Swiggy’s plan depends on the Zomato

Swiggy tried the second in December 2016 and then again in February 2017. And there were strikes, say, employees. A few videos were uploaded on YouTube. That idea was quickly scratched. The company did not want any more PR disasters.

Swiggy striving to expand itself

Now that it couldn’t shave off what it paid the delivery agents, Swiggy tried to squeeze more out of the restaurants.

“The best luxury restaurants have margins of just about 35-40%. They already give half of that away to Swiggy. There is very little give there,” says one of the restaurateurs quoted above.

This leaves Swiggy in a precarious position. It needs its cloud kitchen to give it a higher margin, which will improve its bottom line numbers. For context, in FY16, Swiggy made a loss of Rs 137 crore against a revenue of Rs 23.5 crore.

Swiggy has another plan but it depends on Zomato being able to execute a shell kitchen. The NCR-based company calls it Zomato Infrastructure Services (ZIS), and it was launched in March this year. It started with its pilot project in Dwarka, a suburb in Delhi NCR.

Ken wrote to Zomato with a set of questions. The company did not respond.

Deepinder Goyal, co-founder, and CEO of Zomato, however, described the concept elegantly on his blog.

He wrote, “Think of these infrastructure services as delivery only food courts in locations slightly off the premium locations (think much lower rentals, but accessible); we will not have take-out or dine-in at these locations. Each location that we create for ZIS will have 4 or more restaurant brands co-located with each other, leading to shared (and thus lower) costs; each restaurant brand will have its own space of roughly 300 sq ft. These restaurants can choose to have owned/shared/outsourced delivery personnel – thus increasing delivery efficiencies.”

It means, Zomato provides a shell of a kitchen. Restaurants walk in and start using it. Zomato drives lead generation and for that, it takes about 15-19% in commission. Typically, the Sequoia-backed company draws a commission between 5-12% for listing. Zomato argues that there is no downside for the restaurants as they don’t have fixed costs, which leads to higher margins and they can part with more in terms of commission.

Cutting down the costs

The extra 10% is what Zomato is eyeing. In this model, it also helps restaurants design and prune their menus. It’s one of the most important parts of the food business. Reducing inventory costs. Zomato’s ordering machine will understand what kinds of orders peak and when, which will help the restaurants in supply chain management. “If Zomato can start being the point of contact for sourcing inventory, it can take a margin from the supplier as well and add to its bottom line,” says the entrepreneur quoted above.

For Zomato, there’s one potential downside. A restaurant may not work. Its food may not pass muster or customers may just not take to it. But if a restaurant starts drawing orders, Zomato needs to pay off just the fixed cost (the price of leasing real estate and redoing the kitchen) to break even.

The company will also offer a full suite of services to these restaurants at slightly reduced prices. This increases the margins it draws from the restaurants. So, these restaurants are not only paying for the kitchen but also advertising and point-of-sale services. This means that Zomato has created a new partner where there was none.

According to people who are aware of the ordering pattern, the Dwarka kitchen, in total, receives about 1,000-1,100 orders a week at an average cost of Rs 200-250.

Let’s do a very basic back-of-the-envelope calculation for Zomato. If everything stays the same, ZIS, in monthly sales, will draw Rs 10 lakh across the four brands. If Zomato takes away 20% with all the services combined, it will make about Rs 2 lakh.

Worst-case scenario, it may be enough to just pay off the real-estate lease. There’s break-even at this early stage. Employees at Zomato expect each restaurant to start hitting Swiggy’s numbers in another six months. The company is said to be setting up two more of these shell kitchens in Delhi NCR. At scale, Zomato seems more likely to succeed.

 

 

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