Episode 82: Business Breakdown of the Indian F&B Industry w/ Sarthak Ahuja
About Sarthak Ahuja:
My next guest and co-host on The One Percent Project is Sartha Ahuja. In this episode, Sarthak & I deep dive into India's Food and Beverage industry. We discuss the unit economics of running a restaurant to making butter chicken, ordering patterns in India, the business models of food aggregators like Zomato and Swiggy, cloud kitchens, and the reason behind the rise and fall of Uber Eats. We uncover the success story behind Domino's and how Ankit Gupta and Chirag Chhajer built Burma Burma, a Burmese cuisine restaurant chain in such a competitive industry.
Sarthak shares how consumer businesses must undergo a "speed Ludo test," emphasising time efficiency, small transaction sizes, and positive unit economics. This strategy is essential for long-term success in a price-sensitive market like India.
Sarthak is a published author, a seasoned Chartered Accountant with expertise in startup advisory and investment banking and a LinkedIn top voice who brings a wealth of intriguing insights to the discussion.
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Key takeaways:
The unit economics in the restaurant business is challenging. Contrary to the customer perception, profit margins are low. About 30% of a restaurant's total revenue is spent on food costs, and 40% on kitchen and store operations. Labour costs consume about 20% of the budget, along with branding and marketing which take up 5-10%, and the commissions paid to delivery platforms are up to 7%. In the end, the operating margin is 10-15%.
The F&B industry in India exhibits a rich diversity of business models, categorised into B2C and B2B segments:
In the B2C segment, the restaurant type ranges from fine dining and casual dining to buffet restaurants and fast casual cafes. The landscape also includes patisseries, pubs, bars, and quick-service restaurants. The quick-service restaurant category is further divided into various subcategories. These businesses cater to the diverse culinary preferences of Indian consumers. A notable addition to this landscape is the cloud kitchens, which are essentially faceless restaurants. These cloud kitchens leverage food tech platforms like Zomato and Swiggy to reach customers and operate with lower overhead costs than traditional dine-in restaurants.
The B2B side involves food tech companies focusing on user aggregation (like Zomato) or supplier aggregation (such as providing supplies to restaurants and cloud kitchens). Industrial kitchens and labour training for the hospitality sector further contribute to the complex food infrastructure in the industry.
Domino's success in India can be attributed to its early entry into the market, long-term commitment, and ownership of delivery infrastructure. Unlike food aggregators, Domino's controls its delivery fleet and customer data, fostering strong loyalty. This asset-heavy approach has helped Domino's secure a dominant 70% market share in India's pizza sector and shows the value of physical infrastructure in the food industry.
To succeed in India's competitive market, consumer businesses must undergo a "speed Ludo test," emphasising time efficiency, small transaction sizes, and positive unit economics. This strategy is essential for long-term success in a price-sensitive market like India.
Understanding consumers and continuously adapting to their preferences can be the key to thriving in a highly competitive and price-sensitive market. Additionally, careful market testing and timing for expansion are crucial to building a moat and ensuring long-term success in the food industry. Burma Burma's success in introducing Burmese cuisine to India is a testimony to the importance of catering to diverse consumer preferences and creating a thoughtful menu that resonates with the Indian palate.
In this conversation, he talks about:
00:00 Intro
02:14 Salone's journey into Gaming.
07:38 The History and Evolution of Gaming
16:11 How did Nokia stumble upon "Snake"?
17:49 FAANG founders are gamers.
23:41 The Indian Female Gamer.
27:32 Unit Economics of the Gaming Industry.
30:37 Observations on One-Hit Wonders in Gaming.
34:39 Evaluating Success in the Gaming Industry.
38:36 Understanding the Gaming Demographics- Building a Career in Gaming.
44:26 Views on the Metaverse.
47:59 One management advice that you have learned as a leader.
50:44 Reflections on Leadership Figures- Michelle Obama & Indra Gandhi.
52:22 Are leaders polarising?
52:56 Kindest thing anyone has done for you.
53:32 Key takeaways
Transcript*
Pritish: Welcome, everyone, to The One Percent Project. Today, Sarthak and I are hosting a new conversation on the Food and beverage industry, specifically the Indian Food and Beverage industry. Now, how did this start? How did Sarthak and I start discussing India's F&B industry and unit economics? So, a few weeks ago, I read an article on Domino’s in the Harvard Business Review. I learned that after hitting an all-time low in 2008, Domino's Pizza underwent a vigorous rebranding and product development and embraced innovative technologies to become the world's leading international fast-food seller. The then-CEO, Patrick Doyle, said that Domino's is a technology company that delivers pizza. And I was taken aback. And I spoke to Sarthak about it because he teaches an F&B course in a Master's Union. So, I wanted to know, does he believe that? And I also went back to check that Domino's has been in India since 1996. So, food delivery actually started then, even before the Amazons. So that's how we got in, and the insight I got from Sarthak, firstly, I said, why does anybody get into this business? Because I see it as a consumer. So, let's deep dive and find out how profitable this business is and how one should really evaluate it. So Sarthak, let's start and tell us the most ordered dishes in India.
