In recent weeks, a variety of opinion pieces have popped up on the interwebs, each claiming that the economics of on-demand food are toast! However, our own experience in the online food space gives us great conviction that super-normal economics are achievable if the model is crafted right.
Here are the ingredients of the theory being floated by the doomsayers of online food:
- Demand for online food is high, but cost per delivery is Rs 60 or more.
- Restaurant aggregators get gross margins of 10-20% per delivery.
- Penetration will drive down average order value to Rs 300 and gross margins to Rs 60.
Therefore, the pundits say that aggregator margins barely pay for the cost of delivery and as a result, the unit economics don't work. What the pundits miss, however, is that restaurant aggregation is not the only way to scale on-demand food, and there is another approach that works.
The secret ingredient
The secret ingredient that dramatically changes the economics of the space is the 'full-stack' approach to on-demand food. Full-stack food players operate a tightly controlled supply chain, managing everything from cloud kitchens right up to the last-mile delivery to the customer. By doing so, we at Eatfresh are able to control and guarantee every aspect of the customer food experience, from ingredients, hygiene, packaging to delivery times.
Full-stack players offer great advantages to the on-demand ecosystem at large:
- Gross margins greater than 50% per delivery, creating powerful unit economics.
- The restaurant space in India is 97% unorganised, creating an inconsistent customer experience.
- Aggregating offline restaurants creates no cost efficiencies at the restaurant level. Full-stack cloud kitchens have 80% lower occupancy costs, and focus just on delivery.
- Full-stack players can craft their product and service offering such that its appropriate for the modern Indian consumer, is delivered on-time and is not greasy restaurant food.
- Economic efficiencies from being delivery-centric allow full-stack players to partner with aggregators and still provide great value to customers.
Proof of scalability in the full-stack space already exists â€“ Jubilant Foodworks (Domino's Pizza India) became a unicorn long before the word was in vogue, and similar opportunities abound in virtually every food vertical in India.
Our own experience in the space has established that the full-stack approach to on-demand food is a recipe for success â€“ but how you cook it still matters!
Rajiv Subramanian is the founder of food-tech startup Eatfresh.com.
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