While the FoodTech sector raised only $80 million in 2016, 2017 saw Swiggy alone raising $80 million and Zomato is now reportedly in talks with Alibaba to raise $200 mn.

With Swiggy and Zomato raising funds is investor appetite back in FoodTechImage source: Holachef Facebook page
Atom FoodTech Wednesday, September 06, 2017 - 20:24

Despite major ups and downs in the foodtech sector, it seems to be heating up once again, with Swiggy raising a whopping $80 million from Naspers in May. 

What had started with a bang in 2014 had appeared to be going downhill with several ventures shutting down. From a high of $500 million in 2015, the sector saw less than $80 million in 2016.

However, this seems to be changing this year. After Swiggy, news reports now suggest that Zomato is in talks with Alibaba Group to raise $200 million.

UberEATS, backed by global cab hailing firm Uber, entered the market. Google also launched Google Areo, which lets users order meals from restaurants.

So what is binging investor appetite back?

It’s the consumer’s habits, says Sreedhar Prasad of KPMG.

“Foodtech is definitely a hot sector right now and is in the radar of investors. And what’s driving it is rising consumers adopting to it,” he adds.

One of the biggest factors helping them grow is the convenience it offers. People are keen on using their time better and would rather order in that step out to eat. Variety is another factor. With players like Swiggy and Zomato offering a wide range of restaurants on their platforms, the problem of ‘what to eat’ is solved.

The way people eat is changing and that’s what seems to be driving these foodtech companies.

The numbers too, if one is to go by them, speak for themselves.

Two weeks ago, Zomato announced that it hit 3 million orders for the last 31-day period.

“It took us 13 months to reach the first million orders a month; the second million took us 8 months, and the third million took us a little over 4 months,” Mukund Kulashekaran, VP Global Growth, Business Head of Online Ordering said in the blogpost.

In a blog posted by Swiggy’s co-founder Sriharsha Majety, after several allegations were raised against the company, he says that orders per day grew from 42,480 in June 2016 to 78,417 by January 2017. That’s double the number of orders in just six months.

According to a report in Economic Times, Swiggy is on the verge of reaching a run rate of 4 million orders per month. “In fact, the startup boasted of clocking an average of 1,20,000 orders per day all through a week in July,” the report states.

If one looks at the foodtech startups operating on the cloud kitchen model, Mumbai-based Holachef claims to service over one lakh orders every month. Gurugram-based Innerchef ships over 2,000 meals every day across Gurgaon, Delhi, Noida, Bangalore, Mumbai and Hyderabad. Hyderabad-based TinMen too receives around 1,000 orders a day across eight to nine locations in Hyderabad. Freshmenu does roughly 12,000 to 13,000 orders a day around the country.

So demand is clearly there. But if one looks at numbers, especially of the larger players, forget profitability, they are still burning cash.

Zomato reported a loss of Rs 389 crore for 2016-17 on a revenue of Rs 332.3 crore. Though its burn rate significantly came down, it still burnt $12 million in FY17.

While Swiggy’s FY17 numbers are unavailable, it posted losses of Rs 137 crore in 2015-16, on a total income of Rs 23.6 crore. Reports suggest that Swiggy burnt about Rs 13 crore per month in FY16.

Foodpanda India, too, saw its losses widen four times to Rs 142.6 crore from Rs 36 crore on revenues of Rs 4.7 crore in the year-ago period in FY16.

This brings the question to mind—are they really sustainable in the long term?

It’s first about habitual change, Sreedhar says.

Here he cites the example of e-commerce players like Flipkart, Amazon and Snapdeal.

When E-Tailing started picking up in India about 6-8 years ago came in, a lot of money was invested in triggering a habit change to shop online. After having achieved that, now these companies are focusing on profitability. The same way, food tech is a recent story and currently the focus in on habit change and developing trust in consumers,” he adds.

And that is exactly what investors are putting their money on. At this moment, the margin you get from a restaurant is negated by cost of servicing a customer, Sreedhar adds.

As habits begin to change, he says that business models too will begin to come into focus.

Take Zomato for example, it has been working on significantly reduced its burn rate, narrowing losses and increasing revenues.

 “These Foodtech companies will now slowly start finding ways to make more money. Delivery charge may become a common story. For those restaurants that don’t get footfalls will be dependent on food tech companies for their incremental revenues and might even be ready to pay a higher margin to acquire customers through them. That could be another way for these startups to make money,” Sreedhar says.

As foodtech companies continue their growth streak, the only problem, or challenge, they may face is being able to expand into more and more cities.

Currently, it is a top 5-10 city play in India. Sreedhar says that it is difficult to build bandwidth to start operations in smaller cities. So expanding the number of restaurants will become a challenge if you have to go beyond the main cities.

Like the e-commerce industry saw massive consolidation with just 3-4 players now remaining, the Foodtech sector seems to be going that way too.

In 2016, Runnr, earlier called Road Runnr acquired TinyOwl, which had shut down operations in most cities.

Reports now suggest that Zomato is in the process of acquiring Runnr. UberEATS was also earlier in the race to acquire Runnr.

Rivals Foodpanda and Swiggy are both backed by one common investor—Naspers. This could point towards a possible collaboration in the future. In fact, in an interview with VCCircle in June, CEO of Foodpanda India did not rule out the possibility of partnering Swiggy.

There were also reports of Foodpanda India looking for strategic options, including a sale, which the company denied.

So while deep-pocketed Flipkart managed to secure the top spot in India’s e-commerce market, it now remains to be seen which startups manage to claim that spot in the Foodtech sector.

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