Sarthak: That's actually a fun question, and I'll tell you honestly, the Instagram influencers of the world, especially of India, found the Zomato most ordered dishes report sometime last year, and they absolutely thrashed the content out of it because they knew that this would totally work well with the audiences. Practically the entire country today knows that biryani is the most selling item on Zomato. And it's also reigned supreme for seven straight years on Swiggy. So, if you look at it, both companies release their reports every year, sometime in January, and biryani, of course, it's a no-brainer because you've got carbs, you've got veggies, you've got the masalas, everything in one place mix that you can eat out of your box. And if you're somewhere in the South of India, you would still think it's native to you. If you're from the North, the Lucknawi biryani, you would still think it's native to you. So, no matter which part of India you've really been raised in or belong to, rice, carbs, masala, all of it put together, everyone enjoys a good biryani.
Pritish: Yes. And let me also pitch in because being a Bengali, we have to say that the Calcutta biryani or the West Bengal biryani is unique in itself because probably that's the only biryani in the world which has potatoes in it.
Sarthak: Really?
Pritish: Yes.
Sarthak: Oh, I wouldn't actually mind that at all. As a vegetarian, I absolutely love paneer (tofu) and aloo (potatoes) in anything and everything.
Pritish: Yes. So, you have to have biryani in West Bengal in Calcutta. What are the other things?
Sarthak: Okay. I will pull up this data that I have in front of me. This was from the Swiggy report that came out in December 2022. It's about six months old. It said that last year, 2.3 biryanis were ordered every second on Swiggy. That's the number of biryanis ordered in the country. Quick number two, in terms of comfort food, was the masala dosa. But I feel comfort food typically the most selling in India would be Maggi noodles. It's just because people don't order it online, it doesn't show up in that data. The number one snack in India for chai time was samosas and the number one dessert, absolute no brainer, is the ‘gulab jamun.’ But apart from that, if you were to analyse cuisines, most ordered dishes also include chicken biryani, chicken fried rice, paneer butter masala, butter naan, veg fried rice. And in terms of foreign dishes, there's pasta, pizza, and spicy ramen. While all of this information is there, it's fun to see how 41% of all orders are actually North Indian. So, I'm thinking when it's North Indian, everyone's ordering ‘Dal Makhani’ with a ‘Paneer Butter Masala’ or a ‘Butter Chicken’ along with a ‘Naan’ or a ‘Tandoori Roti.’ And funny story, I was meeting a client just this week in Chennai and we were talking about Dal Makhani and how much butter or cream actually goes into it. And this client was looking at his brother saying that now you need to stop eating dal makhani and I was actually quite surprised, pleasantly surprised to know that someone who's grown up in a Tamil Brahmin household loves going out and eating dal makhani. That's how much people order North Indian food.
Pritish: Yeah, absolutely. North Indians, given I'm from Lucknow and obviously you're from Delhi, the region, we also go out and have a lot of Chinese and a lot of South Indian because our home infrastructure is all about dal, roti, sabzi. Nobody made dosa before ID Idli came in or all those South Indian brands that came up at an FMCG level. What do Indian consumers really like to eat in terms of categories? Indian or Mexican, how's that? What is the breakdown for that?
Sarthak: It's fairly simple. If you're from India, I really relate to this data because this is exactly how our family orders. Percent right at the top is North Indian cuisine. Immediately followed by about 27% of all orders are Chinese. When I say Chinese, it's actually ‘Chinjabi’ or as they say, ‘Desi Chinese’, which is, of course, again, very interesting story around how it actually originated in Calcutta because back in the sixties, I believe all the Chinese merchants who were in Calcutta and it was, as they say, it was invented in the Taj, either at the Taj in Calcutta or the chef who moved from Calcutta to the Taj Mahal hotel in Bombay actually introduced ‘Gobi Manchurian’ as an item. Pritish, you live in Hong Kong. I have absolutely no idea if Manchurian is even an item in China or how close it is to what we eat in India. So, I have no idea. I've recently tried Sichuan cuisine. Someone who does it authentically as the Chinese people eat it. Somewhere in Bombay, there was a supper club, which I absolutely enjoyed, but it was nowhere close to the kind of Chinese we eat in India. Our orders are honey chilli potatoes and Dimsums and Manchurian and veg noodles. That's the closest preference. After that, about 23%, which is again, very close to Chinese, is South Indian food. Again, very close to 22% is Mughlai. And thereafter comes the first, I would say, foreign cuisine. I'm not considering Chinese as foreign because it's all developed to the Indian palate. So, the first foreign cuisine that comes at about 16% is Italian.
