Amazon’s entry in food delivery is a speed bump on Zomato and Swiggy’s race to profitability, says report

• A recent report on the online food delivery space in India indicates that Amazon along with COVID-19 is going to hurt the profitability plans of Zomato and Swiggy.
• Both Zomato and Swiggy are already dealing with the wrath of the coronavirus pandemic.
• Founders of both the companies in blog posts had mentioned that the food tech unicorns will now be leaner and much more focussed organisations.

India’s food delivery fight enters a new round, and the battle for profitability is going to get tougher. Global e-commerce giant Amazon in May rolled out its food delivery vertical in India. Currently, under a pilot mode in Bengaluru, Amazon Food is in a ring where Zomato (armed with UberEats acquisition) and Swiggy are already fighting it out, and spending a considerable chunk of money while at it.

And they are all fighting for a market which is set to double in the next five years – from $3.6 billion in FY20 to $8.6 billion by FY25, despite the coronavirus pandemic, as per a report by JM Financial dated August 10.

But Amazon’s entry in the food delivery segment is also at a time when Zomato and Swiggy are at the receiving end of the wrath of the coronavirus pandemic – both the companies have laid off hundreds, and are currently witnessing a slow recovery post lockdown.

The JM Financial report on the online food delivery space in India shows that Amazon, along with COVID-19, is going to hurt the profitability plans of Zomato and Swiggy. “We believe the entry of a cash-rich player such as Amazon has the potential to impact the path to sustainable profitability of both the incumbents over the medium-to-long term,” said the report.

Can Zomato and Swiggy afford to fight Amazon?

Both Zomato and Swiggy have been cutting marketing costs. Founders of both the companies in blog posts had mentioned that the food tech unicorns will now be leaner and much more focussed organisations while reducing costs – from real estate to marketing and advertising.

And it is not just the companies, but the investors too who have been vouching for the reduced marketing spends of the startups to reduce burn.

The JM Financials report quotes two prominent investors of Zomato and Swiggy – Sanjeev Bikchandani of Info Edge, one of the earliest backers of Zomato and Larry Illg, CEO for Food and Ventures at Prosus, one of Swiggy’s biggest investors.

In November 2019, Bikhchandani had mentioned during an investors' call that Zomato is cutting discounts and is cutting marketing at the bottom end on small orders to cut costs. Goyal backed this up in December, he mentioned that the company had significantly reduced its burn.

And the stakes are higher at Swiggy’s end, which has also introduced several new initiatives – including the most recent, grocery delivery within 45 minutes. Swiggy’s backer Illg confirmed the cost-cutting measures and the focus on new areas on a call. “I think even in a pre-COVID environment the Swiggy team was focussed on cost savings measures including marketing spends with the objective of deploying it in some of the areas (grocery and dairy),” said Illg.

According to analysts at JM Financials, this cutting down of marketing costs would also mean that the food tech companies may lower their volume growth compared to the recent past.

Zomato and Swiggy are already dealing with the wrath of the pandemic

The coronavirus pandemic has hit both Zomato and Swiggy’s businesses. Swiggy co-founder Sriharsha Majety had written in a blog post, “The core food delivery business has been severely impacted and will stay impacted over the short term, but is expected to start growing again after that.”

Meanwhile, Zomato CEO Deepinder Goyal too spoke about the short term impact on the company, predicting an earlier path to profitability. “While COVID-19 has impacted the size of our business, it has accelerated our journey to profitability. In terms of the size of the business, COVID-19 has set us back by a year or so – but a year is only a small blip when you are building a company for the next 100 years,” wrote Zomato CEO Deepinder Goyal in a blog.

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