, have not been averse to entering this segment, going by a recent report in The Economic Times, in what is seen as an attempt to diversify into food delivery to complement their plans for home delivery of groceries.

Reforms, roadshows boost opportunities

Online food delivery got a leg up with India improving its rankings in the “ease of doing business”. This has made the segment attractive for foreign direct investment (FDI).

The manner in which the government has overhauled archaic procedures and policies to throw open hitherto restricted sectors, including defence, construction, railways, medical devices, electronics, roads and highways and, above all, food processing, to FDI explains all the action. Additionally, the frequent road shows held in different countries by the food processing ministry and the interactions with trade partners to highlight the growing opportunities in India have also produced results.

According to industry data, the food delivery space witnessed nearly 63 deals worth US$274 million in 2015. The last year (2017), witnessed 20 funding deals with investments worth US$124 million. After initial hiccups though, the sector is now bouncing back, as is evident from the interest shown by venture funds and related funding agencies in India and abroad.

New trends in the sector

The role of mobile apps and web-based system of ordering food has much to do with the current success of the online food delivery system. As more people start using smartphones besides accessing the internet, inevitably, the potential for this segment seems endless.

The potential size of the online market, of which food delivery forms a significant component, can be gauged from the just released report of the Associated Chamber of Commerce (Assocham). According to Assocham, helped by the fast increasing data consumption and improvement in logistics, over 120 million consumers are expected to shop online in 2018. Over 108 million consumers went in for online shopping in 2017 even as mobile phones became the preferred choice of device for e-commerce sales.

With such ease and access, it is not surprising to see that the Indian Railways Catering and Tourism Corporation has also jumped into the fray, encouraging online delivery of food to the rail passengers. The state-run railway network carries over 20 million passengers a day, running over 5,000 long distance trains daily. The scope for online ordering of food, predictably, opens up huge opportunities for those engaged in the business.

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