Pritish: Let me add something to Chinese cuisine. I was starstruck when I came to Hong Kong and even went to mainland China and looked at their and our Indian Chinese dishes. There is no correlation. There is no chicken chilli. There is no chicken chow mein. There is no chicken chop suey or American chop suey, nothing of that sort. Their dishes are so different. I felt these needed to be more Chinese. By the way, now there are Indian restaurants here that make Indian Chinese dishes, and the Chinese go there to eat it. So, we actually take our friends, Chinese friends, to say, hey, have you ever had Indian Chinese? He said, what's that? I said, you will know. Let's go.
Sarthak: It's funny how I grew up in this part of Delhi called Rajender Nagar. The selling Chinese outlet was actually this van, which was run by this Bengali couple and my wife who grew up in Toronto, says that the best Chinese that you get in the world apparently is in Toronto because there's this van run by a Bengali gentleman there, who gives the best Chinese food. So, the Bengalis have definitely cracked it and they've cracked both desserts as well as Chinese food. So that's massive, and they have their own biryani. Who thought that Bengali cuisine, while not being on the list at all, is actually reigning supreme? It's an undercurrent across all of them.
Pritish: So, let's get into business and unit economics. It sounds amazing. The numbers are mind-boggling in terms of the amount of food. That's ordered online, eaten at restaurants, and the spend that goes on. Every other day we hear about a new restaurant coming up and in the last few years, cloud kitchens have been a thing. What are the types of business models in the F&B industry in India today?
Sarthak: Sure. So, if you think about it, I look at business models. I first divide them into two. One is the B2B or the supply chain side. The other is the front-ending B2C side. Consumers always tend to see the B2C or the consumer side, and that's how they think about it. So, on the consumer side, you've got restaurants among which there is fine dining, there's casual dining, then there are buffet restaurants, which is another category by itself and then there's fast casual cafes, patisseries, pubs, bars, and then there are quick service restaurants. So even in quick service restaurants, there is further sub-categorisation. You've got food courts in malls. You've got standalone kiosks in markets. We've got food trucks in pop ups which show up at different places, which are temporary, which are easily movable, depending on where crowds are being pulled for certain things. And then of course, there are also street carts. So, while dishes what the entire universe of restaurants look like, apart from that, we've also got cloud kitchens, which are basically face less restaurants that you order using food tech platforms like a Zomato or a Swiggy or today even a Thrive where Thrive gives certain restaurants the opportunity to list themselves and deliver food through the Thrive platform. So, cloud kitchens are faceless. They need to be registered at these places, and people order and eat that food at home. For them, it just helps them save the fixed cost of hiring front-end employees, and getting a fancy place where there is enough footfall. They need to run a kitchen, and so many times in India, multiple cuisines and multiple brands are actually being run by the same people at a cloud kitchen. You would see, and there was probably a report sometime last year, which showed that somewhere in Bangalore 160 cloud kitchens were being run from the same location, which was a very shanty location because the journalist who was doing a deep dive, he actually went to that location and saw that it was actually in a very dismal condition. But 160 restaurants are being run, cloud kitchens being run from the same place. So that's where in cloud kitchens you've got multi-brand, multi cuisines, or a single brand and single cuisine. A further bifurcation could be from the cloud kitchen's ownership perspective. Either you own the kitchen, which means you've taken it on rent and you're the only one running your cloud kitchen from that space. But today, many people realise that while people wanting to get into the F&B business thought that cloud kitchens were a great business idea, they said we'll just rent out infrastructure. So, someone who does South Indian food, which we know is going to, at least in a place like Delhi, sends in the money as breakfast items. So, someone will take it on. in the morning to do breakfast from there. Another person would probably run a samosa chai brand from the same location in the evenings. And then a North Indian cuisine partner could come in the night and take over dinner right from, say, 7 in the evening to probably till 1-2 am. So that's how these business models are running. At the back end, I see there is food tech, or there are traditional industrial supplies. So, in terms of food tech, you've got either user aggregation or you've got supplier aggregation. So, if you think about it, Zomato has user aggregation as just the consumer-facing app. But at the back end, through HyperPure, they also provide supplies to all the restaurants and cloud kitchens listed on them. And then, of course, apart from that, some people are setting up industrial kitchens for people. Then some people are doing labour training, like manpower supply. They're actually training them and putting them in the hospitality sector. This is how I look at the food infrastructure right now.
