Vicious cycle of incentives in food delivery firms: How long will it last?

Food delivery firms incentivise both consumers and delivery agents. The incentive-only model will likely reach saturation quickly, and then will begin the inevitable decline

On March 22, Deepinder Goyal, co-founder and CEO of Zomato, posted a photograph of a delivery agent associated with the platform standing beside his spanking new Maruti Suzuki Swift car. The post, which was accompanied with the hashtag #ChaingingIndia, hinted at the kind of opportunity Zomato offered to relatively unskilled workers. While being complimented for changing the lives of many who would otherwise struggle to find employment, a few wondered whether a delivery agent would be able to bear the cost of running a car. “Is he an on-roll or off-roll employee,” asked one.

An overwhelming majority of the delivery agents working for online food ordering companies such as Zomato, Swiggy, Foodpanda and UberEATS are freelance workers who earn a compensation based on the number of deliveries they accomplish. For a large majority of the cases, the two-wheelers are owned by the delivery person. All he needs is a driving licence. The model is similar to that prevalent in the ride hailing industry, where none of the cabs are owned by platforms such as Uber and Ola.

Rising competition and a need to attract more delivery agents to keep pace with their growing businesses has meant the incentive one can earn delivering food parcels is quite high. These incentives change regularly and the companies are burning vast amounts of money fueled by huge funding rounds. While delivery hands are increasingly responsive to incentives, is the model pursued by standalone delivery firms sustainable in the long term?

The incentives are fueled by the growth these companies are witnessing, says Madhav Krishna, CEO of Vahan, a startup that helps recruit blue-collar workers by engaging with them on WhatsApp. Vahan, which works with several of these firms including Flipkart, Dunzo, Uber and UrbanClap, says the demand for delivery/service agents has shot through the roof which, in turn, is forcing companies to incentivise delivery agents to ensure they don't switch and that resources aren’t a constraint.

“Players try to differentiate themselves from their competitors only on the basis of the incentives they offer. Dunzo is facilitating loans of upto Rs 100,000 for delivery agents to buy bikes. Zomato, I believe, is even providing bikes through some service providers. The minimum requirement these days is having a valid two-wheeler license,” adds Krishna. “Yet attrition is very high, upwards of 75 per cent.”

Someone who earned Rs 12,000 and Rs 15,000 a month delivering food for Swiggy, Zomato, Foodpanda or any of the hyperlocal delivery apps such as Dunzo at the start of the year, is today easily able to take home between Rs 25,000 and Rs 30,000. Messages about Swiggy delivery agents making as much as Rs 60,000 a month often circulate in WhatsApp groups, but these are exceptions rather than the rule.

The incentive-only model will likely reach saturation quickly, and then will begin the inevitable decline. Remember there are many competitors out there; hyperlocal food outlets, who may not have the reach will surely dilute the value – most likely by driving down the percentage share that goes to the delivery agent, or at the very least, limiting its growth.

“It’s a great way for young people to make some quick buck by delivering food right, but the problem arises when these delivery agents assume this is going to last forever. Let’s just hope they don’t take on a lot of debt based on their current earnings, or they will suffer once this wave passes,” says an industry watcher who pleaded anonymity.

The scenario in the online food ordering industry mirrors the way India’s cab hailing market operated till mid-2017. Drivers could earn as much as Rs 100,000 a month in incentives, despite the fares being rock bottom. While there were hundreds of thousands of cars on the roads across the country, many drivers enrolled on both Ola and Uber and picked a platform/ride on a given day after comparing the incentives offered.

After the initial euphoria when investors put a check on cash burn, the earnings of drivers fell to Rs 35,000. Many drivers, who had taken loans to purchase vehicles facilitated by Uber and Ola, found themselves struggling to pay the high EMIs. A lot have quit the platforms, while several others say they would do so once they clear their debts. Today, Ola is looking at overseas markets such as Australia and UK to drive growth as growth at home has slowed.

Devangshu Dutta, chief executive of management consulting firm Third Eyesight, likens online food ordering to a hyperlocal logistics play and says cost efficiency is key for players to win. With such high prices being paid for every single delivery, there’s little scope for players to make money. Further, the demand for delivery agents is being fueled by increase in the number of orders these companies are booking, which, in turn, is fuelled by discounts offered to consumers. They are squeezed from both sides.

Experts Business Standard spoke to said the deals and discount-led growth model will collapse as soon as firms stop offering incentives to woo consumers. Some said they were in awe at how players could repeat the same mistake that saw the segment go belly up just about three years ago. Online food ordering was one sector that had shown much early promise, with consumers willing to pay the extra buck for the convenience of getting food delivered to their doorsteps. “It’s a classic case of too much capital spoiling the game,” one of them added.

“Incentivising customers, delivery agents and restaurants to grow the market is a good business call, but it is being done at unsustainable levels,” said an investor, who had made investments in the food tech sector previously, none of which are operational today.