New Delhi: The Open Network for Digital Commerce (ONDC) has been causing quite a stir in the food delivery ecosystem over the past week, so much so that analysts have highlighted it as one of the factors behind the recent slide in the share prices of the popular delivery app, Zomato.
An Indian government-backed non-profit digital commerce initiative, ONDC offers an open source network for all to exchange goods and services on the internet, and is independent of any specific platform.
While it has left many impressed by offering services at a more competitive price than market leaders such as Zomato and Swiggy — social media has been flooded with reports of food delivery being cheaper by over 50 per cent from major food chains (Wow Momo, Biryani Blues, Krispy Kreme, among others) through ONDC — industry experts feel that ONDC’s mode of operation, by offering heavy discounts, may not be sustainable.
Rohit Kumar, co-founder of public policy research and advocacy firm The Quantum Hub, told ThePrint that ONDC has a lower volume of sellers and buyers as of now.
“It is trying to activate that ecosystem. If you remember, all these apps (such as Zomato and Swiggy) initially gave heavy discounts to draw customers. ONDC is going through a similar phase. But as the system scales up, they will not be able to give the same level of discounts,” he said.
ONDC began operations last year and aims to “democratise” e-commerce and make it more accessible. The idea is to help customers buy products and services from participating digital commerce platforms through a single platform, across segments such as retail and food delivery.
For example, someone wanting to buy a smartphone online will currently need to search on individual e-commerce platforms such as Amazon and Flipkart to find the best deal. However, with ONDC, the buyer can open any participating platform, say Amazon, and get seller options not only from Amazon but also other participating platforms such as Flipkart and other stores.
Not an application or hosting platform, ONDC as of now has partners like Paytm, Mystore, Craftsvilla, Meesho, Magicpin, Pincode and Spice Money. Digital commerce applications and platforms can voluntarily choose to be part of it. Consumers can order food, products, and services from sellers who are part of its network from their applications or websites.
ONDC has been beta testing services in Delhi and Bengaluru and alpha testing (within the organisation) in over 200 cities across India.
Unlike e-commerce websites, it does not have its own delivery ecosystem, but has logistics service partners such as Dunzo, eKart, Grab, LoadShare, Shiprocket and Shadowfax. Sellers can choose to work with them for last-mile delivery to the end consumer.
In the food delivery sector, the network has connected restaurants directly with customers, doing away with third-party platforms.
Last month, brokerage firm Motilal Oswal stated in a research note that “direct ordering” (which ONDC facilitates) was not a threat to Zomato due to the high order value required to effectively compete with the platform model. “Hence, we see limited utility of direct ordering apart from some premium restaurants where direct delivery might be cheaper,” the firm said.
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‘A little overhyped’
Talking about the challenges faced by ONDC, Kumar said it lacks a proper mechanism to deal with customer grievances, something the established platforms in the food delivery sector offer.
He also pointed out that once ONDC builds these systems and starts offering the same level of service as its competitors, its operating cost will go up.
“While there is merit in some of the hype around ONDC, it may also be a little overhyped. The price differences that we are seeing right now may not be sustainable in the long term,” Kumar told ThePrint.
He added that what ONDC — which is being developed by the ministry of commerce — will definitely do is increase competition in the sector, as customers will be able to search across platforms and that would likely drive prices down.
In an interview to moneycontrol.com last week, ONDC chief executive officer T. Koshy had stated that no government money was being used for giving out discounts.
“ONDC, as the network orchestrator, has introduced certain limited interventions and incentives for a limited period to jumpstart the network and to support broad-based adoption. This support being given to the network participants is from ONDC’s funds. None of these incentives provided by ONDC are from the government budget,” he was quoted as saying.
‘Limited utility of direct ordering’
Reiterating it’s last month’s stand on the ‘limited utility of direct ordering’, Motilal Oswal stated in a second report issued on 9 May that it believed the risk posed by ONDC will only become significant once it scales up in multiple categories (food, ecommerce, grocery), which would give it the scale to override the delivery scale of the existing players.
“The current 10,000 deliveries/day (40 per cent in Bangalore) across categories does not present enough scale to absorb the delivery rider cost for the platform. For comparison, Zomato currently delivers 1.8 million orders per day on a standalone basis. However, the industry-wide figure across multiple categories (relevant for ONDC) would be several times greater than this,” it said.
It further noted that delivery on ONDC apps was only free for the first order. In case of a discounted/free delivery, this cost has to be borne by the restaurant (possibly to increase competitive advantage against incumbent duopoly) and is not sustainable, according to the May report.
“Also, after the first free delivery, in some cases delivery charge is higher than Zomato/Swiggy. Moreover, the difference in pricing is unlikely to be sufficient to override the wider selection of food options (early-mover advantage) and a well-oiled delivery machine of incumbents. Nevertheless, if ONDC continues to scale up over time, this could become a significant risk, as it would enable greater delivery efficiency making the system sustainable,” the brokerage firm said.
Motilal Oswal highlighted other issues that need to be resolved by ONDC, such as institution of a customer grievance redressal mechanism. Currently, the network has only an email ID to log complaints.
It also pointed out that disaggregated platforms i.e. separate for sellers, buyers, and delivery are likely to lead to problems in returns and quality of service.
“The majority of restaurants on ONDC are currently quick commerce/fast food, and they tend to follow a platform-agnostic approach. They represent a small portion of the overall food market in India,” the firm said.
‘Globally pioneering initiative’
The ONDC entity is a not-for-profit firm and majority-owned by private sector institutions “to allow for the close alignment with market and flexibility and agility in decision-making and resourcing… for the success of this globally pioneering initiative”, according to its strategy document.
It was incorporated on 31 December, 2021, as a Section 8 company (not-for-profit) with limited liability, but has been gaining popularity only recently.
According to a statement put out by the ministry of commerce in December 2022, many public and private banks and financial institutions have contributed equity to ONDC.
“With an authorised capital of Rs 500 crore, ONDC already has commitments of Rs 230 crore with a paid-up capital of Rs 180 crore,” it said.
(Edited by Nida Fatima Siddiqui)
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