Bernstein: New Entrants Test Profitability of India's Food Delivery Market

New entrants are poised to disrupt India's highly concentrated food delivery market, prompting analysts at Bernstein to question whether the moves will expand the sector or simply compress the high profit margins currently enjoyed by incumbents Zomato and Swiggy.

An Attractive Duopoly

For years, Zomato and Swiggy have maintained a stable duopoly in a market that has become highly attractive to new competitors, according to Bernstein. The sector boasts strong fundamentals that are drawing new players in:

• Robust Growth: The market is expanding at an 18-20% year-over-year rate.
• High Profitability: Adjusted EBITDA margins are around 5%, which Bernstein notes is the highest globally.
• Rich Valuations: The two companies invested a combined $4-5 billion before their IPOs and their food delivery operations are now valued at approximately $20 billion, suggesting a high Tobin’s Q ratio of 4-5 times.

Despite this growth, the market remains relatively underpenetrated. Food delivery constitutes just 15% of India’s total food services market, with a combined 85-95 million annual transacting customers across both platforms.

New Challengers' Strategies

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The new entrants are reportedly pursuing aggressive, low-cost models to capture market share. Rapido is said to be testing a no-commission or low-commission model aimed at the lower-priced segment of the market, where the average order value (AOV) is closer to the broader food service market's 150 rupees rather than the current delivery AOV of 400 rupees.

Meanwhile, e-commerce giant Flipkart is reportedly planning to enter with a commission structure of 10-11%. These strategies directly challenge the established pricing power of the current market leaders.

The Unit Economics Hurdle

The central question, according to Bernstein, is whether newcomers can achieve sustainable unit economics by fundamentally altering the cost structure. The most significant barrier is the high cost of fulfillment.

Delivery costs, including last-mile service and rider recruitment, run between 60-65 rupees per order. For a low-commission model to succeed, new players must find a way to significantly reduce this expense, a challenge that has proven difficult for operators globally.