ONDC's Impact on Food Delivery Companies Like Zomato and Swiggy

ONDC has urban India abuzz.

People are sharing screenshots on social media comparing prices they need to pay for food delivery on ONDC and apps like Zomato and Swiggy.

The difference is indeed staggering. 50% in some cases. The food delivery industry will never be the same.

But what is ONDC exactly? How is it disrupting the industry? And will it have an impact on listed stocks?

Let's find out...

What is ONDC and how does it work?

In a nutshell the Open Network for Digital Commerce (ONDC) is an open software network. 'Open' here means it's not dependent on any specific platform.

This means it can be used by both buyers and sellers to conduct business online.

How does it work?

Here we need to understand 'seller apps' and 'buyer apps'. It's simple enough. If a business wants to leverage the ONDC network it needs to tie up with your local restaurants. Then it can register with ONDC.

In the same way. Consumer facing companies like Paytm and Phonepe will register with ONDC and allow their users to order food.

Thus the customer doesn't need to download another app. They can use the buyer apps, in this case Paytm, PhonePe, etc.

The reason why this is proving to be popular is the difference in prices. There's a difference of 30-50% in purchases made on ONDC and Zomato/Swiggy.

Here's an extract from the government's reply in parliament...

• The foundations of ONDC are to be open protocols for all aspects in the entire chain of activities in exchange of goods and services, similar to hypertext transfer protocol for information exchange over internet, simple mail transfer protocol for exchange of emails and unified payments interface for payments.
  
  These open protocols would be used for establishing public digital infrastructure in the form of open registries and open network gateways to enable exchange of information between providers and consumers.
  
  Providers and consumers would be able to use any compatible application of their choice for exchange of information and carrying out transactions over ONDC.
  
  Thus, ONDC goes beyond the current platform-centric digital commerce model where the buyer and seller have to use the same platform or application to be digitally visible and do a business transaction.

The Difference in Prices

Now if both ONDC and the food delivery apps are in the same business, then what accounts for the huge difference in the price of food?

The sellers who are onboarding local restaurants are not charging commissions anywhere near that which is charged by Zomato and Swiggy. While Swiggy and Zomato charge about 25-30% commissions per order, ONDC charges only 2-4%.

This difference is a big incentive for restaurants to join. Also, restaurants don't have to charge extra from customers to cover their costs, due to high commissions.

And then there are the discounts.

Remember the days when the discounts on Zomato/Swiggy were more mouth-watering than the food?

That's the situation with ONDC right now. And that's the reason why transactions have already crossed 10,000 orders per day.

Right now ONDC is new. It's active in 236 cities as of this writing but most people are still unaware of the service. And those who are aware may not know about that ONDC offers clothing, electronics, beauty products, and hospitality services too.

This is a challenge because ONDC is a platform based service. Its usefulness will grow as more users join. As more sellers join it will attract more buyers and vice versa.

There are 43 participants on the ONDC network as of this writing. These are the seller apps, the buyer apps, and the logistics providers.

While this is a good start, 43 is still a small number. After all, there will be a limit to how many restaurants a seller can register. There's also a limit to how many customers will use the buyer apps like Paytm to order food.

Thus discounts is the go-to tactic being employed by everyone on the network to attract ever more restaurants and customers.

This is most visibly seen in the delivery charges. Most logistics providers are not charging anything right now on ONDC. Thus the customer gets 'free delivery'.

This is a big value proposition of ONDC. The delivery charges are a major component of food deliveries from Zomato and Swiggy.

Winners and losers

Let's quickly take a look at the potential beneficiaries and also the ones at the receiving end of this disruption.

ONDC is to a government service/company. It's a private company. It has many backers, the biggest ones being SBI, HDFC Bank, Kotak Mahindra Bank, BSE Investments, and NSDL.

It's a non-profit organization and the government has done a lot of the initial marketing to get it off the ground.

Despite the full backing by the government, it will have to stand on its own over time. This means all three kinds of service providers on the network - buyers, sellers, and logistics providers - will have to be profitable.

This is only possible if the network achieves scale across the country, especially in non-metros.

Also the discounts, especially the free delivery, will eventually have to go. This will ensure everyone on the network benefits.

The million rupee question is, will customers still use ONDC if the discounts go away?

The biggest beneficiary is, without a doubt, the customer due to lower prices.

The other big beneficiaries are the restaurants. They believe ONDC will be a game changer as they have a direct link to the consumer. This is not possible with their tie ups with Zomato and Swiggy as these platforms own all the customer data.

There have been reports of some apps doing much better than others. Magicpin, Gurugram based start-up, which has tied up with Paytm, has onboarded more than 22,000 restaurants already.

On the buyer side, Mesho, PhonePe, and Paytm have grabbed an early lead.

On the logistics front the main players are Delivery, Dunzo, eKart, Grab, Loadshare, Shadowfax, and Shiprocket.

What about Zomato and Swiggy?

Are these companies in trouble?

The answer is mixed.

In the near term, the impact is unlikely to be significant. The ONDC network is still small. But as ONDC scales up, there will be some impact. The question is, how much?

Here, it's interesting to note two things.

First, most people who are using ONDC now, are doing so because of the discounts. And these discounts only exist because the network is small. Once ONDC scales up and becomes sustainable, the discounts are likely to vanish.

Second, Zomato and Swiggy have subscription plans for free delivery (above a certain order value). These plans are popular among repeat customers i.e. high value customers.

These customers have already proven themselves to be valuable and loyal. They contribute a significant (and rising) percentage of revenues to Zomato and Swiggy.

Will they start ordering from ONDC just because the cost is slightly lower? After all, the 'free delivery' is the biggest value proposition of ONDC. This is not a concern for those on Zomato and Swiggy's subscription plans.

Conclusion

ONDC is a massive disruption in the food delivery space. It will likely be a disruptor in the hospitality space too in the near future.

The biggest beneficiaries of this disruption are consumers and restaurants.

However, the road won't be easy for everyone else. They will have to invest in customer acquisition software, customer service, logistics, marketing, etc, depending on where they stand in the value chain.

The threat to Zomato and Swiggy are not trivial. However, they could survive this wave of disruption if they invest in retaining both customers as well as restaurants.

However, the biggest beneficiary overall will be the ecosystem itself due to the entry of multiple businesses across the entire value chain.

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