Daybreak - Why Swiggy's pre-IPO ad-revenue strategy has its restaurant partners complaining

Episode Date: February 23, 2024

Advertisements on the food-delivery giant Swiggy are only growing in number and variety— from banners and icons to full-blown video ads. If you're wondering what id going on, it's all a part of Swiggy's preparation for its upcoming IPO. It needs to boost its revenue and ads are a great way to make more money with every order.But while Swiggy is doubling down on its four year old advertising business to boost its topline, its restaurant partners are crying foul.Tune in to find out why.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first studio recording, episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Swiggy, the food delivery platform is punching in all directions before its much-awaited this year. The company wants to raise more than a billion dollars through its public offering. And for this, it is going by its last funding rounds value.

of nearly $11 billion. And it does seem like a good time to go for it, considering its rival Zumato stock price is finally seeing a turnaround with back-to-back profitable quarters. Plus, earlier last year, the CEO of Swigy, Sri Harsha Majeti, announced in a blog post that after nine years since it came to be, Swigy's food delivery business has finally turned profitable.

In one of the previous episodes, I told you all about how Swiggy is getting its house in order. It's cut down 6% of its workforce so far, which means that the pressure on the existing employees is higher than ever before. They're working extra hours, even on weekends that do with budget constraints. The company leadership, meanwhile, is adopting a more hands-on approach with its restaurant partners. So this is what is happening internally.

Now, lately, if you use the Swiggy app, you must have noticed the ads. Different types of ads. For example, once you've placed your order and you're tracking it on the map, instead of the regular bike icon that you usually see, you'll see an Oreo cookies icon. And there are others too. They even have video advertisements for restaurants. These ads are only growing in number and variety. So what do you think is going on?

You are going to find out in the next 10 minutes or so. Today, I'm going to take you over to the other side of the story and tell you all about how Swiggy is doubling down on its four-year-old advertising business to boost its top line before the IPO. But not everybody is happy about it. Welcome to Daybreak, a business podcast from The Ken. I'm your host, Nidda Sharma, and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time.

Today is Friday, the 23rd of February. Before we begin, let me clarify. Swiggy is not the only one that is advertising on its platform. Zemato, Zepto, Blinket, they're all doing it. And as much as 10% of the revenue for these delivery companies comes from advertising. Also, the margins in the ad business are much higher than their regular delivery business. In fact, insiders say that it is as much as 90 to 95%. Also, we have to understand that food delivery platforms have to constantly walk the tightrope

between restaurant partners and customers. So the scope for increasing margins over there is very limited. They cannot keep increasing the delivery fee that customers pay, and neither can they keep pushing the commission that they charge their restaurant partners. Which is why ads are a great way to make more money per order. And what is even better is that they show immediate results. Plus, tech platforms can supply ads space at nearly zero cost. My colleague the Ken reporter Gaurav Bauer spoke to Karan Thoreani from Illara Capital, an equity research firm.

He told him that more than 95% of all internet companies advertising revenue flows towards their EBITA. Ibita stands for earnings before interest, taxes, depreciation and amortization. Sadat Javar, the India head of US-based performance advertising company called Moloko, told the Ken that global giants like Amazon and other members, American firms have figured out outcome-based advertising, meaning where platforms can secure orders and revenue for advertisers instead of just promising views and clicks. Indian platforms are not there yet. Swiggy, though, works on a cost-per-click model, but clicks do not always translate into revenue.

So now, let us take a closer look at Swiggy's ad business and how it is working out for its advertisers. stay tuned. Two former employees told us that on an average, Swiggy earns between 11 to 14 rupees per order in advertising revenue. The average order size, meanwhile, is around 400 rupees. Now, put two and two together, I will spare you from the calculation process, Swiggy is making approximately $90 million per year from advertising, which comes up to nearly 10% of its overall revenue,

which was close to a billion dollars in the year that ended up. in March 23. So how did Swiggy manage this? It built its own ad platform. But ad tech as a product is quite complicated and that is something that the company now has to figure out. But we're not going to go there right now because there is something more important that we want to look at. How are advertisers, which are mainly Swiggy's restaurant partners, feeling about this whole thing? Well, it is turning out to be an endless tug-of-war-like situation with, with restaurants, especially the smaller ones. Gorof spoke to some restaurant partners to get a sense of what is going on.

One of them is a former marketing manager at a premium pizza chain that has about 10 outlets in Bangalore. And they said that every other month, Swiggy comes up with new ways of displaying ads. Earlier, there were just banners, now there are videos and other new display spaces too. Swiggy has become almost aggressive in pushing restaurant owners to make higher spends than its rival Zomato. The marketing manager told us how Zomato is not so pushy. Swiggy account managers, meanwhile, are more persistent in calling up the restaurant,

trying to convince them to buy newer ad properties, and also setting up meetings to give live demonstrations. We also found out that Swiggy has increased the cost per click charges over the last year or so. For example, an Italian restaurant chain used to pay $7 per click until a year ago. That has more than doubled now. The thing is, restaurants understand that they do need to spend on ads to get more visibility. But they also feel that ads are becoming more and more a means for Swiggy to extract more money from them over and above the commissions that they pay.

To understand this better, let us take a look at the pizza chain that has 10 outlets in Bangalore. For it, margins stand at around 40% on orders coming in through ads, as opposed to the 60% from organic ones, which is typical of restaurants from the premium segment. But the manager of the chain told us that they are comfortable with lower margins as long as they're not losing money. The large volume of orders though has also given the chain leeway to negotiate the commission with Swiggy, which they have brought down to 20%. But it is a different story for smaller restaurants. Spending on ads narrows their margins to

quite an extent. For example, Shiva Prasad Shetty, who runs seven restaurants in Karnataka's Udupi region, said that the business spends around $18,000 a month on ads, which is roughly 10% of their monthly revenue. This is besides the 28% that it pays as a commission to Swiggy. Add to it the ingredients and the packaging costs, and these smaller restaurants often end up making losses on deliveries. That is why they run ads only. and only when they need to boost sales or during festivals. So, while advertising may generate higher order volumes, it does not always benefit a restaurant's bottom lines.

But to close in on its revenue ambition, Swiggy has started to give restaurants more control. It has been upgrading the restaurant's dashboards on its app to help them track analytics at every step of the order process, which means that the ads can be more targeted, and that in turn will lead to better revenue. But it is still not there yet. Sophisticated, targeted advertising,

like the kind you see on big platforms like Amazon, requires a mature platform with big volumes of data and a specialized team of engineers. An ex-employee actually summed it up pretty straight. They said so far Swiggy has managed to grow its ad revenue steadily, but doing so consistently from here on will be a challenge. especially with the IPO around the corner. Daybreak is produced from the newsroom of the Ken

India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host,

and today's episode was edited by my colleague Rajiv Sien.