Daraz Bangladesh-owned food delivery startup HungryNaki is reportedly shuttering its operations, The Business Standard reported last week.
Originally founded in 2013, HungryNaki was one of the earliest players in the food delivery industry in Bangladesh. In 2021, it was acquired by Alibaba-owned Daraz for an undisclosed amount.
Post-acquisition, HungryNaki quickly expanded to several cities outside Dhaka, including Gazipur, Narayanganj, and Cumilla. However, the company has been on a retreat since mid-2022. It has scaled down its activities, closed all of its hubs outside Dhaka, and laid off a significant number of employees. The company later claimed the measures were part of a restructuring plan aimed at achieving a more sustainable operational strategy.
The recent media reports suggest the company has apparently been unable to turn around the business.
However, it remains unclear from the report whether the entire food delivery business of HungryNaki will be shut down or if a scaled-down version will be integrated into its parent company, Daraz.
According to the report, Daraz was planning to close the HungryNaki app and brand, accommodate the majority of its employee in different departments within Daraz, divert the HungryNaki users to the Daraz app, and serve the customers from one single app.
If that is the case, the idea looks more like an integration of the food delivery service within the Daraz app, serving customers from one single app instead of a wholesale shutdown of the entire food delivery business.
Future Startup could not independently verify the details of the news.
Citing unnamed sources, the TBS report wrote that the company has been facing challenges in competing with the market leader foodpanda, and the second-largest player Pathao Food. The current market reality has also exacerbated the condition of the company.
II.
After acquiring HungryNaki, Daraz Bangladesh initially wanted to expand the business to around 100 cities, investing extensively in infrastructure, technology, and human resources. The company did follow up, expanding to multiple cities within a short time.
However, it did not take HungryNaki long to realize the reality of the market. While many socio-cultural conditions for the flourishing of food delivery services are present today, the service is yet to go mainstream. More so, in cities outside Dhaka.
The intense competition from leading players and over-reliance on incentives such as discounts and offers for growth have turned the vertical hyper-competitive, although the vertical only has a handful of active players at the moment.
The customer acquisition cost remains high. Intense competition makes it difficult to scale sustainably. This has naturally resulted in one of the two responses: a reduction in investment. HungryNaki accepted the reality of the market and decided to recalibrate accordingly concentrating on locations where it has meaningful penetration.
While the decision to scale down the operation looked like a strategic decision before, it now apparently seems that the company has failed in achieving that goal.
HungryNaki's fate follows a similar path as several other food delivery companies in Bangladesh.
Shohoz Food started its operation in 2019, claimed to have over 2,000 restaurants on its platform, and had a brief period of growth, albeit using heavily in customer acquisition. However, in October 2021, Shohoz announced that it was shutting down its food delivery business following a "strategic business decision".
Uber Eats, the food delivery service of the global ride-hailing giant Uber, entered the Bangladesh market in June 2019. The company offered heavy discounts to attract customers and partnered with over 1,500 restaurants. However, Uber Eats faced stiff competition from already established players and struggled to cope with the low margins and high operational costs of the food delivery business. In May 2020, Uber Eats announced that it was discontinuing its operations in Bangladesh. Uber, being a global company, certainly had other priorities.
Some smaller players also suffered such as Cookups, before it was bought by Chaldal. Foodpeon, another local player, shut down its operation several years ago.
How to read the story of HungryNak’s shutdown?
For one, the world is going through a difficult economic condition. All indications suggest the days are going to be tougher. Taking a deliberate approach in a difficult financial environment makes sense for any company.
Second, I never understood what Daraz wanted to do with HungryNaki. It was never clear. There was little effort to build any significant differentiation that could offer the company meaningful moats and competitive advantages against other players in the market.
In theory, part of the reason Daraz Bangladesh bought HungryNaki was that it saw an opportunity to cross-promote both services, take advantage of its existing infrastructure, and build greater service and demand aggregation. The company explained some of these strategic synergies lately but none of them materialized. Sometimes being big is an insurmountable problem.
The food delivery market in Bangladesh went through several shifts over the last few years.
The pandemic afforded the industry excellent growth within a short time, doubling business for a few players. However, the market remains urban-centric and relatively small. Industry insiders concede that a significant percentage of the growth is discount driven.
It is natural for a new vertical/product to go through an early period when you incur higher customer acquisition costs. People don’t know much about your product. There is little awareness. You need to invest in education and awareness.
Food delivery is a relatively new service in Bangladesh. Although it has been around for about a decade now, companies are still having to invest in market education which drives up customer acquisition costs. The customer acquisition cost eventually comes down when the market matures and companies begin to retain users.
However, food delivery companies in Dhaka have so far found it difficult to expand their recurring customers sustainably. Customer acquisition remains expensive.
The vertical also faces challenges with rider shortage, relationships with restaurant partners, etc.
While growth has been there, as we noted earlier, the market also saw several players shutting or scaling down their operations in the last few years.
