07 Jan 2019 20:35 IST

Lifestyle change, a key business driver

Ola must implement new ideas to leverage shifting market dynamics, stability in food delivery sector

As I stand at the grand entrance gate of TA Pai Management Institute (TAPMI), the campus being the only habitat for miles around, located 6 km from Kasturba Medical College in Manipal amidst the surrounding dense jungle, a Hero Splendor drives up slowly. The driver is sporting a black Swiggy T-Shirt with a food bag on the rear seat. Food tech has evolved so rapidly the last few years that even small towns such as Manipal get high-quality food delivery services, and in record time.

Shashank Kamath

 

Other players are catching up too, the most prominent being Foodpanda, recently acquired by the $7-billion unicorn cab-hailing service Ola, which failed to make a mark in its first attempt in food delivery operations. This segment — currently witnessing a fierce battle between Swiggy and Zomato, with Foodpanda being a third challenger and UberEats on the rise — is expected to be a $3.5-billion industry by 2021. This case solution discusses whether Ola’s decision to enter the market at this time was right or if it’s miscalculating in making another foray at this time.

Overview of food tech business

India has traditionally been a country where eating out has been seen as a luxury rather a necessity. Contrary to the developed world, where an average person eats out 20-25 times a month, in India it is just four-five times.

The food industry in India is growing at a rapid pace, at a CAGR of 10 per cent and, from $47 billion in 2017, is set to touch $77 billion in 2022, with metros such as Delhi and Mumbai contributing to 22 per cent of the total consumption. With rapid changes in lifestyles, the food delivery industry in the country has grown tremendously, at a CAGR of 10-15 per cent, and is expected to touch $3.5 billion in 2021 (see Figure 1).

 

Let us understand the key drivers for the food-tech industry in India, which will help us figure out the reason for the failure of Ola Café, TinyOwl and other hyperlocal start-ups between 2013 to 2016, when India moved to becoming a mature market

1. Large youth population

While the rise in population is a bane for the nation, it has strategically played out well for the food and food delivery industry. Most young people live in nuclear families, with little or no time to spend on household chores, and resort to getting the necessary services at affordable prices. With the increase in the number of women in the workforce, the cook-at-home concept is reducing to just two-four times a week

2. Increase in disposable income

People nowadays earn relatively more and save less, thereby increasing the income allocated to leisure spending and improving their lifestyle

3. Convenience

For the impatient youth, things must be available in their comfort zone and at one destination, to save time. Enterprises that can deliver on this requirement survive.

While there are other contributing factors, the above drivers broadly cover most aspects that a business has to take into account to be successful in this segment.

Some of the other reasons, which players must focus on to gain significant market share, is shown in Figure 2.

 

Failure of first foray

Ola came up with Ola Café in 2015, only to shut operations in 2016. Here are some reasons why:

a. Ultra-fast unorganised expansion

India ranked No.1 in the consumer confidence index during that era. Swiggy had just started operations, TinyOwl was the blue-eyed child of the segment and Zomato was re-inventing itself. Other hyperlocal start-ups like Nearby, PepperTap, and Grofers were in business. The market was abuzz with start-ups and Ola entered a crowded, low-funded (the funding in this segment fell from $500 million to $80 million), highly volatile market.

2. Catering to the wrong market

Ola promised to deliver food within 20-30 minutes of the booking, that too for a limited number of dishes; this wasn’t acceptable to consumers. A similar fast-growing market in the United States is run by players such as Sprig and Maple, which deliver select, reheated dishes. India was not ready for the same.

3. Fall in growth of QSRs

With the entry of international brands in the country, the segmentation between quick service restaurants (QSRs), casual dining restaurants and fast dining restaurants was clearly visible. There was a fall in same-store growth of up to -4 per cent during 2015-16, the main reason being the stiff competition. Older players survived the fall in growth and profits, while over 650 QSRs shut shop. Ola being a new entrant, with no exposure in the segment (UberEats created a success story for itself in Japan), it failed to survive the changing market dynamics while incumbents such as Zomato and Swiggy survived, given their strong understanding of the market

Why Foodpanda won't go the wrong way

The timing is just right for Ola to enter the market. As the market post 2016 has matured, with Zomato and Swiggy being the major players, as seen in Figure 3, Foodpanda was the only player that Ola could afford to buy. Looking at the sheer size of the other two and Foodpanda's ambitious plans since its entry into India, it seems like the best bet for Ola.

 

Foodpanda has over 1,25,000 delivery partners and 15,000+ restaurants on board, and by catering 12 million orders a month, it has safely secured the post of challenger to Zomato and Swiggy. While the purchase decision at $40 million was a good one, the following reasons would explain why the timing was right for Ola to enter and list out few decisions than can be favourable for the company.

1. Foodpanda has its own delivery fleet and own set of customers

Believe it or not, logistics was one of the major issues with Ola Café. The drivers used to deliver the food, thereby increasing the operational cost for Ola to maintain the business in a market where ₹50 is incurred on an average for a delivery

2. Matured Market

With the exit of many players in the hyperlocal segment, it has reduced the competition to four players. This gives Ola the synergy to focus only on giving quality service rather than fighting the odds against steep discounts and burning more cash for this business.

