Zomato, Swiggy & Co. killing the Goose with the Golden Eggs

Foodtech players like Zomato and Swiggy have established a dominant position in the market. But if they misuse this dominance and spoil relations with partner restaurants, a crash is round the corner.

A taskforce meeting was held for the first time between foodtech players and the National Restaurant Association of India (NRAI). During this meeting, NRAI raised some serious concerns with the business practices being adopted by food aggregators.

Firstly, the restaurants complain that deep discounting by aggregators is turning customers into discount addicts. NRAI president Mr Rahul Singh stated, “There is no doubt that aggregators have created a platform to bring restaurants closer to the customer through the benefit of digitalisation, but is it making the customers ‘discount addicts’ under the guise of ‘customer is winning?’ One can’t sell at loss to attract customers, distort competition and create dominance through capital dumping.”

The meeting also deliberated on the FDI policy in e-commerce, and whether any aggregator controlled inventory in this space or gave preferential treatment to its own non-restaurant private labels. The association reiterated that the industry comprises lakhs of small businesses that are owned by small/family entrepreneurs whose interests need to be considered.

Additional concerns raised by the restaurant body include data masking, right to use own logistics and ad hoc campaigns.

Aggregator firms are being questioned across sectors for their business practices. In the travel segment, the Federation of Hotel & Restaurant Association of India sent a notice to MakeMyTrip and Goibibo that accuses them of exploitative, unethical and divisive business practices, leading to predatory pricing and other market distortions that could harm hoteliers and consumers over the long term.

Gurbaxish Singh Kohli, VP, FHRAI, commented, “One of the biggest concerns is that after securing discounted rates from a hotel, the OTAs further discount it on their online platforms without the hotel’s consent. This damages the hotel’s reputation and also simultaneously distorts the market scenario.”

In response, MakeMyTrip CEO countered that FHRAI has no locus standi on individual deals, adding, “Each one (hotel or chain of hotels) is a separate legal and commercial entity and we have entered into individual contracts with each entity… The actions by the FHRAI in this regard have no parallel.”

In the e-commerce space, companies are also being similarly accused of deep discounting by offline retailers. Protests by the latter prompted a note by the Department of Industrial Policy and Promotion on December 26, which said that e-commerce companies operating a marketplace will not be able to control inventory or exercise ownership.

If a marketplace or its group entities own more than 25% of the vendor’s purchases, the vendor’s inventory will be deemed to be controlled by the e-commerce firm. Also, if a vendor has equity stake in a marketplace, it cannot sell its inventory on that marketplace according to these rules.

Around 500 small-medium sized restaurants sent an online petition to Competition Commission of India (CCI) and the PMO at the beginning of this year, allegingmisuse of dominant position by food delivery companies, including Swiggy, Zomato, UberEATS and Foodpanda”. They accuse these aggregators of unfairly leveraging their unique competitive advantages to wipe out SMEs in the sector.

Restaurants are also looking for similar FDI restrictions on foodtech firms as have been applied to retail. Several restaurants have closed online ordering for aggregators over the past few weeks. Furthermore they are noting the beginning of private labels by foodtech firms like Swiggy’s in-house kitchen The Bowl Company with concern, as it also amounts to misuse of the consumer database and killing of competition. Restaurants allege that foodtech firms got consumer data at their expense, identified demand trends and are now competing with the very restaurants they once called partners.

Similarly, restaurants allege in the petition that Zomato’s in-house company HyperPure, which sells vegetables and meat, engages in anti-competitive practices by compelling restaurants listed on Zomato to buy its products. UberEats is accused of enticing customers with unsustainable discounts for some menu items.

It is undeniable that food aggregators enjoy overwhelming power with big-pocketed investors, huge restaurant networks, strong growth momentum and wealth of customer data and associated insights into consumer behaviour. This dominance is prone to misuse, but if they end up increasing distrust and spoiling relations with their partner restaurants, all the promise as well as the funding could go up in smoke in no time at all.

Regulatory action could also extend to the foodtech sector swiftly as it has done for e-commerce, and make the going much tougher. Therefore, they need to curb their predatory instincts and secure a win-win with these restaurants well in advance.


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