19 December 2022
The digitalisation of food delivery traces its roots back to the 1990s, when the first online ordering service was launched in the US.1 Though a success,2 the nascency of the internet meant it took a further decade before the concept gained broader traction and began upending the traditional way of ordering ready-to-eat food for delivery.
By leveraging technology, online food ordering platforms brought significant improvements to both the consumer and restaurant experience, including providing the former with greater choice and convenience, and the latter with a much larger market opportunity. In doing so, these platforms have transitioned a market once characterised by direct relationships at the micro level to one where mass-market aggregators have become the norm.
As the concept and its associated business models mature, and consumer habits evolve, these continue to drive significant growth. The global online food delivery market has tripled in size over the past five years3 and is now a $US150+ billion market reaching all corners of the earth.4 Its construct and pace of growth differ considerably across national boundaries, however, as regional markets develop at a locally dictated pace.
The world’s three largest online food-delivery platforms – based on the number of monthly transacting users – are Meituan in China, DoorDash in the US, and Zomato in India. Though with 340 million monthly users, Meituan is an order of magnitude larger than the other two – which have 40 million combined users a month – and is the largest in the world.5
Source: World Bank, WEF, Macquarie Research, June 2022
Despite their populations being equivalent, the difference in market size between China and India is especially stark. China’s market is valued at close to $US220 billion, whereas India’s is just a fraction of that, at $US7 billion. The US, with just a quarter of the comparable population, has a market valued at $US23 billion.
|Total market size (at at FY21)||~$US220b (Rmb1048b) (FY21E)||$US23.4 billiona||$US7 billion|
|Market share||66%||59% b||~45%|
|Monthly Transacting Users||340-350m||25mc||17m|
Source: Macquarie Research, June 2022, unless indicated
a IMARC (https://www.imarcgroup.com/united-states-online-food-delivery-market)
b Bloomberg Second Measure
Using market penetration (the percentage of the internet-using population using online food delivery services) as an indicator of the concept’s maturity in different countries, India’s market is the most underdeveloped, at just 7 per cent6 – considerably lower than 50 per cent in China7 and 35 per cent in the US.8
Structural and cultural differences and distinct demographic and urbanisation dynamics that influence consumer demand are dictating the speed and scale of growth in online food delivery adoption at a micro level. Nowhere is that more applicable than in India.
With lower income levels, a narrower income distribution and a smaller share of its population living in urban areas (35 per cent versus 63 per cent in China9) - food delivery remains a large city phenomenon due to the delivery economics - its potential user pool is (currently) limited.
Furthermore, with lower female participation in the labour force, the heterogeneity and regionality of food consumption habits, and different attitudes towards food services – home-cooked food remains the strong preference in India10 – the market faces a longer latent runway to maturity.
Of the three nations, India’s food services market is also the most unorganised and highly fragmented, making large-scale production and distribution difficult.
But much of that is changing. Disposable incomes are rising, consumer habits are changing, access to technology and the internet is increasing, and the dependence on home-cooked food among the growing middle class and younger generation11 is falling. Societal shifts are opening the market up to new consumers and ushering in new opportunity for platforms.
India is likely to be the third largest consumer market by 2030, joining the US and China in the top three.
Much of that growth is geared towards services-based consumption as its population – and middle class especially – increases in both size and wealth.
With a median age of 28 (compared to 38 in China and the US), India has one of the youngest populations in the world.
This demographic has a higher acceptance of delivery food and a greater willingness to order online.
Growth in India’s urban population, increased participation of women in the workforce, and the growth in internet and smartphone penetration – which has doubled in India since 2015 – is giving online service access to more people.
Source: Macquarie Research, June 2022
The number of potential food delivery service users in India will more than double by 2033 to 150 million, with the total addressable market for online food delivery growing more than threefold from $US7 billion in 2022 to $US25 billion over the same period.12
The penetration level is, however, only expected to rise from 7 per cent today to between 10 and 13 per cent over the next ten years, as food delivery remains a city-based phenomenon and urban areas approach saturation. Meaningful market growth for platforms, therefore, will need to be achieved by increasing the amount spent by each user rather than by expanding their number.