3. Offerings and Profitability

While Ola Café offered only a few dishes and restaurants, the bouquet it inherited from Foodpanda doesn’t differentiate on time of delivery rather the quality of food, which is 13% of the issue for the customers in this segment. On the other hand, Ola acquired a profitable business while its parent business is still burning cash. This is an indication that the market has factored out on the losses and it can achieve profitability on a consistent basis. This is an important point to be noted while timing entry into an unknown vertical

4. Right time for acquisitions

With Loyal Hospitality under Zomato’s realm, CCD under UberEats, Access by Swiggy, Ola has just made the right investment in HolaChef, a virtual kitchen which caters to the needs of the consumers depending on their brand and taste preferences. TinyOwl’s only profitable vertical was Homemade, which was in direct competition with HolaChef.

After TinyOwl wound up, HolaChef developed the expertise of delivering home-made food. In the Indian market, customers increasingly prefer a home-made taste, and food-tech players that can re-invent to address this can stay relevant. Other players are Fasoos, Box8 and FreshMenu, in the cloud kitchen segment.

5. Innovation, growth of organised sector

After over 650 QSRs shut shop between 2013 and 2016, the restaurants have moved to smaller inventory and innovative ways of cooking food in the least possible time. On the other hand, the unorganised food services sector, at 70 per cent in 2013, has fallen to 66 per cent in 2016 and is expected to decline to 57 per cent by 2022.

Restaurants are moving to the organised sector due to the perceived benefit-system created by the incumbent players and the explosive demand for quality food. The organised sector is growing at 16 per cent a year, which means that Ola can leverage it by creating a network of exclusive restaurants under Foodpanda.

6. The dream marketplace

While Ola has been envisioning an ideal marketplace, it plans to be a one-stop destination for all the time-saving measures for an individual in its daily life. By bringing in Foodpanda, it directly competes with UberEats, providing services to book a cab and food by the time the consumer reaches the residence. With Ola Play in the realm, the Ola app is truly transforming into a marketplace to keep customers glued to their phone apps.

7. The hidden agenda

Ola could simply replicate the Japanese model of Uber. Uber in Japan is facing severe regulatory issues regarding drivers, so it created UberEats to stay relevant and justify its investments, even if the cab-hailing business fails. While Ola serves major cities, there are some places, such as Manipal, that are on the Foodpanda map but currently non-existent on the Ola service spectrum. This synergy of Foodpanda to understand markets could be used by Ola to expand into new towns and cities to sustain its business model.

Steps towards innovation and differentiation

Ola entered the business for second time, but in a market in which incumbents are still burning cash to survive, despite significant innovation. Here are a few measures that may make Ola a differential service provider:

1. Tap existing drivers – re-inventing the wheel

Ola services 169 cities in the country, with over 10,00,000 vehicles on board. While the drivers are satisfied with their earnings and work, there are a few who are disgruntled by the commission and the way the passengers treat them. After a counselling session, the drivers who want to switch can be given a new task.

As previously mentioned, the organized sector is growing at 16 per cent in India and small outlets want to enter the business. These drivers could be given the task to bring in their own customers near their residences and arrange delivery for Ola/Foodpanda. This is a convenient step if Ola wants to move from a start-up to an established business, where experienced loyal employees get an opportunity to take care of their families (by staying close to home) and do business. The natural extension would be keeping an inventory stock of ready-made food in the vehicles which, when requested, could be delivered in 10-15 minutes.

2. Pickup with a difference

Zomato Pickup and Swiggy Takeaway are the new extensions by the incumbents. It makes logical sense as these players want to focus more on food quality, which will make it a company more than a delivery unit. Once the customer makes a booking on the Ola app, if there is an Ola cab driver around that location, he can offer to leave the parcel at approximately 150-200 metres, say, near a bus-stop. This would save the operational cost and a better pickup facility than that what Zomato and Swiggy offers.

3. Expanding HolaChef

Home-made food is in demand and with the significant investment by Zomato and Swiggy, it becomes important for Ola to improve its portfolio. As HolaChef is around for a long time, they could now start offering chefs who would go to the home to cook food at their kitchens for a fee. This would be a natural extension for the delivery-perceived player like Ola, as it would now focus on improving quality of food.

The chef aggregation could be from an in-house cloud kitchen for the initial days and later the firm could employ the driver-commission model for this business. The customers would still have to buy the ingredients; if the model is scalable, the entire package of raw material delivery and cooking could be done at one place.

Just envision that a customer sits in an Ola, books for a chef and ingredients to reach at a stipulated time based on the estimated time of arrival on the Ola app. When the customer reaches his residence, the raw material reaches first, followed by a dinner cooked by a chef according to your taste.

4. The marketplace

Ola is now in food delivery, and has an entertainment and wallet system in place. Ola can now offer a package of integrated services of food delivery, entertainment and travel through the Ola Pass. This would be one way to retain customers after implementing the above three ideas or once the integration of all services is completed.

Ola’s gambit is timed correctly considering the changing market dynamics and stability offered in the food tech and delivery business. To shun the image of a delivery provider, it must implement new ideas to survive. While some moves may seem difficult to implement, proper market research would help gain sufficient clarity (as it is data dependent) on how the product or service would work in the market.

(The winner is pursuing a PGDM in Banking and Financial Services at TAPMI.)

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