ONDC benefits may not be enough to offset Zomato, Swiggy scale: Jefferies

ET had reported earlier this week that of the total orders that are serviced on ONDC’s network, around 97-98% are food and grocery orders. Jefferies noted that while the lower prices on ONDC make it a “compelling” proposition prima facie, the comparison did not “seem to be based on the principle of inefficiency elimination, but the fair amount of subsidy (up to Rs 125 per order)” offered by the platform. “We also note that these are limited period offers, and ONDC plans to phase these out by 31 May”.

“The popular narrative currently seems to be that lower prices imply Zomato/Swiggy are over-charging but the reality is, despite significant scale, steady rise in take-rates and acute cost focus, both are barely making any profits. We find both platforms to be fairly efficient and at this stage we are not really sure if open protocol and resource pooling could offset the scale benefits with the incumbents even in the medium-term,” the brokerage firm noted in its report.

ONDC allows restaurants to sell food directly to consumers through buyer apps such as Paytm, PhonePe’s Pincode and Zomato-backed Magicpin.

ETtech

Prices on brands such as McDonald’s, Taco Bell, Behrouz Biryani, Wow Momo, Pizza Hut and Cafe Coffee Day had 30-80% discounts on the ONDC ordering apps compared to what consumers pay for the same items on Swiggy and Zomato, ET had reported on May 9.

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Also read | Explained: ONDC vs Zomato-Swiggy and what it means for the food-delivery space

In its latest report, Jefferies also pointed out that as ONDC was funding most of the delivery cost currently, the seller and buyer apps could afford to charge a lower commission from restaurants compared to the incumbent players.

A seller app here refers to an application such as Magicpin that interacts with sellers, can receive buyer requests and, in response, publish a seller’s catalogue of goods and services and fulfill buyer orders. A buyer side app, on the other hand, is the end-customer facing application responsible for demand generation or transaction origination. Paytm is an example.

“If the delivery costs are passed on to the customers, the price differential vs Zomato/Swiggy goes away which can impact order volumes, in our understanding. On the other hand, if the platforms decide to absorb bulk of the delivery costs, they will eventually have to charge higher commissions from restaurants, which in turn will result in higher listing prices as restaurants pass on the additional cost,” it said.

“It is unsustainable for the ONDC-enabled platforms to offer higher discounts or lower delivery charge vs Swiggy/Zomato in the absence of the ONDC-funded incentives, in our view,” the brokerage firm flagged.

Discounting play

Citing a sample of 30 orders from 15 restaurants placed across Delhi, Mumbai and Bengaluru across various platforms, Jefferies showed that ONDC-enabled platforms were at an approximately 20% discount to Zomato (excluding loyalty discounts).

The brokerage firm also noted that the ONDC-backed platforms have an extra 400-basis-point difference on average compared to Zomato, when comparing discounts as a portion of overall bill value.

ETtech

Even though the prices listed on Paytm and Magicpin were 15% lower, coupon discounts were higher on Zomato and Swiggy, resulting in a net difference of 4%. It said that average discounts on Zomato were 21% of the overall bill value, while for Swiggy it was 26%. For Magicpin and Paytm, average discounts were 25% of the overall bill value.

Also read | Magicpin reports 100% growth in daily orders on ONDC network

Similarly, the average delivery fee as a percentage of the overall bill value was 17% and 16% in the case of Zomato and Swiggy, respectively, while it was 2% for ONDC-backed platforms.

“Most of the orders on ONDC are charged no delivery fee on account of the Rs 75 subsidy, but distant orders, which cost more than Rs 75 are charged for the difference,” the research note said.

Currently, ONDC offers only end-user incentives, including a Rs 50 per order direct discount for customers, restricted to three orders per day per user, and up to 2,000 orders per day per buyer app. In addition, it offers a delivery cost subsidy of up to Rs 75, restricted to Rs 2.25 lakh per seller app, per day. This aggregates to a total of Rs125 order, Jefferies said, adding that the incentive scheme was initially scheduled to end by March, but was extended to May.

ET had reported that effective May 9, the incentives for subsidising delivery cost for buyers would be capped, citing a recent communication to seller-side applications on the ONDC network.

Flagging potential pitfalls for ONDC from a service-level perspective, Jefferies said that reliance on third-party delivery in a short shelf-life category may raise some issues.

“Controlling all aspects of the platform, as Amazon has shown, results in high customer satisfaction, key over the long term. This may miss out on an ONDC ecosystem, or will take a fair amount of time to settle. Having reliance on third-party delivery in a short shelf life category may raise issues, the resolution of which could both take time and be expensive,” it said.

“The example of UPI (unified payments interface) clearly highlights that we do not want to underestimate the power of a digital good and hence, we continue to watch the space. However, our preliminary view is that ONDC will take time to become a meaningful concern,” the brokerage firm added.

(Graphics & illustrations by Rahul Awasthi)