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The Zomato controversy: Their business plan, the dispute and a dark tale of greed, exploitation and fear

Deepinder Goyal now has to answer for his recklessness to Zomato Gold Members as well as Restaurants, having taken money from both, for a service that he had no control over and unilaterally changing terms of a contract for his own benefit, and which may cease to exist soon.

The last few days have seen some very interesting turmoil in one of the largest Food Aggregators and Delivery Networks in India. Though the turmoil is just a few days old, the rumblings could be felt in the last few months. Deep discounting, favouritism, monopolistic trade practices amongst others, have created a rift between the delivery platforms and Restaurateurs.

Business Plan

Zomato Media Pvt. Ltd. (Zomato) started off as an online listing service for Restaurants. A yellow pages of sorts with an option for the users to review and rate their dining experience. With changing market scenario and emergence of new players, Zomato diversified into food deliveries and on 3rd November 2018, changed their app to a full-fledged delivery platform first, with listings on the side.

Zomato charges restaurants anywhere between 18% to 25% of the net invoice value as commission for their delivery services. At the same time, customers have to pay a nominal delivery fee which changes depending on various factors.

Zomato also offers various advertising options, primarily “Clicks Per View” (CPV) to prominently display a restaurant more favourably on its online platforms. These CPVs have to be purchased in bulk in advance for a minimum period of 3 months. The Clicks are expended pro-rata during the promotion period. The regions where the clicks will be displayed is predefined. The clicks usually have a conversion rate of between 10-30%.

Another product that Zomato offers is “Zomato Gold”. Zomato Gold is a “Buy One Get One Free” offers exclusively available to registered “Gold” users on Food and/or Beverages at “Select” participating Restaurants. Zomato collects a onetime registration fee from restaurants. The fee varies greatly and depends on factors such as the restaurant’s popularity, bargaining skills, location, etc. Zomato charges its users a fixed annual fee in advance at the time of registration.

The Zomato Gold onboarding agreement with restaurants clearly states “Zomato Gold is only valid on dine-in…” Another condition applicable to “Gold” users is that a minimum of 2 patrons have to be present at the restaurant to avail the discount, including the registered user.

Restaurants that chose to offer Zomato Gold do so to increase footfall. They usually would upsell one or two additional products to the Customers. Hence the order would usually be more than just the initial two dishes covered under the offer.

Dark Kitchen

Zomato and Swiggy, are delivery platforms. They accept orders on behalf of the restaurants, on their respective platforms, pick the food up from the restaurant, and deliver the food to the customers. The aggregators collect payments from the customer and transfer it to the restaurant weekly.

It is pertinent to note that the transaction is between the restaurant and its customer with Zomato and Swiggy playing the role of facilitator between the two. Even the Tax Invoice is issued by the restaurant to the customer. The data that is collected thus belongs to the Restaurant alone.

Both Zomato and Swiggy, have collated this data, analysed it and have unfairly used it to start their own dark kitchens across the country. The dark kitchens started by the aggregators is a breach of trust, privacy and good faith and is also a conflict of interest between both parties.

(While we have broached this potential dispute briefly, the present disagreement doesn’t involve this issue. A former member of Parliament, Baijayant “Jay” Panda has tabled the Data (Privacy and Protection) Bill, 2017 in the Lok Sabha, proposing the right to privacy as a fundamental right for Indian citizens. This Bill might ensure that such blatant misuse of personal data by online portals is made a criminal offence in the future. The authors, to maintain brevity, shall not discuss this pertinent issue in this piece.)

The present dispute

Over the last few months, Zomato, Swiggy, UberEats and FoodPanda have indulged in an all-out war to increase the orders placed on their platforms. They have offered heavy discounts, some of which they have partially funded, to induce customers to use their platform.

These platforms offered schemes to select restaurants and not all the players in the business. Hence, they have been accused of favouritism on more occasions than one by the industry. Also, deep discounting drove the customer away from visiting the restaurants, affecting both their top and bottom lines.

In January 2019 a few hundred small and middle-sized restaurants even lodged a complaint of unfair and restrictive trade practices with the Competition Commissioner of India and the Prime Ministers Office.

The Department for Promotion of Industry and Internal Trade (DPIIT) summoned officials from these platforms and Restaurateurs for preliminary discussions on July 2019.

A few days after this meeting, Zomato got in touch with its “Gold” affiliated restaurants and informed them that all current offers from Zomato will end on 14th August 2019 and that Zomato Gold, which was erstwhile only for dine-in, would now be offered to Zomato Gold members for their online orders. The new product was ostentatiously named “Zomato Gold O2 (Online Ordering)”.

Under the O2 scheme, the restaurant would have to offer a free item of the customers choosing, while playing for a higher-priced item; as well as pay 18-25% commission on the net order value. Effectively, a restaurant would realise only about 38-42% of the gross invoice value. Zomato was unwilling to bear any part of the discount or reduce its commission.

The business logic of “Zomato Gold”, as explained earlier, was based on the ability of the restaurant to upsell a few extra items to its patrons and cover the cost of the complimentary item offered. In the case of O2, there was no incentive left for the restaurant, as there is no potential for upselling and recovering the cost of the complimentary item in an online transaction.

At this juncture, the Restaurant industry associations decided to step in, and city by city, chapter by chapter, started endorsing #Logout campaign against Zomato Gold. Zomato responded by sending a legal notice to restaurants threatening them with legal consequences as they are “Contractually Obligated” to serve a 45 day notice period.

Present Situation

After receiving the notice from Zomato, Restaurateurs further intensified their agitation and boycott of Zomato Gold.

Zomato Gold is now trying to underplay the crisis and is offering a dialogue with the Restaurateurs and their association.

In the meanwhile, Zomato Founder and CEO, Deepinder Goyal, has tweeted from his handle, offering to resolve the issue. He has, unfortunately, also offered unsolicited advice to Restaurateurs on how to better manage their business and reduce costs, which obviously has not gone down well.

Zomato: A story of Greed & Fear

Zomato and the other delivery platforms, targeting higher valuations for their next round of funding, have inflicted irreparable losses to the F&B sector. While Deepinder Goyal is not interested in earning a profit; valuation being his sole intent, the Restaurateurs are collateral damage in this war.

Restaurateurs are by and large, small to medium-size enterprises, with fixed costs that they have to recover from their customers. Deepinder Goyal might be a successful raider, but has not created value for the society at large at the scale that the Mom & Pop restaurants have done, some since many generations.

The Contract Act in India is inherently equitable in nature. Zomato has unilaterally changed their policies and contracts, to suit their agenda, and now has the audacity to threaten Restaurateurs with legal action on account of lapses of “Contractual Obligations”.

Deepinder Goyal now has to answer for his recklessness to Zomato Gold Members as well as Restaurants, having taken money from both, for a service that he had no control over and unilaterally changing terms of a contract for his own benefit, and which may cease to exist soon.

(This article has been written by Ankur Pandey and Chandrabhushan Joshi)

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