Game of scale in foodtech: Are smaller cities ready for Zomato & Foodpanda ambitious bet?

Game of scale has intensified in food delivery space as Zomato and Foodpanda have started penetrating tier II and III cities aggressively. Both companies have been ramping up operations in about 100 cities and eyeing stable grounds across the country.

Although experts, as well as reports, outline that demand in smaller cities is not large, Zomato and Foodpanda believe otherwise. While Foodpanda claims that about 40 per cent of its business comes from tier II and III cities, Zomato is astonished by the magnitude of demand hailing from these demographics.

“We have been surprised by the demand in tier II and III cities and are therefore the gung-ho around serving every last customer, living in the smallest of towns of India,” said Mohit Gupta, CEO - Food Delivery, Zomato while announcing online ordering across 100 cities.

Food ordering via phone has been a practice in smaller cities for several years. And, now with penetration of Jio, people in these cities are likely to use online food ordering apps.

“Driving adoption won’t be challenging for Zomato and Foodpanda as they will dish out irresistible offers and discounts,” said Satish Meena, Forecast Analyst - Forrester.

However, Meena raises the real concerns - are smaller cities actually ready for Zomato and Foodpanda? Will users continue transacting when online food ordering apps stop offering subsidy? Reports by RedSeer go on illustrating these concerns.

According to the consulting and research firm, Bengaluru, Delhi, Mumbai, Pune, Kolkata and Hyderabad, and Chennai are the top cities for online ordering. These 7 cities together contribute about 87 per cent of the overall online ordering market.

The report outlined that market potential beyond these 7 cities is only 13 per cent. Facts show how such cities weren’t ready a couple of years ago. Previously in 2016, Zomato had tested potential in smaller cities and had to shut down online ordering in four cities including Lucknow, Coimbatore, and Indore owing to poor demand.

When asked about whether smaller cities are ready for food ordering apps, CEO of a logistics company that offers rider to companies such as Zomato, Swiggy and others said, “To some extent, yes. But, volume isn’t large for sure.” He requested anonymity given his ongoing relationship with these companies.

“Since these companies have been raising large funds, they have to show growth and scale. Driving scale across top 10 cities have become tough as well as expensive due to competition and saturation. Henceforth, moving towards smaller cities is quite natural,” added the above-mentioned person.

In hindsight, it is important to remember that Grofers had expanded into several tier II and III cities but had to suspend operations in nine cities. At that time, Grofers had outlined that some of the smaller cities were not ready for the hyperlocal business yet.

Almost after a year and a half, the SoftBank-backed company resumed operations in some cities where it had earlier withdrawn operations. Similarly, Ola was also forced to wind up operations in a few cities as there was a lack of significant demand in the past.

Compared to Zomato and Foodpanda, Swiggy doesn’t seem to be so bullish on realising this said potential in smaller cities. Instead of launching into numerous cities at one go, the food tech giant is proceeding with caution and limiting itself to 50 cities for now.

Meanwhile, the real scale for any consumer-facing e-commerce play undoubtedly lies in Bharat (tier II and III cities) and whosoever amongst foodtech trio wields an upper hand in such cities will have a big winning to take home.

Now coming back to the question we begin with, are the smaller cities actually ready for the food delivery applications? This is something that we’ll have to wait and watch, just like Swiggy.