Pritish: That's interesting. The most visibility we have as consumers is in the casual dining, quick service, and cloud kitchen. I really don't care how the packaging happens, or the sourcing happens, but there is probably a massive industry there. There is an industry that is the supply chain from actually connecting those aggregators/producers to these restaurants or different kinds of food-making business opportunities. So, how does unit economics really work for the restaurant? All these consumer-serving or consumer-facing businesses?
Sarthak: That's a very interesting question. And while, of course, I can answer in a straitjacket fashion, give you the few numbers that I see in the industry. But it is funny to see how anyone who wants to become an entrepreneur, one of the most common answers you will see, right? Apart from starting a D2C brand today, where everyone wants to start like a personal care, skincare brand, I would hate to generalise. Still, even as a consultant, right before this podcast recording, I was on my fourth consulting call of the week to a fresh entrepreneur who again wanted to start a personal care brand. And I'm literally stopping one of those people at this point from doing it and making that mistake. Just because customer acquisition costs in that category are so high at the moment. A similar thing happens with food and has been happening for a very long time. And why? Because if we remember, you know, as kids, when we were in school, back in college, when we would go to a restaurant with our parents, Indian mothers would typically always end up saying, why did you order a dal curry for 500 rupees, when I could’ve made it for 50 rupees at home. So, that's our first interaction or exposure to understanding unit economics of the food business, which comes from your mother saying that, see 50 rupees material, they're actually selling for 500, look at the margin. And that's when it strikes us. And what we also do is we'll count the number of people who are sitting in the restaurant that day. And we'll say, okay, if the average order value is about 500 per person, oh man, this restaurant is doing this much revenue at this hour. And imagine there are, they do five table turnarounds during the day. You know, then this is their daily sale and it would be higher on a weekend. And we automatically calculate the amount of revenue that a restaurant would be doing in a good area with decent footfall all through the month, and think it's an amazing business model. But what happens is when you actually dig down to unit economics, you'll realise for most food businesses, 30% of their total revenues go into food costs. So, when your mother's telling you that it's actually less than 10%, it's actually not. And let's use the example of Dal Makhani there. You know, I work with this North Indian food brand, and the gentleman has been in this space for the past two decades. And one day, I was just jokingly asking him that now people do blind tests on Coke versus Pepsi. What if we were to get you your dal makhani and the top five competitors that you have named for your business, if I were to get you dal makhni of all of them, would you be able to pass the blind test and tell which one is yours? And which one is the other person? It is because at the end of the day, the consumer will prefer the one which is the tastiest. Let's assume price is out of the equation. He said, it's very difficult to mess up a dal makhani, which I refuse to believe because in my life, 90% of the time I've eaten dal makhani, which is just shoddy. It doesn't meet the kind of standards I have for a dal makhani. But he said it's very difficult to mess up because some person or some cook will put in 50% of the weight of dal makhani in cream and butter. And for someone else, maybe 60% will be cream and butter. So, it ranges between 50-60%. And that's the only kind of difference because apart from that, the dal being slow-cooked is similar for everyone. And that was quite a shocker for me because I never imagined, of course, while the name is so obvious and it should have occurred to me, I never thought that dal makhani is 50-50, like 50 dal and 50 makhani, which is why it's given that name. And it's shocking because most other food items that you see, probably if you go to a grocery store and you pick up a GoodDay almond biscuits, 50% is not almonds. It's barely, it's less than 5%. So here, you get the shock of your life because at that point, the typical order of say a dal makhani is about 300-400 grams. So, imagine about 150-200 grams of cream and butter going into it. And of whatever cloud kitchens I have visited or seen, most of these people get the Tetra pack of the cream, which is apparently a Nestle or something. So, I'm assuming they're using decent quality. By no standard is that cheap and can they sell that product for just 10% of the selling price? If the selling price is 400 rupees, their cream consumption in itself is definitely more than 40 rupees. It's closer to 60, I would say. On top of it, you add the dal, you add the cooking expenses, you know, the LPG and everything, and let's forget all these, more than 40% of the carpet area actually just goes into the kitchen and the store operations and everything, which is naked to the visible eye. Which is why anyone who's starting off in the food industry, this is another nuance that they tend to miss out on and not realise. Because when they do a unit economic calculation in their head, they'll always relate it to what they see with their naked eyes and think it is this much cafeteria, maybe this is what it would cost. So even the manpower easily takes away about 20%. And I'm sure you can totally imagine that if you pull out the finances of any of the listed restaurants in the country, everyone needs to spend 3-5% on branding and marketing. And then of course, come in commissions if you're doing deliveries and for most restaurants today, 50% or so of their revenues actually happened from deliveries and about 30% of that is going in the form of commissions. So, 30% of 20, anyway, 7% is going to commissions. And then of course you're going to put something in branding, marketing. So that will take up say 5-10% of your unit economics. So, we said 30, we said 15, that's 45, another 20%, that's about 65, you add another 10%, 75, then there are going to be utility, consumables, contingencies, whatnot, then take away another 10 to 15%. So, if you're a fabulously running restaurant, the operating margin that you make lies mostly between 10-15%. And that too, if you're lucky and everything's going. Well, at times you've made some wrong bets at a few places, so certain outlets in your portfolio will actually just be breaking even or not doing that well. Go on in this business. If you're making 10 percent of the top line, that's actually fabulous. If your expectation is to make any higher than that, then you're just expecting the moon.
