In its early years at the beginning of this decade, food-tech was a term primarily associated with listing platforms that would help restaurants increase awareness about their businesses. This was followed by consumer internet companies entering into a deeper layer of agreements with brick-and-mortar restaurants to take orders on their behalf, thus becoming aggregators. The next progression for online firms, the form which they are in currently, was hyperlocal — as per which, they become single-point source for restaurant owners to sell food and one-stop shop for customers to buy it. In this process, these start-ups burnt millions of dollars to acquire customers but ended expanding the market, for their own services as well as for eating joints.
Two of the largest platforms in India doing this — Zomato and Swiggy — in the past five years, received nearly as much amount in funding from private equity (PE) and venture capital (VC) investors as the organised restaurant chains did. The Indian Express reported on Wednesday that while the PE-VC funds have pumped in $843 million in the restaurants business — as per data sourced from Chennai-based firm Venture Intelligence — the investment in the two online platforms has been about $700 million.
Experts believe that even as food-tech companies have started raking in as much money from PE-VC funds as restaurants, all along the chain have benefited.
“As an industry, eating out and calling in is a large industry and is much bigger than the FMCG sector. It’s growing at about 10-12 per cent every year and is a sustainable growth model because eating out and calling in will comprise a large share in the consumers’ spending as years evolve. Currently, the industry is at the beginning in India. In developed countries, it took the industry 10-20 years to reach the size and scale they are at now. In India, modern formats have just started developing,” said Saloni Nangia, president, Technopak. “The scale that companies like Zomato and Swiggy can achieve is different from what a chain of restaurants can achieve. These platforms have given a new ecosystem for the restaurants. Be it discovery, reviews, online ordering, it’s a completely new ecosystem that has come up that has been supportive from a growth perspective for the brick-and-mortar restaurants,” she added.
This is in contrast with the retail sector, where growth of order volumes for e-commerce companies such as Flipkart and Amazon have negatively impacted traditional retailers.
“Zomato and Swiggy have ridden the growth of mobile and internet and there are 10 million people in the top-eight cities who eat out every day. None of the restaurants, barring Domino’s Pizza, have got a presence across India with the depth Dominos does. The reason why Swiggy and Zomato are getting the funding they’re getting because they have solved the problem of expansion in number of cities and depth in a city,” co-founder of healthcare and food start-up CureFit, Ankit Nagori told The Indian Express. According to research firm RedSeer Consulting, the online daily order volume has more than doubled in a year to 4,50,000 in 2017 from 2,00,000 in 2016.
However, food-tech companies have recently started going beyond the concept of connecting restaurants with customers and some of them like InnerChef, Faasos, Freshmenu are operating cloud kitchens. Explaining the concept of cloud kitchens, Nagori said that companies, instead of producing a wide variety of food items, are making a limited number of items but in a standardised manner across all their outlets — as it is with multinational restaurant companies like McDonald’s or Domino’s Pizza.
The slew of investments by PE-VC funds in the restaurants space notwithstanding, experts believe that the segment is not an attractive opportunity for this particular type of investors compared with the consumer internet space, including food-tech. This is primarily because the high capital expenditure that brick-and-mortar restaurants demand and the slower rate of scaling up than food-tech companies such as Swiggy and Zomato. Gurgaon-based Zomato, which offers listing, feedback and delivery services, has seen investment from firms such as Sequoia Capital, Info Edge, Temasek Holdings and, in the latest round, China’s Ant Financial. Swiggy, on the other hand, which provides food delivery services through its exclusive fleet of riders has raised funds from investors including Naspers, Accel Partners and Bessemer Venture Partners.
The consumer internet companies, despite reporting losses from operations, are still attractive to PE investors given the rapid scaling up of business and valuations, which gives their investors an early opportunity to exit profitably.
“Private equity firms invest in profitable restaurant businesses but not venture capital funds because they don’t see enough value in the scale and there is a lot of capex involved. The restaurant business is not attractive for VCs because they are looking for return in multiples of their investments, and in restaurant business that kind of return is not visible as, say, in a company involved in food delivery or listing,” said Satish Meena, senior forecast analyst at Forrester Research.
However, the food-tech industry in India has arrived at the current stage after a number of companies shut shop or consolidated into other firms. Till around two years ago, there were a number of food-tech companies operating in India, but many of them did not survive. These include EatOnGo, TinyOwl, Dazo and Eatlo. Last year, Zomato acquired food-delivery start-up Runnr and taxi-hailing company Ola acquired Foodpanda India from Berlin-based Delivery Hero Holding GmbH.