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Amazon’s foray into Food Delivery poses a risk to incumbents

Amazon has started its much awaited Food Delivery service (Amazon Food) in Bengaluru, exactly a year after launching internally for employees. While we see a marginal impact on Zomato/Swiggy’s duopoly from the much delayed and limited launch, Amazon Food will pose a risk to both players as it can shake up an established setup with a focus on profitability

Launch is slower than expected

* Amazon’s entry into the public Food Delivery market is currently limited to Bengaluru, with coverage in 62 pin codes (out of over 250). It had internally conducted trials in four pin codes a year ago.

* The initial rollout has primarily been with restaurant chains in Bengaluru and is yet to expand aggressively to small independent restaurants. It has 2.5k restaurants v/s ~15K restaurants for Zomato (within Bengaluru).

* Food delivery is through a tab built-in the flagship Amazon app, visible only to customers who are located in the delivery regions.

Commission rate much lesser than the ‘duo’

* Our initial channel checks of restaurants in Bengaluru suggest Amazon is charging a take rate of ~10% on order value from restaurant partners.

* This is less than half of what the duo (Zomato and Swiggy) charge from restaurants (22-25%), which has increased over the years.

* The increase in take rate has enabled incumbents to curtail their losses, a high priority for both players. 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).

Another hook to ‘Prime’ membership

* Apart from early deliveries (Online Shopping), exclusive deals, and video/audio content, Food Delivery is another angle for entry into the Prime ecosystem.

* Amazon’s key focus in India remains its Prime membership, which should allow it to sustain losses in the Food Delivery business. It is not charging any delivery fee to its Prime members (ranges from INR20-100 for Zomato/Swiggy), and is charging a marginal INR19 for non-Prime members

A risk to 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 INFOE’s consolidated P&L.

* We foresee a risk to the duopoly structure and consistent take rates in the industry. INFOE holds 18.4% stake in Zomato. Maintain Neutral.

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