Can ONDC upset Swiggy/Zomato duopoly to disrupt the food delivery market?

Although ONDC's hyperlocal tilt gives small sellers effective inroads in e-commerce, disruption in food delivery market will be contingent on building scale, meeting quality set up by Swiggy, Zomato

Amid an ongoing debate on whether the government-backed Open Network for Digital Commerce (ONDC) will be able to dethrone Swiggy and Zomato’s duopoly in the food delivery space, market analysts are of the view that the network does not pose an immediate threat to the current market leaders.

Although ONDC’s hyperlocal tilt offers small sellers effective inroads into the e-commerce space, disruption in the food delivery market will be contingent on building scale and meeting quality and service expectations established by Swiggy and Zomato. However, according to experts, this might take a while.

ONDC is a non-profit platform set up by the Department for Promotion of Industry and Internal Trade (DPIIT) as an alternative for online shopping. The Network is not an app but a facilitative platform designed to “revolutionize” digital commerce.

Since ONDC does not have its own app, customers looking to order food need to do so using either the Paytm or magicpin app. Currently, the Network also counts other platforms like Meesho, Craftsvilla, Mystore, and Pincode, among others, as its buyer applications. Customers also get access to third-party logistics providers like Dunzo and Shiprocket who can deliver the orders.

“This effectively disintermediates the aggregator model, and eliminates the related commission and fees,” says Girish Ramachandra, co-founder and CEO, Shopalyst – an ONDC partner. “The open network is expected to make the market more efficient in the long run, hence reducing the overall costs for restaurants and consumers.”

Shopalyst is a SaaS-based discovery commerce platform. Its plugin services help brands in seamless onboarding onto the network.

By design, ONDC is expected to provide a more efficient alternative to the app-centric e-commerce models prevalent today. Unlike the Zomato or Swiggy model which requires buyers and sellers to transact on the same platform, ONDC helps consumers connect with sellers and transact on any buyer app on the open network.

By operating as a digital public good, industry watchers say, ONDC significantly reduces the entry barriers for smaller players to compete with the larger incumbents.

Perhaps the best example of this is Gurugram-based discounts and delivery platform magicpin, whose operations have been flourishing on ONDC due to its first-mover advantage. While joining the network in March, magicpin brought with it access to over 22,000 restaurants.

Since then, it has scaled 100-fold month-on-month, making it more than 300,000 orders per month. “We plan to take 5,000 more restaurants live on the open network in 3 months,” Anshoo Sharma, CEO and co-founder at magicpin, told Business Standard.

The online platform magicpin has been able to stand on equal footing with Swiggy and Zomato by offering customers cheaper food items. Its order volume, however, is still a far cry from existing incumbents.

“The prices shown on the ONDC network are a result of the efforts made by all the players in the network (buyer app, ONDC, merchant, logistics) and vary from one order to another, sometimes even by the time of day,” Sharma says.

Sources close to the company said that magicpin is not funding any discounts on ONDC.

“Since magicpin is also helping fulfil orders of other ONDC participants, there can be teething issues related to delivery and customer resolution. As we grow, we’re also providing our SaaS and tech support to comb out minor issues if any,” adds Sharma.

Currently, the food delivery space is a settled duopoly. Zomato is the top dog in the market with a 56 per cent market share, while Swiggy commands a 44 per cent share, as of the fourth quarter of FY 2023, according to analysts at HSBC.

ONDC is touted to upset this duopoly by cutting out the middlemen between restaurants and customers. The Network has been offering customers cheaper food items than Swiggy and Zomato by discounting its offerings, which is admittedly not a long-term strategy for ONDC.

“Every major entrant into the food delivery sector has acquired customers using the lure of discounts at the start. Eventually, they rationalize their operations,” says Gaurav VK Singhvi, co-founder, We Founder Circle – an early-stage investment platform.

“ONDC is also doing this. When you have to create an alternative, as a newcomer, to highly funded start-ups, you can't build a customer base without such strategies,” he adds.

The current market leaders reportedly charge higher commissions of around 20-25 per cent, which has routinely drawn the ire of restaurants. Commissions on ONDC, on the other hand, are much lower at around 3-5 per cent.

“It’s not easy to build food delivery businesses. They have a lot of capital requirements and success depends on building scale,” said the founder of a large angel investment platform.

“Tapping into the tier 2 and beyond market can help achieve this scale since the needs across the country are the same. I think that Swiggy and Zomato will remain popular in tier 1 and maybe tier 2 regions, while ONDC will be more popular in tier 3 and beyond regions, due to its hyperlocal tilt,” he explains.

However, analysts are of the view that ONDC does not pose an immediate threat to Swiggy and Zomato.

“As ONDC is funding most of the delivery cost currently, the seller and buyer apps can afford to charge a lower commission from the restaurants as compared to Swiggy/Zomato. As the commissions are lower, restaurants can afford to offer better pricing on ONDC-enabled platforms. However, if ONDC withdraws the incentive scheme post-May, either the platforms or the customers will have to pay for deliveries,” analysts at brokerage firm Jefferies noted.

Moreover, once this incentive period ends, order volumes are expected to take a hit. In contrast, if partner apps attempt to bear the delivery costs, commissions to restaurants might increase as a consequence.

Brokerage firm Motilal Oswal also echoes a similar claim. “We do not perceive direct ordering as a major concern for the industry. However, we see ONDC as a potential threat to Zomato, only if it meaningfully scales up across categories, allowing it to achieve greater efficiency compared to the walled gardens,” it said.

Furthermore, meeting the same quality and service standards as Swiggy and Zomato, who have been in this space for over a decade, will be a challenge.

“In the food delivery space, incumbent players like Zomato and Swiggy have established a certain service quality expectation from consumers which ONDC will surely need to meet or offer something better,” says Ramachandra.

“While the ONDC protocol is making it easy to connect consumers and restaurants, there is still a need for the right process and policy to create a competitive alternative to existing players. Robust processes and policies are key to success at scale for the ONDC model in the food delivery space,” he adds.

Nevertheless, ONDC is just starting off with food delivery. “It will eventually expand to cover the entire e-commerce space, across various categories. As such, highly funded incumbents in the market are going to have a difficult time,” says Singhvi.