Pritish: This doesn't sound as rosy as it looks. Cloud kitchen is perfect, because your OPEX in terms of the front end is completely gone, but you're almost charging the same price. Then a cloud kitchen makes sense. But you say that a cloud kitchen is equally not valuable. Why is that?
Sarthak: That's also because people ordering from cloud kitchens, they know they're not going for the ambience. At the end of the day, they're going to just pull out their plates from their kitchen and empty those cartons into their plates and eat it off of it. So there as long as a customer knows that the dal or whatever dish I'm ordering from these five or six restaurants, all of them are fine based on the ratings. For them, the decision factor is either time in terms of delivery or the price. And because now this industry has become so commoditised and I'm talking about a place like Gurgaon where there is a very high population density. Delivery time for most brands is going to be between, say, 30 to 40 minutes and no more. So, if that's gone as a differentiator, and because every cloud kitchen is trying to open at a high-density area where there is a high-rise apartment, they know it's a hot area where they can get more orders. It's like a footfall for them. It's just the numbers. So, because you've got competition there, suddenly the opportunity for you to make margins also goes up, then becomes a price war. Then what happens is someone will reduce the price and at the same time also maybe reduce the quantity which you wouldn't know. So, one cloud kitchen selling a paneer tikka, which could be 400 grams of paneer. They could be selling it for say, as an example, 400 rupees. Another would price it at 300 and be selling only 300 grams of paneer in that paneer tikka plate. But that grammage is not given on the app. A customer will tend to go on the cheaper one. And when in any industry there is a price war, the person who owns the distribution just wins because they're taking a straight 30% off of you. Now, for you to actually rank higher on the search page of the app, they will ask you to do more ads. For you to do more ads, you will have to spend more on ads. So, the amount that you're giving to the distribution channels is no longer 30%. It's actually higher because 30 is the direct commission. Another 10% you're just putting in ads. So, what people tend to miss out on in cloud kitchens is one, the food cost is going to be slightly higher because people would expect the cloud kitchen to have prices lower than a restaurant by at least 15-20%. So, your food cost may go up to say 33-35%. The rent is going to be substantially lower. So, imagine there's a 10% saving that you've made there when the rent is just about 5%. Manpower could also be a saving. So instead of saying 20%, you could spend like 12%. Or 10%, but all those savings that you make in the form of rent and manpower are eaten away by the distribution channels or the tech platforms who're actually getting you the orders because they've got the negotiating power. I mean, you are there because they are getting you the orders. No customer is going to your website to order. So, at the end of the day, whoever owns the consumer or owns the demand actually makes the margin and even the best of Cloud kitchens at best are making between 5-7%. And finally, I'll add, so I remember back in my MBA, there was this one professor who made us do this one exercise in class. He said, I want you to rate yourself on are you a better driver than an average person or are you a worse off driver than the average person. And literally 90% of the class said that I'm a better driver than the average driver. Because you would assume, I mean, I know how to drive well and I can get out of situations and I've driven in a metro city with potholes and this and that. Of course, I'm good. So, he said, that's just statistically not possible. Half of you have to be worse off than the average, even within this class. But that's exactly what happens with everyone entering into the space that they would say, okay, there is an opportunity of 5-7% percent profit margin or say 10% profit margin. I can totally get it, not realising that this profit margin is only enjoyed by say the top 10%. The other 90% have such a long learning curve of efficiency and costs also to go through, must learn marketing, learning how to sell on these platforms, that it's not as easy as plug and play. And that's where so many people end up burning their fingers, figuratively and literally, in the food business.
