Poor last mile delivery could hurt Amazon’s ambitions in India’s food delivery market

While Amazon Food has been seen as a serious competitor to the Zomato and Swiggy duopoly, analysts have raised concerns about the global company’s weakness in last mile delivery.

Even in the case of traditional (sustainable) deliveries, Amazon’s last mile delivery is handled by subcontractors like Dependo Logistics. Last mile delivery is a critical aspect of food deliveries and much more complicated than durable goods delivery, given the perishable nature and high frequency of food orders.

“If there were any arguments for major synergies between Amazon’s core offerings and food delivery, its Amazon restaurant offering would have been a resounding success in key markets like the US and UK . On the contrary, it had to shut down this service after three years of its launch in 2017. Our analysis suggests that this is due to Amazon’s weakness in last mile delivery, ”said Sudheer Guntupalli, Manoj Menon and Hardik Sangani, ICICI Securities analysts. in a note to investors.

This is where local food delivery companies Zomato and Swiggy seem to have developed expertise over the past four to seven years. The customer data collected by the two companies is proving to be a strategic asset for these players in predicting and encouraging customer behavior. It also gives them a competitive advantage in last mile deliveries by enabling better route optimization for delivery partners, among others.

Amazonian food from Bengaluru

Launched in 2020, Amazon Food’s operations have remained limited to Bengaluru with coverage of 62 PIN codes out of more than 250 PIN codes in total. According to a note from Motilal Oswal to investors, Amazon Food’s initial rollout was mostly done with restaurant chains in Bengaluru and has yet to aggressively expand to smaller independent restaurants. To put it in perspective, Amazon Food had 2,500 restaurants compared to around 15,000 restaurants on Zomato (in Bangalore) until March 2021.

Commenting on Amazon Food’s growth plans and current metrics, an Amazon spokesperson said Activity area, “We launched Amazon Food in Bangalore earlier this year, allowing customers to order from handpicked local restaurants and cloud kitchens that pass our high hygiene certification bar. We conduct free hygiene audits and have received appreciation from our catering partners for helping to identify gaps in their processes / infra and their tremendous support in correcting these deficiencies and meeting these standards.

The spokesperson added that Amazon Food customers order several times a week and food is the most ordered category on Amazon. Going forward, the company aims to serve millions of customers and partner with restaurants across the country.

Low catch rates

To strengthen partnerships with restaurants, Amazon Food offers restaurants approximately 10% lower participation rates compared to the 20% participation rate of Zomato and Swiggy. The catch rates charged by Zomato and Swiggy have increased over the years, following the duo’s attempt to cut their losses.

Amazon has bet on its Prime membership, to help it bear the losses in the food delivery industry. The global company does not charge any delivery fees to its Prime members, but charges a marginal amount of ₹ 19 to non-Prime members. Zomato and Swiggy typically charge between 20 and 100 shipping costs on orders.

Both Swiggy and Zomato have launched their loyalty programs, Zomato Pro and Swiggy Super, which allow users to place orders at discounted rates, among other benefits. Still, these food tech companies will struggle to compete with Amazon’s Prime membership, which includes faster Prime deliveries, a Prime Video membership, and Amazon Prime Music in addition to zero delivery charges on food orders. .

“Amazon is able to keep its take rates below the industry average as it gains an added advantage by increasing the number of Prime members at the expense of losses in the vertical food delivery industry. Unlike Amazon, Zomato and Swiggy don’t have interest at lower commission rates. Increasing competition (if Amazon expands) can lead to another extended period of money consumption in the industry and pose a risk to the Zomato-Swiggy duopoly, ”said Mukul Garg, Heenal Gada and Anmol Garg , Motilal Oswal analysts in a statement. note to investors.

Uber Eats case

However, this is not the first time that a global company (with deep pockets) has attempted to capture the Indian food delivery market. In 2017, Uber also entered the food delivery space in India with the launch of Uber Eats. The taxi company had also relied on its existing taxi network and global presence to expand into the Indian market. But after three years of a lukewarm presence, Uber finally sold its food delivery business to Zomato for $ 206 million in 2020.

Examples like Uber Eats and Ola Cafe (closing after one year of operation) show that while capital is a necessary requirement for food delivery companies, it is not enough. Zomato and Swiggy have taken a head start by partnering with Pan-Indian food chains such as Dominos, Pizza Hut, Burger King, and more, as well as stand-alone restaurants, which account for around 94% of the Indian market. This forerunner advantage gives these businesses an edge over Amazon in terms of network, brand and reach effect.

“While Amazon’s ‘extended brand’ in food delivery may be as good as that of Zomato and Swiggy, we believe it will take some time to establish the other competitive advantages – network effect, reach and data or insight into client behavior, ”added ICICI Securities analysts.

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