Swiggy vs Zomato: Elara Capital weighs in on who will dominate and profit from food delivery business – Industry News

While the IPO of Swiggy has been already cleared by the Securities and Exchange Board of India (SEBI) and the company targeting an IPO launch in November, Elara Capital said that Zomato may continue to dominate the food delivery business in terms of growth and profitability. Rightly so with the total income reported by Zomato during FY24 at Rs 12,961 crore and profit at Rs 351 crore, and Swiggy posting a total income of Rs 11,634 crore and a loss of Rs 2350 crore during the same period. Swiggy has filed its updated Draft Red Herring Prospectus (DRHP) with the SEBI for an IPO to raise Rs 3,750 crore through a fresh issue and an offer for sale (OFS) expected to exceed Rs 6,500 crore, bringing the combined IPO size to well over Rs 10,000 crore. 

Zomato growth prospects intact

Per a report by Elara Capital, Zomato’s long-term growth prospects remain intact for the food and Q-commerce business based on market growth data. The company, it added, is expected to dominate the food delivery business in terms of growth and profitability by focusing on levers, such as advertising revenue and platform fee to drive higher take rates vs Swiggy. Elara Capital said that Swiggy would need to execute better on growth, scale and profitability vs Zomato, to command the latter’s premium valuation. 

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Within Q-commerce, there won’t be a big negative impact, due to the entry of e-commerce firms coming into Q-commerce, given the latter’s high growth penetration opportunity. The e-commerce giants entering into the segment, Elara Capital said, will only help enhance growth of Q-commerce as the latter is not a discount-led business, but a convenience-led approach. Key profitability drivers for Q-commerce include: 1) the increased number of categories, 2) delivery & platform fee, and 3) big untapped potential on ad revenue. 

India demographics suited for online consumption

With 32 per cent of India’s 339 million households in CY23 forming the upper and high income class and set to rise to 41 per cent in the next five years, the consumption spend is expected to grow. Further, lower middle income households are also likely to increase to 32 per cent contribution by CY28P from 31 per cent in CY23, and this will have an incremental positive impact on online consumption. Also, the shift towards a nuclear family and working women are big trends which will enhance online food delivery growth prospects as double income-household growth is expected to pick up pace. Further, as on CY23, India’s online commerce user base is 230 million and is set to grow at 7.8 per cent annually to 335 million users by CY28P, which is a mere 28 per cent of internet users vs China’s online commerce user base of 850 million CY23, which is 80 per cent of internet users. This, Elara Capital said, implies significant penetration opportunity and ensures steady user growth for India’s online platforms in the medium to long term.

Growth of online food delivery market

India’s online food market is at $8 billion, which is 11 per cent of the overall food services market and it is estimated to grow at 19 per cent per annum by CY28P. This growth, Elara Capital said, will be led by 1) increased user base of 1.5x by CY28P; 2) higher Average Order Value (AOV) and increased monthly order frequency with India at 4.0x, China at 7.5x and the US at 9.0x.

In terms of users, the report stated, the online food segment has 83 million annual transacting users, which is at a mere 10 per cent of India’s internet users, poised to grow at a 7.9 per cent CAGR by CY28P. Further, Elara Capital said that food delivery AOV is currently at Rs 425, and price hikes by food services firms and increased ordering from premium restaurants would drive online food AOV CAGR of 7 per cent in the medium term. “Online food delivery frequency for India is still at mere 4.0x per month, which is well below US’ 9.0x and China’s 7.0x per month. Based on these factors, the online food delivery market in India is estimated to grow at 19-20 per cent in the medium term, which is largely in line, as we have estimated Zomato GOV CAGR of 22 per cent during FY25E-27E,” said a report by Elara Capital.

Q-commerce is a big opportunity

In terms of Q-commerce, grocery continues to form a lion’s share as it is 61 per cent of India’s retail market while fashion and electronics forming a share of 10 per cent and 5 per cent respectively. The Q-commerce market size is at $2.8 billion as on CY23, which is 0.3 per cent of India’s retail market and is expected to move to 2-3 per cent given the growth prospects of the segment of 71 per cent CAGR during CY23-28P. Further, Q-commerce, e-commerce and modern retail are estimated to grow as a channel, at the cost of the unorganized retail market, which is likely to come off from 80 per cent in CY23 to 67 per cent by CY28P.

Q-commerce will grow given its expansion into several untapped niche categories (gifting, beauty & personal care [BPC], pet care, and apparel) beyond grocery. Within grocery, which forms the largest share for Q-commerce companies, grocery brands derive 1.5 per cent of overall (Q-commerce and e-commerce) sales online, which can also grow toward 4-5 per cent, given the segment expansion. “We expect Blinkit to report a GOV CAGR of 74 per cent during FY25E-27E, higher than 71 per cent industry growth, led by rapid expansion and market share gains,” stated Elara Capital.

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