Pritish: Zomato and Swiggy, they are also eating into the percentage, because obviously, they, as you said, actually are the face to the consumer. They are, I was in the hospitality industry many years ago, and I used to work with OTAs, online travel agents. Zomato, Swiggy, to me, seem to be exactly the same thing for the F&B business. If you have to rank higher, you need to give them a higher percentage. There is price parity in OTAs. It's probably more than the Zomato and Swiggy, where you cannot price your room lower than the price that you have actually quoted on booking.com. Because if you do that, then I will bar you. And the 80% sales that you're actually getting through me completely go up because the small players, the boutique players, 80 to 90% of the business depends on OTAs. They cannot actually negotiate. They have to just agree. So, I'm assuming that Zomato and Swiggy also play in the same space and they're also eating into the margins. Firstly, how are they making money? The Zomatos and the Swiggys, and how do the restaurants and the cloud kitchens work with them?
Sarthak: I'll speak from the perspective of the restaurants. Depending on how hot a restaurant you really are in the eyes of the consumer already. If you're an established restaurant that people really like and they would want to search for you on Zomato or Swiggy, maybe you can negotiate and lower commission on your sales because you already have a pull, you already have a consumer, that you can pull for the platform onto the app. So, all these consumer apps, the reason that it's a no brainer that everyone's spending so much money just to establish a consumer base and acquire the consumer initially, thinking that all the spend that goes into acquiring the consumer which is building the infrastructure, after that, it's just going to be pure profits because we're going to keep sending and up sending to them and the lifetime value is going to be huge. What has happened is that the good ones who already had consumer loyalty have been able to negotiate lower commissions at some point in time, which could be somewhere around 20%, which today, or maybe a little less than 20% also, which today is very difficult for any new player to even believe because they'll say our starting point was upwards of say 26-27%. But despite that, because of the kind of CapEx and the kind of OpEx, which has gone into building that consumer base initially, the startups have reached valuations for which to justify your profit through a PE multiple of a listed entity, needs to be so much higher. Despite that these people are not making enough profits as tech companies, which would justify their valuations. So that is where they're going in and trying to say, okay, if revenue commissions is an easy lever where we can just increase the percentage by 0. 51% every year, that's one very easy unlock, which would not require building any additional infrastructure. That's what they're trying to do. And which is why a lot of these cloud kitchens and restaurants are going to fight those commissions saying that we're not giving you anymore share. But it's again, it's almost the fight that happened between an OYO and smaller hotels. You can go on a dharna or you can say, we're going to boycott you. At the end of the day, if all your sales are coming from one channel, you're dependent on them. And I wish more people in the world were formally taught Porter's five forces model, or even those who've learned it at some point could keep refreshing it because when you read it in 11th standard business studies, that was the first time I read it, it seems like common sense to you with, yeah, this is a no brainer. What are they teaching us in entrepreneurial education or business studies really? It's so stupid. But if you think about it, common sense is not common because your emotions towards a product or a business end up clouding your judgement.
Pritish: Now that's Zomato, Swiggy. Then there was UberEats. They entered the market. They had the network. So, what happened to them?
Sarthak: Yeah, so between both Zomato and Swiggy, and I'm going to give due credit to the team at the Ken, Praveen Gopal Krishnan, who's the COO of the Ken, has done a great deal of writing around this subject, which people should go check out. He writes this newsletter called the Nutcrack. He's probably done a few pieces on this in the past as well. If you look at the narrative, or if you look at the target markets of Swiggy and Zomato, you’ll see Swiggy has more market share in the southern part of the country. So, Maharashtra and below people, more people use Swiggy than they use Zomato. And in the North, more people use Zomato than they use Swiggy. And it would also be because the founder of Zomato is based out of Gurgaon and the founder of Swiggy is based out of Bangalore. So, of course, that's their native ground. But the common consumer perception is also that Zomato is more a consumer facing, consumer first product. All their advertising or their quirky ads and wanting to make the consumer happy and all their notifications that they send is all very consumer focused. And Swiggy is supposed to be a more supply chain infrastructure company by the common perception of it, that they want to optimise on efficiency and Zomato wants to optimise on customer experience and customer willingness to pay. But what has happened in India is while Swiggy started building on the supply side and Zomato thought that okay, we've listed all the restaurants and their menus, now let's try and own the consumer. Both companies started spending money on owning the consumer and acquiring more users, thinking that once we acquire the user and these people download the app and the retention is also the D30 retention or the 90th day retention is upwards of say 10%, it's a great metric and these people will continue to buy. Uber thought we already own the consumer, people already have the Uber app. What if on top of it, and we already have the logistics infrastructure, what if we just start sending food as well? It's easy, but what's different