Scramble for customer acquisition passé, focus is on improving unit economics, says Swiggy COO Sunder

The coronavirus outbreak hammered the food and restaurant business, with food delivery companies also taking a hit. As lockdown restrictions are rolled back, food delivery startup Swiggy says it is business is back on track, with home-bound customers spending 25-30 percent more on food than they did before the pandemic. But high discounting and cash burn to acquire customers at the cost of unit economics has been a challenge for food aggregators like Swiggy and rival Zomato.

In an interview to Moneycontrol’s Priyanka Sahay, Swiggy’s Chief Operating Officer Vivek Sunder talks about why IPL 2020 has been great for the Bengaluru-based company, how venturing into hyperlocal delivery helped the business and how the company is reworking its plans in the post-pandemic world. Edited excerpts:

Swiggy says the business is back on track post-COVID? What is the period we are talking about and what are the numbers we are looking at?

As you're aware, this pandemic in India from a business point of view had two broad phases. We are still not over the pandemic but the phases are about a lockdown, with differing intensities and then a series of opening ups. What we are defining as pre-COVID or pre-lockdown is the period that is January to March, which is largely COVID unaffected. A part of March was affected but think of February as the sort of cleanly unaffected period, right? And from there, we have two phases—of an intense period of lockdowns from March to May and then starting June, a series of openings up and even as we speak right now, there are still restrictions. So what we are referring to as getting back to normal is the period where we are benchmarking with February, which is the clean period before COVID or lockdown happened.

So happy to state that yes you're right, we had talked about the business coming back to normal. The last time I had actually spoken to the media, we talked about 80 percent, 85 percent of the business coming back. Every single week since then, driven by improving consumer sentiment, the fear of COVID inflections happening through food delivery rightly going down as well as other means like IPL and this has been one of the most amazing IPLs as a cricket fan. But even as a business person, I would say it's been great in terms of encouraging consumers to order their favourite food.

So we are seeing a lot of our major cities having already reached pre-COVID levels. Bangalore, Mumbai and Hyderabad are the most active metro cities but even some of the smaller cities are doing brilliantly well. Now those smaller cities are doing well for two reasons. One, of course, there is the natural, sort of IPL trend but also because a lot of the population that we're from, let's say an Ahmedabad or Jaipur or Lucknow or Ranchi, we're working in let us say a Bangalore or Delhi and have gone back semi-permanently or permanently because now they're working from home. So we now have more consumers in those cities, as a result, we are getting recovery in those cities too.

Last month, Swiggy said it achieved 150-200 percent of the pre-COVID order value in select markets. How is the company positioned in terms of volume? 

At the office, a lot of people used to order single lunches because they were ordering for themselves. But if the office itself is not open and you're working from home, and you're basically staying at home with a partner, then you're mostly ordering not for one person but for two people. So because the underlying trend is that you're actually in larger households, the order value has gone up between 25 and 30 percent.

How is the company dealing with unit economics? We’ve seen that companies, especially in the logistics space, in your case a food logistics, have focused on growth. Unit economics has come into the picture only in the last couple of years. What has Swiggy learnt from the pandemic and how are you treating unit economics?

There are a lot of lessons that we learned during the pandemic that we believe helped us become a better company. In the pandemic, when there was a lot of uncertainty and fear, we found creative ways to solve consumer problems and still stay relevant. I read a study somewhere that during the pandemic Swiggy was one of the top three brands in the country in terms of being relevant to consumers who were largely locked in during the worst stage of the pandemic. Why? Because we were using the fleet that was out there that was allowed to operate and not just doing what was originally our purpose, which is food delivery. But we were doing pretty much delivery of anything you could have used Genie, you could have used groceries, you could have used just for pet food, you could have used just for books, you could have used just for painting supplies, the sheer amount of things that people used us for at a time gave us a lot of learnings on both what consumers wish to do with a hyperlocal delivery service as well as what kind of capabilities we need to build in our delivery fleet and our product framework to be able to cater to that. 

What amount of the company's current business, in terms of value, is coming from food compared to the ancillary services?

So the reality right now is that it is ...different businesses that all waxing and waning as different unlocks are happening and as the government is allowing different services to operate. 

Food is continuing its steady growth. So any number I give you will be relevant only for a week but not really relevant for the period that we are referring to. But it's safe to say that as we have come to a full sort of near-full unlock. Well over 80 percent of our business is still food and all the other ancillary businesses are waxing and waning, depending on which businesses they are. But it's a sizable minority but not as big as it was during the worst of the lockdown.

So it's 80:20. Going forward, how much of that will diversify?

The right answer is -- truly we don't know. But what we can say is that we have very strong plans to grow each of our businesses and at the same time, we have very disciplined frameworks to make sure that we don't sort of burn too much money and basically waste too much money, especially during these times on any one of these ideas. I think we have the strong financial discipline and strong plans. So where (will we be in) the next year, we honestly don't have a forecast. And we are fortunate to have great people in our board who also understand the uncertainty of the next year.

