Zomato-Uber deal: Harbinger of consolidation/shakeup?

We have unrolled the thread by Harsh Chawla for the benefit of wider audience.

The Uber-Zomato deal doesn’t signal the creation of a duopoly, it is likely a precursor to the creation of a monopoly. An extreme consolidation/shakeout of the food delivery business is inevitable, in India and across the world. A thread:https://t.co/DimQSsPzad

Fundamentally, the food delivery business has “pseudo” network effects, not real ones. After a number of restaurants are on-boarded, the marginal customer & restaurant don’t add much network value to the platform. Network effects are far weaker than say in cab-hailing.

In fact, as the platform grows, the peak and troughs of demand become sharper, placing an extra “slack cost” on the business. Slack is needed to service meal-time, weekend demand and for growth. Competition forces players to keep investing (and losing millions)to this slack.

At the core, it is high-fixed cost, high-variable cost and undifferentiated business. Customers don’t care who delivers the product – they care about the particular dish they order from a particular restaurant. Whether Swiggy delivers or Zomato does, doesn’t matter much.

The high cost of this business model will eventually have to find its way back to the restaurants. They will bear the burden – as heightened commissions or as “discovery or marketing” costs. Of course, must-have-on-platform restaurants will be affected to a lesser degree.

Another way to offset this weak-network effects infrastructure is to launch private-label kitchens, or lock-in popular brands on shared kitchens and launch them in new markets. Both will hurt stand-alone restaurants. Or to deliver things other than food (groceries!)

Finally recourse: charge customers a premium for instant delivery in peak hours or offer them a discount if they “agree to wait” and allow the platform to club deliveries… So you can say goodbye to piping hot meals delivered in 25min, unless you are willing to pay for it.

The billions spent in this market are not generating any “consumer value” – they are being spent to create a monopoly without which VC-type returns will be impossible. Thus we may see investors force a Zomato-Swiggy merger.

A possible threat to this monopoly: if costs on the restaurants and on consumers become unbearable – a restaurant-supported supply-side platform could emerge. Unlikely but possible. The more likely threat:…

Amazon – which already has defrayed/absorbed the cost of a massive delivery infrastructure could simply earmark mealtime deployment and operate at a fraction of the cost/overhead of a stand-alone food-tech company.

Regulators are already on the guard. Amazon’s investment in Deliveroo in Europe has been stuck for several months, pushing the food company company into a corner. https://t.co/WBrEdI9XtW https://t.co/nREC1bO0XC

Net net. Interesting space to watch as profitability pressures will drive consolidation and restaurant lobbies & regulators try and deal with this beast. For more context do read my piece on how platforms are inevitably destined to abuse markets: https://t.co/vx5rJuLx5G Fin.

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