in India is that India is such a price sensitive market that literally every person had a Swiggy and a Zomato and an Uber Eats on their phones thinking wherever we get the cheapest food, we’ll order from that app, how does it matter? In fact, I also remember there's this one friend of mine from undergrad who had actually built an app where you could compare prices of getting from one place to the other between Uber and Ola, and then the prices for the same order from the same place between Zomato, Swiggy, and maybe a third platform. It could be Uber Eats or not. A lot of people have attempted to do it because that's what the consumer wants. The reason Uber Eats had to shut down and sell to Zomato as much as I remember is because they realised despite owning the consumer, it's a race to the bottom by giving more and more discounts to increase the gross merchandise value. The more discounts you give, it just eats away from your capital. The consumers don't care. There is no loyalty. That's the problem that all these people are facing in India, which is why the other day I also made this comment online. I said in India, if you're building a consumer business, put it through a speed Ludo test. Because back in the day in school, when we used to play Ludo with our cousins, a typical game would last about say 30 minutes. We grew up to start playing Uno, which would last about 15 minutes. Now if you look at all these real money gaming apps and casual gaming apps today, they have this concept of speed Ludo. Where you don't need to throw the die to get a six and you start moving your pawns. Your pawns are already randomly placed somewhere. Purely base is luck. And you finish the game within two minutes because you've got a pawn each. So, one, they've solved for speed. Second, in terms of betting or maybe putting in money, even if you call it a game of skill. They've said, put in five rupees. Each person put in five rupees, we'll take our rake and the winner gets the remaining pool. They've solved for transaction size because they realize the Indian pockets are willing to spend smaller amounts of money and not a big amount. And third, if you look at a video game, it's unit economic positive. There's no tangibility being delivered. Spee Ludo solves for time, transaction size, and unit economics. So, if you're building a consumer business, you have to think of solving all three. If you leave out even one, it's just a race to the bottom.
Pritish: Given this industry is so complicated, so competitive, as well as the margins are so thin. So how did Domino’s crack it?
Sarthak: So, as they say, whenever they teach compounding to people, they say that the biggest factor is really time. Certain things in the physical world, you can't fast track more than what the limits of physical nature would allow, even with technology. Just the sheer time, your Warren Buffet has been investing since the age of 11 and now at the age of, I don't know, what, 92, 93, probably more, he's had the longest time as an investor to make money, which is why for Domino's to enter in 1996, when no one was thinking about home deliveries, starting it then, they've had such a massive forerunner opportunity to make money and capture the consumer. In fact, Zomato and Swiggy never share data of the actual consumer and their phone number and their address with any of the cloud kitchens and restaurants because they want to own the consumer. But Domino's is the only company who actually gets that data because they use their own fleet to deliver it, so they need it. And in fact, more than Domino's needs a Zomato actually Zomato or Swiggy need Domino's because even though the data shows that less than 19% people are ordering Italian, to my mind, I would say, actually, even more than biryani or probably equivalent would be a pizza getting ordered from Domino's which is not getting captured in the Swiggy and Zomato reports. Because 3/4th of all orders that Domino's gets is off of those apps. So Zomato and Swiggy have essentially wanted to capture the gross merchandise value of Domino's and they don't make as much commission from those orders also because they're not delivering it. Domino’s has built that loyalty. So, I tell people, acid light models, because the VC's thesis is I want a 20X return in five years, seven years, and you can't do it by building physical infrastructure, but you really make a mark and build a legacy business when you own the infrastructure. In one of my classes I see, and I'm probably borrowing this from someone, that it's harder to build atoms than bits. And you could say atoms are tangible and bits are intangible. But really today, the time for you to build in bits, say an asset like model is amazing, is gone because then there's been a problem of customer acquisition or some other platform has come in the way to acquire consumers for you. So, the real vote and the reason why China has outperformed every other country today is because of their manufacturing muscle. Like in India, we just went from agrarian to service by completely skipping manufacturing. Because when you skip manufacturing or when you skip building that physical infrastructure, there's a great deal of opportunity to make money that you miss out on. So, Domino's is a classic example. Despite being Italian, there's the China in the Indian food sector. 70% market share of India's pizza market. I've probably read this somewhere. I don't know how validated this data is, but 70% of pizzas in the country we got through the Domino's app or through Domino's. Mind boggling.
Pritish: Yeah, it's mind boggling when I actually read that HBR report and I spoke to you that an international entrant who came to India in 1996, I can't fathom how they could have thought India would call up somebody and in 30 minutes somebody would land up and those iconic ads that it said within 30 minutes pizza will be home or you get a refund or you get the pizza free, something of that sort. I was like, unbelievable, that to prove that it could not be done people started ordering pizza. The hack in marketing is brilliant.