Let's go back to unit economics. For Swiggy, the focus has shifted from growth to getting into positive unit economics but is Swiggy unit economic positive on an order level?

As a private company, we don't release financial information but let me just give you a framework for how we are thinking about unit economics. So obviously, we believe that we need to improve our unit economics across the length and breadth of the P&L. And so starting with the order size, because that's a big driver of unit economics, as I've already told you, through a combination of our initiatives as well as consumer behaviour, the average order value is already 20 percent 30 percent bigger and that is a big driver of unit economics.

The second thing we have also seen is that the mad rush of customer acquisition isn't true these days. We thankfully (that we) had done a lot of customer acquisition in the years prior to the pandemic. We find that we don't have to spend as much money on discounting to attract new customers because we already have a very large customer base. So the amount of discounting that we do for customer acquisition, or new customer acquisition, or re-acquisition is much lower than before because we now have a more loyal customer base. So that, again, is an important lever of improving our unit economics.

The third thing, which usually causes unit economics to go bad is when, too, many companies are paying all sorts of money to the fleet and as a result of which there's a lot of attrition in that fleet. And therefore, we are having to pay a lot more than the normal market rates to be able to retain that fleet. Now, we don't have to do all of these on top of spending that was crazy during the 2018 period to be able to retain them. That also provides a stable footprint on the cost base.

Now, if you take all of those three things, you will find that this business is inherently moving very strongly across all the levers into positive unit economics. It is fair to say that we are very, very happy with the progress towards unit economics positivity, both at the city level, as well as the total level and consequently, the reduction in burn that we have as a company.

As a customer, I remember paying Rs 30 for a delivery. What is the cost Swiggy incurs while delivering a product to the customer? The industry standard is Rs 60 but can you tell me if you have managed to bring that cost down? 

Over time that cost has been brought down through a combination of strong operating discipline on the ground as well as technology and algorithms basically shaving costs off the system. Now if it is well ahead of the Rs 30 that you talked about? The answer is, yes. But that's why I said that at the end of the day, the consumer realises that even if they're paying Rs 25-Rs 30 for delivery, you're still being charged less than what it would have cost them if they had done the job themselves or what it's costing us to do the piece of work.

Indian companies have been copying firms in China or Silicon Valley but the Indian market is very different. How are you treating India as a standalone market without copying the strategies of companies in foreign markets?

The advantage we have is this is our home market and this is our only market. So while we should always be agile and open to understanding what the folks are doing in Silicon Valley or in China or any of the other technology hub spots, we actually think that it's good to be aware and even two hours ago, actually there was a team that presented the key learnings that they learned from the call that they had with the Chinese team to understand what they were doing. So we are very open as a young company to listen to what other people are doing.

But I think it's completely fair to say that we always ask this question ‘is it fit for our Indian consumer’. And if the answer is no, it doesn't matter how well it worked in China or the US, it would never find its way into our product or operations roadmap.

India is not even homogeneous. There are more diversities inside India than there is in all of Europe together. So given that we segment India further into its different diversity elements and then we say ‘how do we solve for that consumer’.

So, it's fair to say we're not solving just for India, we're actually solving for the various little groups that exist within India and their unique needs, as it were.

Swiggy has a bunch of marquee investors. How has your conversation with your investors changed after the pandemic? What are their concerns and what conversations are happening to change strategy to look at the market differently? 

I don't believe that we have had anyone meeting where they have unfairly pushed us to do something that we, as a management team, we're not aligned to. And that's saying something given that this is a six-year-old company ... and we've had 6 into 12 ... basically, we've had 72 monthly meetings and maybe half of those as board meetings, right, quarterly board meetings. So we have had a lot of meetings but in not one of those meetings… I have observed there has been sort of you know people coming at it with a very unfair bent but I just wanted to state that first before then get into what are the kind of challenges and conversations we've had.

The challenges and conversations we have had are largely in two buckets. One, this is a difficult time for the startup world. Cash and cash bonds aren't looked at as favourably for market acquisition or market growth as favorably in 2020, because of the pandemic as it was in 2018. So given that, how's our core business shaping up in terms of its journey towards financial sustainability, which is EBITDA improvement, as well as the burn reduction is something that has kept us engaged for a while now.

And I'm happy to note that they've acknowledged very strongly the progress we've made, both before COVID but even more so in the lockdown and post COVID era over the last eight months.

The second conversation that we are having is around new businesses because a lot of new businesses have spawned. COVID has also made us enter into a lot of territories, some with a higher risk than others.

So obviously, they're asking questions around two fronts—are we fighting too many battles and is it the right number of battles to be fighting as far as the new businesses are concerned.

