What Went Wrong With App-based Food Delivery Firms – Strategy With RS

App-based food delivery firms are under severe stress. Let me share with you what went wrong … and strategies they can deploy to rebound!

Till 2015, app-based food delivery companies were the darling of investors. According to Tracxn, a startup analytics firm, in 2015, 31 food tech companies raised as much as $161.5 million, with Zomato alone raising $110 million.

What went wrong

Armed with funds, these companies scaled up their operations by:

Opening offices in multiple cities
Hiring staff to man them
Offering attractive discounts to acquire customers
Giving more and more attractive offers and discounts to retain them
The single-minded objective was to acquire and retain customers at all cost. Why? Investors valued the companies based on multiple of revenues and these companies recklessly pursued unprofitable growth to win higher valuations from investors.

The customers who were showered with attractive promotional offers and discounts had no loyalty to any particular site. They scoured the net to see which aggregator gave the best deal.

Even as sales moved northward, profits moved deep-south, painting the balance sheet red.

Over time, food delivery companies started running out of cash. This time when they looked for more funding, investors asked tough questions and were unwilling to finance this reckless adventure.

Faced with this reality the aggregators cut back on discounts and the customers cut back on ordering with them. This put in motion a negative feedback cycle, which seemed to be collapsing on itself.

The casualties

In November, Zomato’s founder Deepinder Goyal sent an email to all employees painting the real picture: “We are far behind numbers that we promised our investors for this financial year (March 2016) … We are close to not living up to that for the first time in 5 years. So we really need the sales team to achieve peak performance and it needs to happen right now.”

Desperation can be seen in the fact that Zomato advertised on porn sites, but the association damaged the brand.

Clearly, results were not visible on the ground, prompting Zomato to suspend operations in four cities.

TinyOwl is undergoing restructuring too. As a part of the strategy, it laid off its staff. There was such animosity to this move that a member of the founding team was held hostage by frustrated employees.

Foodpanda is rumoured to be scouting to sell its India business. It is valuing itself at a bargain price of $10 – 15 million, but there seem to be no takers.

To put the current price in context, last year it raised $300 million from Berlin-based Samwer Brothers and Goldman Sachs to bolster its global business. A large part of this fund was invested in India to acquire Tasty Khana and Just Eat, and to promote itself to ward off threat from Zomato, Swiggy and TingOwl.

Result: On a turnover of Rs 4.8 crore it ran up a loss of Rs 36 crore (FY ending March 2015). Its top management team came under a cloud following allegations of irregularities in its operations. It has let go of hundreds of employees.

Bangalore-based Dazo had to down shutters for lack of funds and SpoonJoy too is facing a funds shortage.

Is there hope for salvage?

Here’s my take on the root cause of the problem and some solutions.

During my interaction with food app companies I got an impression that they have built business models to make investors happy and continue to take decisions to keep them in good spirits—by striving to get sales at any cost; adopting strategies that can be scaled up even if they do not deliver good experience to customers; relegating chefs to support functions; buying sales; hiring people to scale up and letting them loose to get business at all cost, without proper training and then ruthlessly sacking them when results do not show.

To live up to their promise, I would propose food tech companies do the following:

1. Differentiate: Currently, leading food tech companies offer two benefits: speed of delivery and large aggregation of food suppliers. To stand out in the crowd, they will have to differentiate themselves. For example, by specializing in a cuisine, be it Italian, diet, Indian or Chinese. And they should defend this unique position.

2. Signature dishes: Today, any dish can be ordered from any food delivery app. There is no exclusivity. To create exclusivity, food tech companies ought to work with food suppliers to create a selection of exclusive signature dishes. If people like it, they will visit the app to order.

3.Be an authentic consultant, not merely an order collector: Food tech companies should transform themselves into an authentic consultant, helping people choose the right food. This would help the platform build and deepen the relationship with every transaction.

4. Collaborate with restaurant owners to identify dishes that are suited for home delivery: They should only put up a menu on the app if it delivers a finger-licking experience. Many dishes do not lend themselves to being delivered at home—these should be weeded out of the menu.

5. Collaboration between technology team and chef: Currently engineers, data analysts and visualizers populate the platform in large numbers, relegating the chef to a support function. This should change; the chef should occupy an important position in the team. Together they should keep customers at the centre and build a business model to delight them.

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rajesh-srivastava-insideiim

In this series, Rajesh Srivastava, Business Strategist and Visiting Faculty at IIM Indore gives you a regular dose of strategy case studies to help you think and keep you one step ahead as a professional as compared to your peers. Rajesh is an alumnus of IIM Bangalore and IIT Kanpur and has over 2 decades of experience in the FMCG industry. All previous Strategy with RS posts can be found here.

Comments

2 comments

ramji yahoo

as always, another inspirational and useful blogpost from RS. This habit (in the minds of ceo/coo) is there across all start-up businesses like ISP, VOIP telco, ecom, KPO…. Investor first, Sales Turnover amount second, rest all backside burner.. My question/doubt is, why no investor/investment house did not/so not see the profitability/gross margin/net margin/ BEP.. of the product level before investing funds.

Rajesh Srivastava

Ramji many startups, in the initial stages, do not have attractive margins. Take WhatsApp. Facebook bought it for $ 19 billion it had minuscule revenue & profit. If Facebook had valued WhatsApp using traditional methods, then it would not have bought WhatsApp.

Silicon Valley has devised a new way of valuing companies with little / no revenue & little / no / negative margin.

In my future posts, I will be sharing how companies like WhatsApp are valued.