Source: Company data, Macquarie Research, June 2022
There are signs of this already materialising. India’s largest online food ordering platform, Zomato, reported a 23 per cent increase in gross order value (total amount spent by each user) in the three months to September 2022 on the same period last year.13
In a further sign of optimism, the listed company highlighted how securing growth will depend more on its ability to scale up the necessary infrastructure than generating additional demand for its services such is the level that it’s seeing.
While there is long latent runway for growth, Zomato’s average order value is less than $US5 (404 Indian Rupees), compared with $US8 for China’s Meituan and $US30 for Doordash in the US. Though relative to the other two markets when compared to GDP per capita, it’s an indication of the challenges platforms in the country face in making the economics work as they scale up.
Source: World Bank, Company data, Macquarie Research, June 2022
By contrast, despite China’s food delivery industry being at a more mature stage, it will continue growing by around 20 per cent a year to reach a market size of $US270 billion by 2024.
With the much higher level of awareness and popularity these services already have there – especially among the urban population – and a moderate expansion in average order value, platforms’ growth will also depend on their ability to increase order frequency and supplement food delivery at key dining times with cross-selling of services such as coffee, flowers and groceries throughout the day.
Source: Company data, Macquarie Research, June 2022
General price levels are rising at the fastest rate for decades in all three countries and this has the potential to filter down and weaken demand for online food delivery as consumers cut back on purchases they deem ‘discretionary’.14
Higher (input) prices also pose a challenge for restaurants. With already-stretched margins (platform fees can be up to a quarter of what a customer pays15), their ability to raise charges is made harder by the fierce competition they now face on the ordering platforms on which many have become dependent.
To reduce their costs, they must therefore increase order volumes – including through greater collaboration with platforms to encourage more business from both new and existing customers – source efficiencies and optimisation, or diversify.
The latter option is leading some to return to having their own delivery networks16 in a bid to avoid paying someone else to do the job. Others are exploring vertical expansion into the ‘cloud kitchens’ space – restaurants set up for only servicing delivery orders.
But restaurants are not alone; platforms have also identified similar opportunities.
Taking greater control of operations gives them additional flexibility to adapt their offering based on data and insights on consumer ordering habits, and reduces the costs associated with outsourcing fulfilment.17
Both parties are now battling to expand their appeal and increase their margins with an evolution of the food delivery business model. The most recent data available suggests that last year there were 7,500 cloud kitchens operating in China, 3,500 in India and 1,500 in the US.18
Rebel Foods, an India-based operator of ‘cloud kitchens’, last year raised $US175 million in Series F funding to help it expand the concept both at home and across its international footprint.19 In a sign of outsider investor interest in the potential of the Indian food delivery market, the funding round was led by the Qatar Investment Authority (QIA). Rebel Foods itself pivoted from being a single-brand high-street quick-service restaurant chain to a ‘multi-brand’ cloud kitchen in 2016, in recognition of the concept’s potential.20
The other main growth avenue – for platforms at least – is the ‘quick commerce’ delivery of groceries. Zomato, whose publicly stated vision is to be a ‘farm-to-fork’ company delivering both prepared and non-prepared food, acquired quick commerce platform Blinkit for about $US570 million earlier this year.21
But those platforms seeking to diversify into grocery deliveries should be careful what they wish for. Though fast growing, the market is even more nascent than food delivery, highly competitive and not exactly renowned for the size of its profit margins.22
This article was written using Macquarie Capital research prepared by Aditya Suresh and Baiju Joshi in Mumbai and Ellie Jiang in Hong Kong. Subscribers can access the related research reports on the Macquarie Insights portal.
Online food delivery garnered interest in India in 2012-13, when multiple companies such as Foodpanda, TinyOwl, and Scootsy started their operations independently of existing players such as Zomato and Swiggy.
Over time, the industry has consolidated, driven by acquisitions and market exits; a pattern reflective of consolidation in the space globally, with most major markets becoming dominated by two to three key players. The US, UK, and China all have two to three large food delivery players (Uber Eats, DoorDash, and GrubHub in the US, Meituan and Ele.me in China).
India’s biggest player, Zomato, started as a discovery website for restaurant advertisements and user reviews in 2008. It ventured into table bookings and marketing tools for restaurants, before entering the food delivery space in 2017. The largest online food delivery company in India, it has around 16 million monthly transacting customers across more than 1,000 cities whose orders are fulfilled by about 300,000 delivery drivers.