Amazon's food delivery service in Bengaluru risk for Zomato, Swiggy: Study

Topics Amazon | Food delivery | Zomato

Amazon Prime members get free delivery on all their orders, while other customers can pay a nominal delivery fee of Rs 19 for their orders.
Amazon’s new food delivery service in Bengaluru could hurt Zomato and Swiggy as its commission rate is cheaper, said a report by Motilal Oswal institutional Equities, predicting "cash burn" in the industry as a result.

Amazon Food charges restaurants 10 per cent: almost half the 22-25 per cent charged by Zomato and Swiggy, which have been able to curtail their losses due their higher rates.

The report focuses on InfoEdge, which holds a 19.3 per cent stake in Zomato.

"Amazon will consistently keep take rates below the industry average as it gains an additional benefit for increasing Prime membership at the expense of losses in the food delivery vertical. Unlike Amazon, Zomato and Swiggy do not have a vested interest in lower commission rates. Increasing competition (in case of an Amazon expansion) can lead to another prolonged period of cash burn in the industry. Amazon’s expansion can pose a risk to Zomato’s road to profitability and lead to higher ‘losses from investee companies’ on InfoEdge’s consolidated profit and loss," said the report.

Amazon Food said on Monday the service was available across 62 pin codes in Bengaluru, covering key localities like Whitefield, HSR, Sarjapur, Koramangala, Indiranagar and MG Road. The other such areas include Jayanagar, JP Nagar, Frazer Town, Malleshwaram, Rajajinagar and Vijayanagar.

Amazon Prime members get free delivery on all their orders, while other customers can pay a nominal delivery fee of Rs 19 for their orders. As a limited period offer, there is no packaging fees for all customers. They can receive offers from restaurants along with Amazon Pay cashbacks.

While the brokerage maintained its neutral rating on InfoEdge's stock, it said, "We estimate 37 per cent compound annual growth rate in gross merchandise values, 26 per cent CAGR in the number of orders, and a consistent take rate of 21 per cent for FY20-34E. Our weighted average cost of capital/terminal growth estimate stands at 11 per cent and 6 per cent."

Zomato’s 1HFY21 commentary suggests positive contribution margin (INR27/order) on continuous cost optimization, rising scale, and consistent take rate (with an increase in the average order size), according to the report.

The Indian food-tech industry is poised to grow at a compound annual growth rate of 25-30 per cent to $8 billion by the end of 2022, according to a report by Google and Boston Consulting Group.

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