Sarthak: Correct. A lot of times consumers tend to think that we are gaming the company, and we figured out this hack. We don’t know that the company knows it and they want you to feel like you figured a hack. That's the real six sigma test. That's the real test. So, it's almost giving a bounty. Like if you're getting it free somewhere, that's okay because it's costing us probably just hundred rupees to figure out where there is a logistical inefficiency rather than getting a McKinsey or a Bain on board to figure it out and map the market for us. That's a very small cost to pay to actually find deficiencies in your system and optimise from it.
Pritish: We talked about the traditional F&B business. We talked about the business models. We talked about the restaurants. We talked about Zomato, Swiggy, and we talked about Domino's. So, if somebody has to really get into this space, what is the opportunity and where is the opportunity?
Sarthak: The opportunity really is fundamentally, you would know as well as I do, is in having a moat right. So, if you were to look at data to say India orders this much North Indian, the consumer data is telling me That they want North Indian food and you've set up a North Indian cuisine business. Again, there are so many players which are serving that market. It's about looking beyond consumer data or what is evident from it to find a white space where you can offer something new to the market, build a certain sense of loyalty and make money. I probably come with a little bit of bias here when I take this example because I work closely with Burma Burma. Now, they have already completed nine years of their existence. They're in their ninth year and six months or something at this point. And in this entire decade, there has been no other Burmese only cuisine brand, which has come into India. Risky to say, I'm going to experiment with a new cuisine, which no one else knows, but I'm going to make it so likeable to the end consumer that they keep coming back. From there it takes a lot of conviction, a lot of understanding of the consumer, but still doing something new. So, I feel anyone who can crack new areas, that's where the USP is to make money because as it is with any industry, you're just a commodity.
Pritish: Interesting, because what I understand is that basically everything has been exhausted. We need to take a really high bet, a high risk, figure out if there is an opportunity. Like Burma Burma, as you mentioned. I don't even know how does Burmese cuisine taste. I've never had it. Will it be palatable to the Indian taste? Could be. So yeah, I feel that's a big risk.
Sarthak: Yeah. And what's also interesting is one of the founders. His mother grew up in Burma and they left Burma at the time of the exodus, probably in the seventies sometime. So, he's grown up at home eating Burmese food. And because Burma is neighbouring to India, what kind of dishes will Indians also like? Because it's not very far off. It's not like China where it's divided by the Himalayas. What's happening across the mountain, you don't know. They do authentic Burmese cuisine, but they've also very tactfully picked up items, some that cater to expats living in India, some that cater to the Indian palate altogether. Like I remember the first time I went to Burma Burma where, when a few friends took me saying that it's amazing. I thought because I only eat dal makhani, Paneer Butter Masala and Tandoori Roti, there is no way I can like anything else. Chinese, I could still do Italian, maybe, but I would never experiment with my food. And I really enjoyed it. I really enjoyed it, but I remember once, our entire family went, which also had my grandmother, who at that time was 82. And I was just like, okay, this is going to be difficult because I know my parents would like it, but what about my grandmother? And I remember we asked one of the servers for anything that you'd recommend for her. And he had a dish on the menu which he recommended for her, which was like a chapati with a besan sabzi of sorts. This is me explaining it in a very primitive, rudimentary fashion. It's definitely much fancier than that, but that was built to cater to these kinds of people? When a family comes, what will the grandparents have? What would they like? So, they have curated the menu for the Indian consumer. And because Burmese food also has a lot of non-vegetarian, but the kind of shrimp sauce or the shrimp powder or the fish sauces that they use, is they know something that Indians will not appreciate because it's not part of their cuisine, which is why they've kept it completely vegetarian, saying we don't want to confuse people and give them something that they wouldn't like. So that's where a marriage between a new idea but understanding your consumer and making them try it out works. And their expansion strategy has also been there. They started with Bombay, which was their home ground. Then they went to Gurgaon, which they knew was cosmopolitan and people would be open to trying new experimental things. Then went to Delhi, Noida, then went to Bangalore, then went to Calcutta. And only after they tried all four zones of India, did they decide to take external funding for expansion because they were like, okay, now we've tested the market over eight years. Now is the right time to expand this. So just that thought that goes behind building something is the moat.
Pritish: Brilliant. Sarthak, this has been amazing. I would not have done a deep dive or understood the market so well without having had this chance. Firstly, I should give credit to Domino's case study. And second, obviously is your understanding of the market. So, this was great. Thank you. I know that I am going to be a connoisseur of good food, but I'm not going to get into this industry.
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