Currently, foodpanda is the biggest player in the vertical followed by Pathao Food. Both players have invested heavily in the early days. While Pathao now follows a more measured approach when it comes to growth, Foodpanda has been pushing boundaries in the vertical for a while.
The aggressive strategy has allowed foodpanda a significant market share. With the apparent shutdown of HungryNaki, we're looking at a potential ‘winner takes it all’ case in the food delivery space. Foodpanda has also launched a grocery delivery service called PandaMart.
Overall, this bit is clear that while the core food delivery thesis looks plausible on paper, it is yet to play out in the marketplace. From Online Food Delivery Thesis and Questions For Food Delivery Companies in Bangladesh:
“There are several common themes in favor of the food delivery business in Bangladesh.
A growing urban population with dual-income families who are time-poor and in need of support for household chores. The rise of a sedentary lifestyle across social segments. Increasing demand for convenience and comfort and the serious problem of movement in cities like Dhaka due to extreme traffic jams.
Thus the core value proposition many on-demand food delivery companies offer is convenience. The assumption is that inconvenience is a critical problem for a lot of people in Bangladesh, at least in major urban centers. People don’t want to or don’t have the luxury to go out and buy food or eat out. Hence, they would opt for on-demand food delivery services. The expectation is that it would eventually shift the cultural barometer and will go from a mere convenience to an indispensable service.
That’s on the demand side of things. How do these food delivery platforms make money?
Food delivery companies usually earn money in the form of commissions from restaurants and delivery charges from customers. As the demand for food delivery services grows, it gives these platforms enough market power to bargain a meaningful commission from restaurant partners for that demand. The ultimate demand aggregation play in practice. Similarly, these platforms can also build other potential revenue streams such as advertising, and selling other products such as groceries to the same customer base on top of food delivery."
Foodpanda has been able to do some of these things successfully. However, none of the other players has managed to do anything close yet. It looks like the market for food delivery is not large enough for multiple players to have a sizable share of the pie yet.
The food delivery thesis apparently has gaps with the market reality. Bangladeshi people like to go to restaurants for all kinds of reasons. Restaurants are everywhere. The high density of everything weakens the core logic of the thesis.
Office meals and regular meals are a big market. But the cost and health consciousness of customers often limits these markets.
Market research platform Statista projects revenue in the online food delivery market will reach US$987.70m in 2023. This however includes grocery delivery as well, which Statista suggests accounts for US$842.50m of that market volume. Statista defines food delivery as the market at “the intersection of ordering groceries and prepared meals online.” If we exclude grocery delivery, the projected market for ready-meal delivery stands at $145.2m.
One critical flaw in the current food delivery thesis, particularly in the context of Bangladesh, is convenience as a core value proposition. Convenience is important but for a very small set of customers in Dhaka. It has limited use in most markets outside Dhaka. Even in Dhaka, most people are not in need of convenience when it comes to food.
The geographic setting is different in Dhaka than in many Western markets where the idea of food delivery first originated. Many locals call Dhaka the city of restaurants. There are restaurants on every other street. Moreover, people consider eating out as a celebration. There are not many options for entertainment in Dhaka. Often eating out is considered quality entertainment.
That being said, people do need food delivery services. There is a growing market for that. However, that number is quite slim if you offer convenience as the most important value proposition. In other words, the potential market size will remain limited if food delivery companies taut convenience as their core value proposition.
In order to have a sizable market and sustainable growth, food delivery companies have to offer more meaningful value propositions such as price and service.
To that end, HungryNaki did nothing different from other food delivery companies in Dhaka. The company worked with the same restaurant partners. Offered similar services and discounts and offers. Its business model is predicated on the same assumptions as every other food delivery business.
Apparently, in a highly competitive market, which is also a significantly different market for food delivery, this “me too” strategy did little for HungryNaki.
The first food delivery company Takeaway.com was founded by Jitse Groen, a Dutch entrepreneur who built a highly profitable single-market food delivery business. The company has since expanded to a few more markets.
However, the market and cultural dynamics in the US and European are meaningfully different compared to markets like Bangladesh. It will not be as easy to establish food delivery as a cultural reality in Bangladesh.
However, treating HungryNaki’s sorry state as an outcome of market reality alone can be a misreading of the event.
There are lessons to be learned for tech startups in Dhaka, particularly consumer tech startups. One of them may be that doing the same thing and expecting a different result is never a good idea. Companies should be intentional about building strong moats and deep differentiation.
Food delivery is a lucrative but challenging market in Bangladesh. While Foodpanda remains the dominant player, the company also faces challenges such as low margins, high customer acquisition costs, scalability, profitability, and potential new entrants.
Food delivery is here to stay. However, food delivery companies have to evolve to survive and thrive in Bangladesh. The future of food delivery in Bangladesh depends on how well players can overcome these challenges and offer real value to their customers and partners.
The demise of HungryNaki partly highlights the challenges faced by food delivery startups in Bangladesh, including fierce competition, high customer acquisition costs, and the need for sustainable growth strategies. It remains to be seen how the food delivery landscape in Bangladesh will evolve in the future and what impact these developments will have on the overall industry.
