In India’s rapidly evolving digital commerce landscape, there is a well-documented churn when it comes to new players entering and a number of old ones shutting shop. The funding winter that we are witnessing right now has only intensified this churn and consolidated the e-commerce space. This is particularly true of on-demand food delivery and quick-service e-commerce. A new entrant is the Open Network for Digital Commerce (ONDC), an initiative backed by the Government of India’s Department for Promotion of Industry and Internal Trade. Established in late 2021 with a pilot phase in April 2022, ONDC has quickly drawn attention to offering food and grocery delivery at lower price points for the end consumer. This is possible because players using ONDC are not subject to the delivery/network fees levied on platforms like Zomato and Swiggy. This, many believe, directly challenges the dominance of well-established giants, Zomato and Swiggy.
ONDC is an aggregator platform that offers a wide array of products and services, from food and groceries to clothes and electronics. However, its significantly lower food price offerings compared to Swiggy and Zomato have caused a stir. Interestingly, it’s not just the consumers who are taking note of ONDC. The National Restaurant Association of India (NRAI) has been encouraging member restaurants to join the platform, marking a potential shift in the industry’s dynamics.
Why everybody is talking about ONDC?
The ONDC is being touted as a disruptive innovation challenging the dominant duopoly of well-established private companies, Zomato and Swiggy. Having started its pilot in April last year, ONDC has seen its daily transactions skyrocket from 50 in January this year to a whopping 25,000 orders every day last week.
Although this isn’t the first attempt to disrupt the $50 billion food services market, previous contenders like Amazon and Ola couldn’t make a significant dent due to the well-entrenched positions of Zomato and Swiggy. However, ONDC is showing promising signs of being a potential game-changer.
One of the key factors contributing to ONDC’s growing popularity is its significantly lower food price offerings. Several Twitter users are sharing screenshots on the platform showing a comparison of prices and, subsequently, money saved while ordering through ONDC. This, coupled with its wide range of offerings beyond food, is apparently making it a top choice.
Reportedly, ONDC is also seeing a surge in the number of onboarded retail merchants. From a mere 800 in January, it has grown to a staggering 35,000, marking a 4,275 per cent increase within five months. This robust merchant base enables ONDC to offer a variety of products and services, from groceries and home décor to personal care and electronics.
It has also expanded its footprint from 85 cities at the beginning of the year to more than 230 cities now. Along with this, ONDC has introduced mobility services in Kochi and Bengaluru, reporting 35,000 rides per day.
How does it all work?
Seller apps play a vital role in the ONDC network by aggregating various restaurants in a specific area. Once onboard, these restaurants are visible on all buyer apps connected to the ONDC network. This not only simplifies the process for restaurants but also ensures their visibility across a wider audience.
On the other hand, buyer apps, with their extensive user base, act as a direct interface between consumers and the network. By adding a simple ‘Food’ tab, apps like Paytm, PhonePe, and Meesho can list all the restaurants onboarded by the seller apps. This significantly enhances consumer convenience, allowing them to order food from any restaurant on the network.
Despite not being a separate app, its integration with existing apps through UPI makes it easily accessible to users. It can be accessed by navigating to ondc.org or by simply typing ‘ONDC’ in the search bar of the linked UPI platform.
When it comes to delivery logistics, restaurants may opt to create their own delivery fleet, or sellers can select established logistics providers such as Dunzo or Shadowfax.
The ONDC network operates on a commission basis. These commissions are shared among the seller app, buyer app, and ONDC. The restaurant pays these commissions, which are substantially lower than those charged by traditional food delivery platforms like Zomato or Swiggy. This cost-effectiveness extends to customers as well as delivery agents.
ONDC vs Zomato vs Swiggy
The two major players in India, Zomato and Swiggy, have been monopolizing the market by leveraging their extensive user databases and increasing commissions charged to partner restaurants from 2-5 per cent to an inflated 18-24 per cent of average order value. This has pushed restaurants into a somewhat disadvantaged position, with very little visibility of their end consumer and dealing unclear rating system.
Unlike traditional third-party platforms, ONDC allows restaurants to sell food directly to consumers. This is a strategic move that not only cuts out the middleman but also fosters a closer relationship between businesses and customers.
ONDC’s appeal lies in its lower customer acquisition cost (CAC) and democratized data access. It integrates various buyer-side apps like Paytm, PhonePe, and Magicpin, which have millions of users, thus reducing cash burn for customer acquisition. Moreover, unlike Zomato and Swiggy, ONDC shares customer data with merchants, providing insights into customer behavior and ordering patterns.
As Pranav Rungta, the director of Mint Hospitality Ltd and the head of NRAI’s Mumbai chapter, the ONDC rating system is determined by customers, not platform algorithms, ensuring greater transparency.
Some users have even seen prices that are half of what they’d typically have to shell out on Swiggy and Zomato while ordering through ONDC. The government-backed platform’s discounted prices and incentives for both buyer apps and logistics partners are, however, capped daily or based on a certain value of deliveries, indicating the temporary nature of such aggressive discounts.
While ONDC brings a new approach to the food delivery market with potential benefits for restaurants and consumers, it’s yet to be seen whether it can sustainably compete with well-established players like Zomato and Swiggy. It’s current scale and operational challenges mean it may not pose an immediate threat, but as it grows and evolves, the landscape of India’s food delivery industry could see a significant shift.
Challenges ahead of ONDC
The ultimate measure of ONDC’s success is profitability for restaurants and fair pricing for consumers. Zomato and Swiggy currently control the majority of the food delivery value chain, from pricing to logistics, creating a captive ecosystem where restaurants are left with little to no autonomy. ONDC aims to disrupt this, by offering lower commission rates and sharing customer data with restaurants.
However, as per Motilal Oswal, a leading brokerage firm, “We do not perceive direct ordering as a major concern for the industry,” adding that ONDC would only pose a threat to Zomato if it significantly scales up across categories, thus achieving greater efficiency.
While the cheaper prices on ONDC are attractive, the waning discounts and potential issues with the ordering experience may limit its appeal. For example, Zomato and Swiggy, as closed systems, offer a comprehensive, controlled end-to-end experience, which could prove more enticing to power users than minor cost savings.
The ONDC network, similar to its predecessors, initially adopted a discounting strategy to attract users. However, this strategy has seen some revisions as the platform matures. Discounts on orders and delivery incentives are now capped, implying that the era of heavy discounting may be phasing out. Nevertheless, the ONDC network’s unique structure and cost-effectiveness continue to offer a compelling proposition for all stakeholders.
Moreover, Motilal Oswal highlights that ONDC currently lacks a robust customer grievance redressal mechanism and could face issues in returns and quality of service due to the disaggregated platforms for sellers, buyers, and delivery. The brokerage firm believes these issues, along with the need for a broader selection of food options and a scale-up in multiple categories, need to be addressed for ONDC to pose a significant threat to incumbents.