07 Jan 2019 20:30 IST

Gaining strength in smaller cities

Tier 2 cities are a growing market because of quick smartphone and internet penetration

One cannot think well, sleep well, love well, if one has not dined well – Virginia Woolf

On December 19, Bengaluru-based ride aggregator company Ola re-entered the food delivery business by acquiring Foodpanda in an all-stock deal. Ola has now invested about $200 million (₹1,282 crore) into Foodpanda India. Why is a company that is among the top in its core business constantly trying to diversify despite past failures?

Sanchay Singh

 

Harshit Sinha

- Food delivery is one of the fastest growing segments in the internet business space. The food delivery sector is expected to hit around $1.5 billion by the end of 2018 and will touch $2.5-3.5 billion by 2021 in gross merchandise volume (GMV) terms.

- The market’s largest segment is restaurant-to-consumer delivery with a market volume of $6,527 million in 2018. The online food delivery space is now in a much more mature place today, after shakeouts in the past few years.

The two biggest metros, Mumbai and Delhi NCR, contribute around 22 per cent of the overall food services market (11 per cent each), followed by six mini-metros (Pune, Ahmedabad, Bengaluru, Chennai, Hyderabad and Kolkata) with a 20 per cent share in the market. There is huge potential in Tier 2 cities, and Ola is still in its nascent stage.

 

Is it the right time?

- Foodpanda already has a brand name, delivery network, and existing restaurant partners, so Ola will not need to develop the business from scratch.

- Foodpanda provides Ola access to the food delivery firm’s network of over 15,000 restaurants present across more than 100 Indian cities. It will be an ideal platform for Ola as they can reach farther into Tier 2 cities, where the market is still not fully utilised.

- Foodpanda is the only viable solution that can compete with Swiggy and Zomato. It currently claims to have 150 million users and after joining hands with Ola, it will able to process 3,00,000 orders.

- Food tech is more a logistics play; restaurant discovery does not provide a competitive advantage. Foodpanda can utilise Ola’s bike rental service, Ola Bikes, and bicycle rental service, Ola Pedal, to make food deliveries.

- Currently, a customer uses Ola Money to pay at Domino’s, Pizza Hut, Cafe Coffee Day, BookMyShow, and OYO Rooms. Now, Ola is likely to integrate Ola Money with Foodpanda, too.

 

Positioning strategy

Foodpanda has around 30 per cent business coming from Tier 1 cities and 25 per cent from Tier 2 cities. If we see the outlets it has in these Tier 2 cities, its revenue is less. Cities such as Jaipur, Lucknow, Bhopal, Chandigarh, Raipur, Patna and Indore are some of our fastest growing markets today. Since online food ordering is a new concept, the growth in Tier 2 cities is slightly slow when compared to metros but with increased internet and smartphone penetration, these cities will be the key to future growth.

In addition, buying behaviour in these cities is different from that of Tier 1 cities. Foodpanda can focus on lowering order sizes and can have sections on its app for single meals with free deliveries. For logistics purpose, it can also utilise Ola’s bike rental and bicycle rental services to make deliveries. And Ola can leverage Foodpanda’s deep understanding of Tier 2 cities — its micro-markets and the business volume to be expected from these regions.

Today, one of the major challenges faced by the restaurant business is on-time delivery and catering to customer needs. Ola can benefit from this acquisition if it combines Foodpanda’s huge network in these cities to provide on-time delivery. The cost will also be less. ‘Foodpanda Plus’ could be a new channel to cater to the needs of people who are price conscious.

 

Cloud kitchens

A strong proportion in Tier 2 cities are engaged in the retail sector so targeting them will be easy. A box meal system is an alternative that can be looked at for people working in commercial shops, government offices, banks and so on. Foodpanda Plus’ main purpose would be to serve different thalisthat cost between ₹50-100, like a gold, silver or platinum plan. Since most of the outlets will be close to each other and Ola bike or pedal will be available, delivery won’t be a big issue.

Cloud kitchen can also be a good alternative in these cities. When we talk about Foodpanda Plus and a lunch box system, cloud kitchen facilities are a promising solution. Since cloud kitchen restaurants focus on maximising the number of orders per day by focusing on the mass production of food and decreasing the overall production time, they can be used effectively for a lunch box meal system. Another important thing is the packaging cost and time associated with this lunch box system — will be less with cloud kitchen facilities.

(The third runners-up are first-year PGP students at IIM Indore.)

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