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Food Delivery Startups: The Actual Situation

Last 1 year has seen enough number of grocery, medicine and food delivery based hyperlocal startups being funded. In this article I would highlight food delivery startups as FoodPanda, TinoOwl and JustEat to name a few. For those who are not aware of what a food delivery company is: It is a company which takes orders from customers on the system and passes on to its production unit or restaurant as the case may be and after that, the delivery guy delivers to the doorsteps of the customer. While the mode of operation remains the same as food joints like Domino’s or Pizza Hut, food startups do compromise on the quality of food and that is something which distracts the end user.

Food delivery startups don’t work on a huge profit margin and the most vital point to be noted is, these startups incur approximately 3 times the cost as compared to what they earn from delivering an order. Now the question is why these startups remain in business. The answer lies in the number of deliveries. Companies believe that bigger the number of orders, bigger the revenues: it’s all the game of volume. The same logic has been repeated for various other consumer tech businesses and situations.

A number of challenges ahead

Like many other businesses in consumer tech, food delivery startups face the same challenges as unknown origination of demand, fulfillment of order in the stipulated time frame, maintain the quality of the product as in the case of cab delivery business, this is traffic on the roads; in online grocery business, it is the availability of the products and in the case of food delivery startups, it is the speed at which the restaurants or their production units prepare the food. Food delivery startups generally prefer to deliver only within a certain radius from where the order originates. In this way, they are able to cut costs and minimize the scope of variation in point of origination. The same strategy has been followed by grocery/medicine delivery companies.

Apart from the constraints mentioned above, there are two more pain areas of food delivery startups:

  1. Food delivery startups have the biggest time constraints, as people order at the last moment and they want their order delivered in within maximum of 2 hours. At times, this becomes quite tough for companies to deliver at the last moment. In the case of grocery or medications, this is surely not the issue as people generally order these twice or thrice a month.

  2. The toughest factor which food delivery startups face is, the perishability of finished products. Any eatable that is delivered beyond the time horizon of 60 minutes tends to become old and it is a universal truth that we people just hate cold food. Again, if we compare medications or grocery, they do not deliver perishable products and thus they surely have an upper edge as compared to food delivery startups.

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These constraints are universal and they would remain forever. The roads of India would continue to witness heavy traffic during peak hours and most of the orders come in peak hours only. Even big brands like Domino’s Pizza face these issues, but then they have the option of dining that mitigates their risk. From the above mentioned points, it is clear that it is certainly not easy to churn out profits from food delivery business as whatever be the overall volume- the unit economics would always set an upper capping.

What, then, will likely happen to these startups?

As per my personal opinion, food delivery startups don’t seem to be a very bright future as we have already witnessed the disastrous case of Tinyowl just few days back. It is fact that people want their food delivered instantly as compared to the groceries which provide a longer time frame to the companies. That day is not far away when online groceries would begin to deliver food as well. Online groceries generally work on ‘marketplace model’ and they already have the required facilities like delivery boys etc. to run a hyperlocal business. Therefore, it won’t be tough for these startups to start a food delivery business.

The next 10-12 months would be very crucial for food delivery startups with big players like Zomato entering into this space. Let’s see what the year 2016 has got for these startups.