How Zomato and Swiggy are sparking a boom for small-city eateries

Six years since, she is rolling in dough.

The 33-year-old entrepreneur who lives with her husband and two kids says her family was able to purchase a house and upgrade from a two-wheeler to a car after signing up with a food-delivery platform which helped boost sales to ₹4 lakh per month. The apps today contributes up to 90% of her sales.

Kochi-based Mysore Raman Idli which relied on word-of-mouth publicity in its initial days has seen its average monthly order volume gallop to 3,780 from 780 in a span of two years after it partnered with food-delivery platforms. The restaurant claims to have seen a 7x growth in repeat customers and has seen a revenue growth of around 60% during this period.

Bonfire Pizza and Mysore Raman Idli are among thousands of restaurants in India’s tier II and III cities which have turned their fortunes around by partnering with food-delivery startups Swiggy and Zomato. They don’t mind spending 30-35% in commissions as these platforms enable better discovery and give them a head start in their business without investing in promotions and delivery fleets.

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With overall growth plateauing in the world’s most populous country with a restaurant market worth $70 billion out of which $43 billion is delivery, food-tech startups are betting on tier II and III cities to sustain momentum. Over the last two years, Swiggy and Zomato have rolled out several initiatives to promote small F&B entrepreneurs while restaurants have availed incentives such as zero-commission for a fixed tenure. Within the app, there are also provisions to boost their visibility during certain festivities.

User growth

The tier II and III segments are likely to become the next levers of revenue focus for online food tech delivery platforms that saw overall growth moderating last year. Swiggy and Zomato had seen a slowdown in user growth as consumers were prioritizing other kinds of consumption. This led to some softness in the food delivery market, some media reports said.

However, the industry is already showing signs of a recovery on the back of an expanding customer base, growing consumption occasions, and a jump in the number of new eateries in the market. The market for eating out and ordering in is set to nearly double by 2030 to touch ₹9 trillion from the current ₹5.5 trillion, as per a report released by Swiggy and Bain & Co. earlier this month.

While most of the consumption is driven by the upper-middle class and high-income segments across the top cities in India, incremental growth is expected to come from other tier II cities and beyond as well driven by rapid urbanization and a rise in affluence, the report said.

Food delivery commission

Contrary to their peers in the metros who have been up in arms against the so called predatory pricing of these platforms, restaurants in the tier II and III segments believe that the commission rates charged by Swiggy and Zomato is ‘justified’ as it enables better discovery.

Swiggy’s Rohit Kapoor, who is the CEO of the food marketplace vertical, also alluded to the ability of the food delivery industry to democratize access to a larger set of local entrepreneurs. “In many cases, the food delivery fleets have encouraged many promising entrepreneurs to start their ventures, as the delivery and discovery provided by platforms have enabled them to overcome privation of initial substantial expenditure to set up and acquire customers," Kapoor told Mint.

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This is in sharp contrast to restaurants in the metros, that are often seen to be tussling with Swiggy and Zomato over exorbitant commission rates because of higher overhead costs such as rent and labour. Most restaurants in tier 2 and 3 cities incur less costs since they predominantly own the property and barely have any costs other than running the business.

The density of restaurants also is much lower in these areas, so it makes it easier for local entrepreneurs to be discovered by these platforms as compared to metros like Mumbai and Bengaluru. “As tier II and III areas progress further and as the competitive landscape heats up, the pressure will start there as well," said Pranav Rungta, vice president of the National Restaurant Association of India, which represents popular chains like Burger King, Baskin Robbins, The Beer Café and Smoke House Deli.

New cuisine

Meanwhile, many tier II and III markets are showing immense appetite for newer cuisines as opposed to the traditional north Indian and south Indian taste palates. Zomato’s Rakesh Ranjan, who is the chief executive officer of the food delivery segment, pointed that dishes like dimsums and sushis are growing very fast in places like Ahmedabad while Nagpur is seeing a lot of Asian interest.

“There are many such different trends emerging in these areas... smaller cities today are more open to embracing food that they cannot make or eat at home," Ranjan said, adding that this has encouraged several local entrepreneurs to start their own businesses with innovative and unique menu offerings.

In extension to this, a recent Redseer report also detailed how house of brands (HoBs) which own multiple brands across various cuisines under a single umbrella, stand to benefit from an average revenue that is at least 5 times higher than standalone brands owing to a heterogeneous Indian palate with varied tastes for cuisines across regions.

Additionally, many established brands like Bengaluru-based Warm Oven and Haldirams are also taking a conscious tier II, III strategy as they look to expand beyond the metros to grab a larger market share.

Delivery dilemma

Historically, several established restaurants have failed to crack the last mile and the delivery aspect which has bolstered the need for business models like Swiggy and Zomato. Pure-play F&B businesses did not have the finesse and sophistication to handle a complex operation like delivery which covers several aspects of logistics.

Meanwhile, better infrastructure, urbanization and rising consumer aspirations have also contributed to the growth in demand in the suburban areas. “With most of the city centres that have become slightly more crowded, and infrastructure challenged, many of them are now expanding radially outwards where there is a lot of organic demand," Zomato’s Ranjan said.

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He added that larger brands which have predominantly operated only in big cities have started becoming more flexible with their formats owing to real estate challenges in the metros. “If they want to continue on the growth momentum, they have to start looking at other postures and, in that sense—two tier lends itself very well," he said.

While tier 1 cities and the metros continue to drive the growth at a slightly higher pace than tier II markets and beyond, Ranjan anticipates the gap to narrow further as growth rates improve. Zomato currently receives about 60% of its business from the top metros. “As the quality and supply of restaurants increases in tier II and III markets, it is inevitable that they will surpass the contribution from metros," he said.

Swiggy and Zomato, which receive an average order value of about ₹400-450 across India, are also seeing a good uptake in their delivery discount and loyalty programmes from customers in the tier II segments. However, the frequency of orders is greater in the metros. The Redseer report also noted that eating outside is more habitual for metro and tier I customers rather than being a luxury. The report estimates the frequency of outside eating going up by 30% and 20% for students and young adults, and mid-lifers, respectively, from 2018 as they look for more variety.