It was only a matter of time before the Indian food e-commerce bubble started to burst.

The segment has attracted $161 million of investment so far this year, according to Tracxn, as investors have jumped on the trend of hyperlocal delivery in the wake of big e-commerce successes such as Flipkart, Snapdeal, InMobi, Quikr, OlaCabs, and Paytm, which all reached $1 billion valuations this year.

Food e-commerce startups offer services including grocery delivery, freshly-cooked meal delivery and restaurant deliveries, as consumers strive to find more convenient, and immediate, sources of food at home. Some of the bigger names include grocery delivery company PepperTap, which recently attracted funding from e-commerce bigwig Snapdeal; BigBasket.com, which recently reached unicorn status; and TapTapMeals, which delivers freshly-cooked meals to your home.

But cracks started to appear earlier in the year when Langhar, a Delhi-based service selling freshly cooked meals, closed down in February, and OrderSnack, a Chennai startup, shutdown before it had even raised capital, according to sources.

Fast forward to this week and two more established ventures have closed operations. SpoonJoy, another home-cooked food delivery company, has shut down its Delhi operations and scaled back in its hometown of Bangalore, according to reports, while Dazo, offering a similar service and also based in Bangalore, announced it was completely shutting up shop this week to work on a new product. Dazo did not respond to requests for comment when AgFunderNews went to press.

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With funding from big names such as Google India chief Ranjan Anandan, and successful local entrepreneurs including the co-founder of TaxiForSure, Dazo’s demise might have been a surprise to some. But in an increasingly saturated market, it shouldn’t have been, argues Mark Kahn, founding partner at Indian food and agtech venture capital firm Omnivore Partners.

“During this period of huge socio-economic disruption in India, where people are leaving the traditional family structure to work in cities and there are a growing number of two income families as more women work, there is definitely an opportunity for these companies,” he tells AgFunderNews. “But an exceptional amount of money has gone into too many startups in a short space of time, with investors getting the ‘Fear Of Missing Out’ (FOMO) syndrome. The market needs time to digest them. My sense is that there is going to be a bit of a bloodbath.”

It’s not just the sheer number of similar options on the market, but the segment is not easily scalable across multiple cities, as many of these startups have found out.

“These businesses are not really all that high-tech,” argues Kahn. “They have logistics software, a centralized kitchen in some cases, and a consumer-facing app, and that’s it. So that when they try to scale, they discover there are not really economies of scale in what is essentially a local logistics business.”

With each new city, food e-commerce companies need to get new on-the-ground logistics setup, and if they are in the business of cooking, a new kitchen. While this might get easier from city to city, it is not seamless and involves a lot of work in each new market, which some startups might not have realized.

There is also a lack of “last mile distributors” in India and effective cold chains for produce to reach consumers effectively, a local private equity professional told AgFunderNews. “This sector is very capital expenditure hungry to ensure the delivery chain is not broken. The problem is the integration of storage to delivery trucks and so on. There is a huge need for this infrastructure to be developed further in India, so we are still in an evolution phase,” he said.

There could also be challenges on the demand side, according to Kahn. India’s fast food market is less than 20 years old, and while there are fewer other established fast food options to disrupt than in developed markets like the US, there is still a large amount of consumer behaviour change that needs to occur for the market to really flourish.

“It reminds me a little of the early days of the internet when there was a massive overfunding of e-commerce companies but without a large enough base of potential users to support it,” said Kahn.

Having said that, estimates value that just the grocery delivery portion of food e-commerce in India will be worth $2.7 billion by 2019, according to a recent article in VCCircle, as the demand for convenient food will no doubt increase with the number of city dwellers and income per household.

Even India’s oldest, and arguably most successful, product e-commerce company Flipkart has ventured into food delivery with the recent launch of a new app called Nearby. While a different model to Dazo’s home-cooked meals delivery service, the logistics demands of grocery delivery are largely the same, and that’s where Flipkart has already excelled.

“I don’t know if Flipkart will be any more successful [than Dazo], but they can definitely afford the losses,” says Kahn pointing to the very tight margins that grocery delivery offers. PepperTap co-founder Milind Sharma recently told DealStreetAsia: “Grocery is a business where the commission percentage is very bleak. We are spending a lot on marketing and operations. There is no second thought about the need to have additional revenue.”

Move over to the developed markets and there have also been a combination of successes and losses. German-born Hello Fresh, a company delivery all the ingredients for consumers to cook a meal at home, has successfully expanded to the Netherlands, the UK and is now available across the US And Australia after quickly becoming a household name among working people.

“Wanting to serve as many people as possible, the team developed a logistics model that enabled them to deliver to every single household across a given country,” reads the website.

Scaling up presented challenges for one of the first grocery delivery services in the US, Good Eggs, however. Over the summer, the San Francisco-headquartered company announced it was shutting down its operations in Los Angeles, Brooklyn, and New Orleans, and reducing staff in San Francisco, after “growing too quickly, to multiple cities, before fully figuring out the challenges of building an entirely new food supply chain”.

Kahn believes that the situation playing out in India will also play out in the US and other developed markets, with limited economies of scale mostly to blame. What do you think? Email Louisa@AgFunderNews.com with your thoughts.

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