Sun Tzu might have approved. In a sign that it was willing to pick its battles (and save a hefty $750 million annually in the process), Uber Technologies Inc. just merged the India operations of its food delivery arm—Uber Eats—with local heavy hitter, Zomato. The estimated $350 million deal reinforces the prediction of Frost & Sullivan analysts that M&A will further spice up food delivery markets, worldwide. It’s also seen as a strategic move by Uber in India to refocus its energies and monies on markets and battles where it is most likely to succeed, in this case its core ride-hailing business where it is locked in fierce competition with Ola.
Uber’s decision is reminiscent of similar strategies employed by it in the ride-hailing space. In markets where it is has felt unable to fast-track its quest for profitability, Uber has merged its business with local rivals: Yandex in Russia, Didi in China and Grab in Southeast Asia. Ironically, Uber’s main rival in India’s ride-hailing market – Ola – also burnt its fingers (twice) in the food delivery market, first with Ola Café and then by buying FoodPanda in late 2017 only to exit in mid-2019. In the meantime, Uber Eats’ exit means that the Indian food delivery market has now effectively become a duopoly, with a straight fight on the menu between the two unicorn start-ups: Zomato and Swiggy.
Not Quite A Surprise
Of course, the question on everyone’s mind is whether the merger was unexpected. No, it wasn’t. Swiggy showed signs of interest in acquiring Uber Eats as early as February 2019 but the deal quickly fell through because of disagreements over Uber Eats’ valuation, regulatory issues, and Uber’s underwhelming IPO.
The rumor mills went into overdrive in July 2019 when Amazon India announced its intention of entering the food delivery space. Industry pundits were convinced that Amazon would acquire an existing player –the willing and available Uber Eats being the most likely candidate – in order to jump-start its ambitions. Nothing came out of this either.
What Went Wrong
Uber Eats’s entry into the Indian market in 2017 was overshadowed by one big question: how was it planning to take on Swiggy and Zomato, which were already very well-established, popular, and growing rapidly, both in terms of restaurants and geographic coverage?
India’s Online Food Delivery Market
The outlines of Uber Eats’ three-pronged plan for India domination were evident fairly early on. It involved, firstly, riding on the coat tails on Swiggy and Zomato’s existing restaurant partners; secondly, engaging in predatory pricing through deep discounting practices and, thirdly, offering generous incentives to restaurants and delivery partners. This gamble might have paid off had Uber Eats had a sustainable profit model, but it didn’t.
A big stumbling block was India’s extremely price sensitive market, where customer loyalty was guaranteed only as long as the discounts and offers continued. With Uber not yet in profit generation mode, Uber Eats India was compelled to do what other food delivery companies, including Swiggy and Zomato, had been doing to survive: burning through investor cash. At some point, with the cash gone, so did the customers.
By the end of 2019, Uber Eats India was contributing a meager 3% to the company’s global gross bookings but was hemorrhaging more than 25% of its EBITDA. Like Megxit, it appeared Uber had only one choice: exit to escape the pressures.
Zomato becomes bigger
Uber Eats also seemed out of its depth in India as rivals Swiggy and Zomato consistently pushed innovative business models, aggressively pursued expansion, and actively sought to understand the motivations of the Indian customer.
While Swiggy and Zomato added almost one city every day to notch more than 500 cities under their expanding belt, Uber Eats managed to set up operations in only 41 cities in almost three years. While Swiggy aggressively diversified its business operations by expanding its cloud kitchen network, forayed into home cooked/packaged food deliveries and parcel deliveries, and while Zomato tried its hand at becoming a ‘full stack player’, covering the gamut from sourcing, storing and supplying raw materials to its partner restaurants and its own cloud kitchens, Uber Eats did nothing remotely as bold or exciting.
More Consolidation In The Works
The Zomato-Uber Eats merger is coherent with consolidation trends that are shaking and stirring the global food delivery industry. In 2018, Dutch company Takeaway.com acquired the German business of Delivery Hero. In 2019, Takeaway announced that it was negotiating to buy another global player, Britain’s Just Eat for $8.1 billion. The deal was finally signed and sealed this month, with the new entity set to have a combined customer base of over 40 million people. Meanwhile, in December 2019, Delivery Hero agreed to buy South Korea’s top food delivery app owner Woowa Brothers for $4 billion, while in August 2019, DoorDash acquired Caviar in the U.S.
These trends are symptomatic of ongoing industry churn. I believe there will be only a handful—not more than two or three—of leading food delivery companies left in each country/region over the next 5 to 7 years. Such high attrition will be a result of the food delivery business being an extremely price-sensitive, cash-intensive one.
To win over customers, global players have to offer discounts and other incentives, and get into related services like last mile logistics. This, in turn, means that only companies with sizeable investor capital will be able to sustain until they can diversify their offerings or move into adjacent businesses like courier or parcel delivery. Diversification, differentiation and discipline will, ultimately, be critical to setting them on the long journey to profitability.
What Next?
Through the Zomato-Uber Eats deal, Zomato gains access to Uber Eats’ extensive network of delivery partners, without fretting too much about cash burn. There is the added prospect of bolstering its presence in some cities, especially in South India, where Swiggy has the edge. However, with Uber Eats having a presence in only 40 cities, the benefits of this factor are questionable.
At the same time, Zomato will have to move quickly to win over Uber Eats’ customers through subscription offers and restaurant discounts. Meanwhile, with its 9.99% share of Zomato, Uber Eats will continue to have a say in the company’s India operations.
The year has gotten off to a cracking start. With new players like Reliance and Amazon signaling their intentions of entering the market, the action is only set to get hotter than an Indian curry.
