To strengthen its logistics services, restaurant listing and food delivery company Zomato has acquired last mile logistics startup Runnr for an undisclosed amount. Zomato’s founder and CEO Deepinder Goyal announced the acquisition in a blog post. The Economic Times pegs the deal at $40 million. Runnr’s founder and CEO Mohit Kumar will continue to run the company along with his team and founding members.

“With the combination of Zomato and Runnr, we have everything in the stack of building a delightful food delivery service in India and UAE — end to end — listings, discovery, reviews, ordering, and now, logistics,” said Goyal in the blogpost.

Why would Zomato buy a logistics company?

A potential Zomato–Runnr deal has been talked about since May, and this was a bit odd because, in an (Info Edge) investor call in 2016, Goyal, had said that Zomato prefers to let restaurants do the delivery. Why? Because, as of last year, they lost money when they did delivery.

“We make Rs 20 odd rupees as a contribution margin net after everything on our online order business in India. For the 20% of orders, where we have delivery partners, we do negative Rs 2 (as contribution margin). We lose money, in spite of the fact that we’ve outsourced delivery to someone else. The delivery boys of that company only do food during lunch and dinner, and do ecommerce delivery during the rest of the day. Even those guys, our delivery partners, are not able to make this work very well at a unit economics level. There will be scale advantages when it comes to logistics. But will it get to the Rs 20 margin? I don’t see any path to that if we do delivery on our own or outsource delivery. The restaurants know their local area very well, and they are best equipped to do delivery on their own.” — Deepinder Goyal on the delivery business in 2016.

Also, in an interview with The Hindu BusinessLine two months ago, Goyal had said that the company does not find food delivery a sustainable business. He had told the publication that “we don’t think that doing food delivery only for a logistics business is a sustainable or profitable option … we will continue our hybrid delivery model. We believe this approach solves for both a) providing large number of choices to consumers and b) having a sustainable and profitable business model…”.

The Zomato founder acknowledged this in his blogpost and said that, “we have always maintained that the most cost-efficient delivery fleet is the restaurant’s own, where they can utilise the same staff during off-peak hours for back-of-house and marketing activities. That belief is still intact.” Adding further he said that hence, Runnr will continue to function as an independent logistics company, offering its logistical services to players other than Zomato as well like pharma, grocery, e-commerce, etc. “This will ensure that the delivery fleet capacity that we build operates on a positive unit economics level while serving the mega-peaks in the food delivery business,” Goyal said in his post.

It’s possible that Zomato decision to acquire Runnr was impacted by UberEATS, Swiggy and Foodpanda. Companies which do their own delivery have greater control over the customer experience, while companies which rely on restaurants, are dependent on the restaurants.

It is worth noting that UberEATS had affected Zomato’s order for a brief period, InfoEdge’s CEO and MD Hitesh Oberoi had said in Info Edge’s Q1FY18’s earnings calls that online orders on Zomato were down for a “couple of weeks” in April to June quarter with UberEats launching. “There was a bit of an impact for about a couple of weeks and on Online Ordering a bit of slowdown growth for about a month, but I think they are back to normal now,” he added. For the month of July, Zomato surpassed 3 million online orders, it had announced it in a blogpost.

Swiggy does its own delivery, and had raised $80 million this May in Series E funding led by global internet and entertainment group Naspers, along with participation from existing investors, which it said will use for introducing a suite of new product and service offerings by the company. It is worth noting that the company had claimed to have reduced delivery costs by 35%, as in December last year Swiggy started charging delivery charges for orders below Rs 250.

In June, Foodpanda had launched a third party delivery service for restaurants to handle delivery of orders placed through both its platform and other competing platforms.

How was Runnr doing? 

Runnr was formed in June last year, when troubled online food delivery startup TinyOwl and Roadrunnr were merged into Runnr. After the TinyOwl merger, Runnr had pivoted from logistics to a B2C food delivery company. TinyOwl was in trouble during that time and had shuttered its operations. Before that, in November 2015, Gaurav Choudhary, one of TinyOwl’s co-founders was held hostage by TinyOwl’s Pune employees demanding their dues and an explanation of the shut down. During the same period, TinyOwl had laid off over 100 employees in the company’s second round of layoffs that year, after laying off around 160 employees earlier.

Zomato’s food delivery business (from the 2016 concall)

The company had reported food ordering revenues of $9 million for the financial year ended 31st March 2017 (FY17), around 8 times of FY16.

In its earnings conference call last year, Deepinder Goyal had said that there are three players in restaurant food delivery in India, and he doesn’t think they have more than 6 to 9 months left; this was in response to a question about the few food delivery players which had faced issues in 2015.

During its call for earnings in FY16, Goyal told that 7% of Zomato’s revenue in India was coming from its food delivery business, and the monthly growth rate in order business at that time was at 30% with a daily average of 25,000-26,000 orders. At that time, of all the orders, 80% were delivered by restaurants, and 20% were delivered by Zomato through its logistics partners.