Whalesbook
Platform Fees Rise Amidst Rising Costs
Swiggy has set its platform fee at ₹17.58 per order, including taxes, matching Zomato’s recent increase to the same level. This is Swiggy's second significant fee rise in less than a year and brings it in line with Zomato. Zomato’s fee, before taxes, was raised to ₹14.90, resulting in the ₹17.58 final charge. These increases are partly due to rising operational costs, such as higher fuel prices impacting delivery expenses.
New Rivals Challenge Delivery Giants
India's food delivery market is expected to grow substantially, potentially reaching $337.15 billion by 2034. However, competition is intensifying. Rapido recently launched 'Ownly' in Bengaluru, offering a different model: zero commission for restaurants and a flat ₹30 delivery fee for customers, bypassing platform fees. This approach targets restaurants unhappy with current commission rates, which can be 16-30% on platforms like Zomato and Swiggy.
Consumer Demand and Past Trends
Historically, Swiggy and Zomato have gradually increased platform fees. Swiggy’s started at ₹2 in April 2023 and Zomato’s at ₹3 in August 2023, climbing to ₹10 by October 2024. Recent tests were seen around ₹12-₹12.70 before reaching current levels. Despite these hikes, Zomato’s order volume growth has stayed strong, supported by a rise in monthly active users. This suggests consumers are currently absorbing the price changes.
Pressure on Profits and Market Share
While presented as necessary, the fee hikes point to underlying pressure on company profits. For example, Zomato’s high stock valuation reflects investor expectations for future earnings. Fee increases are therefore important for boosting short-term profits and showing progress toward profitability goals. Analysts estimate that every ₹1 increase in platform fee can boost Zomato’s revenue share per order by about 0.26% and add roughly ₹120 crore to its earnings before interest, taxes, depreciation, and amortization (EBITDA). However, models like Rapido's Ownly, by offering zero commissions, directly threaten the main income sources of established players. Even small, repeated fee increases could eventually deter price-sensitive customers, especially if rivals maintain lower prices.
Balancing Growth and Profitability
Analyst views on Zomato remain largely positive. Elara Securities recommends 'Buy' with a target price of ₹415. CLSA and Jefferies also have 'Buy' ratings, with targets of ₹375 and ₹480, respectively, citing strong performance, especially from its quick-commerce service, Blinkit. The market is watching Zomato’s ability to increase profits through higher fees without hurting order volumes. As the food delivery sector matures, the focus is clearly shifting toward sustainable profitability, which will likely involve ongoing strategic pricing and competition.