Why is food on Zomato and Swiggy priced higher?

Food Aggregators like Zomato and Swiggy have been in the news due to a viral LinkedIn post. The post claimed that food aggregators charge higher when it is bought through their service. He compared the prices, both at the restaurant and at Zomato. At restaurant, the price was ₹512 and through Zomato – the price was ₹689 after applying a discount coupon of ₹75.

Zomato here charged 34.76% (₹178) more than what customers pay at the restaurant for the some order.

Why is the price higher on Zomato and Swiggy?

Food aggregators generally list restaurants on their apps. These apps are basically aggregators and in return these restaurants pay a small commission fee. Well, the commission is usually not small. It ranges from 25-35% depending on the app policy and the outlet they are ordering from.

This commission is given by the restaurants. Hence, in order to not lose out the profit margin, these restaurants charge much higher on the apps. This is not new to the world. Other countries where UberEats, DoorDash, etc. are used as food aggregators do the same.

These apps are nothing but a high-end marketplace like the food court at airports. When a third party gets involved for example – food courts in malls, airports or apps; the prices rise automatically.

Factors leading to high pricing of Food Aggregators

1. High Operating Cost – Running a food aggregator is a difficult job, especially in India. The companies have to keep up with the new technological changes and has to remain competitive by hiring good candidates for job.
2. Low Competition – Zomato and Swiggy are probably the two biggest food aggregators in India. Low competition means they have the leverage and control on the pricing. Their pricing might not exactly be the same but both are almost on the same boat.
3. High Maintenance Cost – To keep the app and services in good condition, they need to burn cash.

Apps like Zomato and Swiggy in India have billions in valuation. They have the support from the big investors and entrepreneurs. To have a control over a market like India, they have to burn cash and give huge discounts in order to get more customers.

But those days are gone ever since Zomato has gone public. They now are mostly dependent on the retail investors for funds and have to maintain a steady cash flow for the company. Before IPO, Zomato was valued at $12 billion and in 2022 its valuation has gone down to as low as $5 billion.

Division of Pricing on Food Aggregators

Developed countries like the US and Japan apps like DoorDash and UberEats are used respectively. The pricing of food on these platforms is divided into –

1. Subtotal – The actual price of food is inflated. Food on food aggregators are likely to be more than what it is on the restaurant.
2. Delivery Fee – Money that you pay to the delivery partner.
3. Service Fee – Service charges for using the app.
4. Tip – If you want to tip the delivery partner.

Now if you add up the subtotal, delivery fee, service fee, tip and taxes then the price would be 25-40% of more than what it looks like on the restaurant.

How can Zomato and Swiggy Become Profitable?

Zomato and Swiggy are trying to penetrate into a market like India where people love cost-cutting. Most of their profits come from Tier I cities but they are also trying to get into Tier II and III cities. It is a difficult market yet they have been successful in changing the landscape of food delivery.

Earlier only companies like Domino’s Pizza and a few restaurants were into food delivery. Today, most of the consumers love buying from the apps. They have been successful into changing the behaviour of consumers in India.

With discounts, coupons and freebies, they have been to retain the consumers and created a need for such service. Now these companies are looking to become profitable.

In the US, DoorDash has been a success story. Delivering food is not enough to sustain. DoorDash helps in delivering anything. From food to groceries to anything possible. Swiggy and Zomato should look up-to DoorDash and try to become the first DoorDash of India.

It is also obvious that in order to increase the profits, they have to have cost cuttings. They certainly need to let go of the large workforce they have acquired over the years. It will be very interesting to see how these two giants manage to sustain a country like India where consumers are smart and are always looking for discounts.

With recent slowdown in the US, global economy has been hit. Especially technology based startups on the stock market. It will be very interesting to see how Indian startups would sustain in this environment.