And two, how confident are we that we actually have a competitive advantage in these new businesses to continue to scale them and get to market share leadership like we have done in our core business, which is food delivery. And if they feel that we are, we don't have a source of competitive advantage that is going to sustain, then you know that it's not a business to be in for the long-term.

The last meeting, I think, was two weeks ago.

Food aggregators have been having issues with restaurant service-providers who are upset over the increase in commission rates. This comes at a time when Swiggy, as a company, has ventured into the cloud kitchen space. How do these things go hand in hand? 

So first of all, I just wanted to clarify yes, the restaurant partners had challenges with the aggregators. And those challenges, obviously, some of them continue on to now, that's factually true. But I think it will be fair if you were to look at the records, and these are all publicly available records on what actually has happened, is that they found us a willing partner to discuss transparently all the issues. And, we engaged with them multiple times in the 2019 period and we found solutions for some of them, some of the other ones we moved to let's work together to find solutions for them. (For) some of them, we actually gave solutions. So by and large, you would find that we have never really had any business disruption as a result of the tension that was there between us specifically and then.

Have they had issues with aggregators? In general, the answer is yes. But for us, we've never had our business disrupted because we know they are interested in business, they are a business, they will have questions to ask. There is no partnership that should basically be one way one question the other. But I think it's completely fair to say not one day of business has been disrupted despite the tensions. So that's the first thing.

The second is as the pandemic happened, their biggest problem right now as the restaurant industry is that because a lot of their business used to happen on dine-in, their revenues used to be on dine-in, their costs, a lot of it are linked, dine-in. They have expensive real estate, and they're paying rental on those costs that they're increasing every single day. Now, if consumers aren't visiting them because of lockdown, or are now visiting them very little because of all these social-distancing norms and fear and everything else, then it's fair to say that they are in very severe stress. I think them plus the airline industry, plus the entertainment industry, a fair bit of these industries are very severely affected.

And so one of the things we have done in two waves is to have given two sets of packages, which we call the jumpstart package, which is to revive businesses that have been devastated because of COVID, or businesses that are really suffering in terms of their financials and cash flow.

We've more new restaurants wanting to be on Swiggy in the post-pandemic era on a monthly basis than we did pre-pandemic. If that is not a sign of optimism about this industry and the need to enter into providing food for consumers and doing so in a digital manner, I don't know what else is.

Do we still have unresolved issues with restaurants and restaurant associations? Absolutely yes. But it is important for us to keep engaging and talking and resolving them on one by one because we have businesses to run and there will always be things we agree on and things we disagree on.

How is alcohol delivery doing?

So, first of all, alcohol, as you know, is a very tightly regulated, central and state subject dependent, different parts of it are at the center and many parts of it are at the state. So alcohol is not one of those things where we can make a national plan, it has to be a state-level approval, the comfort level that the state administration has to open it up. And once they open it up and give us the authority, we then work in a way that is within all of the safety norms that they asked us to do for alcohol. So for example, of course, we don't have age verification for food delivery but for alcohol, we need to have age verification to make sure that it's above the prescribed age.

We have actually worked in a way where it is agile and fast where there is approval but in a careful manner, based on the guidelines that have been provided. And we are actually quite hopeful and happy seeing the progress in the states that we opened up, you know, in places like Bengal and Jharkhand, etc we were the first to open up.

We are hopeful that more states will open up. And as more states open up as they come with their own unique rules and regulations, we are happy to follow because this is a sensitive subject.

How many states have you already entered and which are the states you are targeting?

So conversations are happening with all of the states in the country... It is progressing slower than we would all like but we are not pushing it any more than that, we are just engaging with the government partners showing them the data, allowing them to make the decision, we don't want to be in a situation where we have over aggressively or assertively pushed anybody to do it. We are hoping that one by one all the states will open up, including the big ones like Maharashtra and Karnataka. 

Swiggy laid off around 1,000 employees during the lockdown. Now that we're talking about recovery, what are your plans for the employees who were laid off or whose salaries were restructured?

Even though we went into that sort of very uncertain, very negative times, one of the things I want to say is that we were very careful in making sure that we are helping protect these employees financially, even after they are not on our rolls, and that included both the physical aspects of monetary compensation as well as health coverage and stuff like that. 

So even till now, those laid-off employees still have health coverage that actually has been paid for by Swiggy. Now as the orders are coming back. Are we back to hiring? The answer is yes. Does it mean that we will hire some of those employees back? The answer would be yes. But we are also finding that some of these new businesses need new skills. So while we're back to hiring, the hiring may actually not include a lot of people who were previously part of Swiggy because those are new skills that we bring into the company, or experiences that we want to bring into the company to cater to the new business problems that we're coping with.

So I think it's fair to say that we are back to hiring but we’re still being very careful in our hiring.