Craving for a ‘double cheese Margherita pizza with cheese burst’, a ‘sloppy joe burger with fries’, or just plain old ‘dal makhani with butter naan’? Well just pick up your phone, open the app and select your guilty pleasure (food) for the day, and by the time you finish another episode of your favourite TV series, your order will be at your doorstep! And, because of the good people handling the app, at half the price!
How convenient, right? Well as a customer, one couldn’t ask for more. But the restaurants hate to disagree. Though they have benefitted from the popularity of food delivery services like Zomato, Swiggy, Uber Eats etc. many restaurants have come to the conclusion that they are losing more than they gain.
Five years ago, there were only a handful of online food aggregators. Today, the industry is a behemoth that ferries 80 million orders each month in over 500 cities. Ordering food online is convenient and restaurants gain from the extra visibility. But the food aggregators are increasingly dictating the terms of the business.
For instance, a set of new rules put in place by Zomato that require restaurants to restrict food preparation to 15 minutes, has stumped many. There are other conditions like using only the aggregators’ fleet to fulfil deliveries, concerns regarding non-transparency over customer data, and the biggest irritant – the ‘deep discounting game’ which has started to hurt profit margins.
Deep discounting is when companies offer heavy discounts on products or services. These kinds of discounts help increase the customer footfall by luring them to shop more than they would have without the discount. However, this strategy isn’t always great for businesses as they have to cut costs or they risk incurring losses. In fact, that’s what’s happening. The restaurants’ profit margins are shrinking. Especially since the aggregators are offering such discounts 365 days a year.
A customer orders food worth ₹1,000. The food delivery service takes a cut of ₹100-300 as commission. Raw material costs around ₹350-400. Discount given to the customer is, say, ₹100-150. Rider’s fee varies between ₹25-70. Thus, the restaurant is left with a profit margin of only ₹80-100, on good days.
However, the relationship between Indian restaurants and the country’s online food aggregators can range from sour to sweet – depending on where one chooses to dine. Several prominent malls in India have witnessed an increase in business and profits due to online delivery platforms. These platforms have reportedly been contributing 15-20% annually towards the growth of food court business in malls of India.
On the other hand, around 1800 restaurants across India decided to immediately #Logout from dine-in apps to protest against deep discounting. Started on August 14, the “#Logout” movement led by the National Restaurant Association of India (NRAI) aims to give the restaurant industry freedom from aggregators who have distorted a vibrant marketplace by aggressive discounting and predatory pricing.
You must be thinking, “Why now?” Such deals and discounts have been on the table for quite some time now. Well, the agitation against aggregators comes at a time when restaurants are feeling pressure on dine-in sales due to a combination of higher rental prices, increasing competition in the eating out market, a general slowdown in consumer sentiment, and the removal of input tax credit under the revised GST regime that has inflated the cost of running a restaurant.
What was supposed to be a symbiotic relationship between the two booming sectors is turning sour. Fact is, customers are moving away from dine-in, giving an upper hand to aggregators when it comes to running the market.
And then there is the added problem of customers becoming ‘discount addicts’. Whether you admit it or not, but it so happens that we often choose a restaurant based on if it is covered under Zomato Gold or not. Discounts are actually shaping behaviour and spending patterns of customers.
They encourage customers to do things that they might not otherwise do, just because it’s cheap now. Think about it – would you have eaten at that five-star hotel if you weren’t getting a ‘1+1’ deal on the buffet?
Aggregators insist that this would drive up overall volumes and costs will even out in the long run. However, if a restaurant is reducing its top-line by 50 per cent, it needs a 100 per cent jump in sales to make up, which unfortunately isn’t happening. And it is not the aggregators who have to carry this burden of discounting. It is the restaurants who are paying for that one extra dish.
On top of that, restaurants do not get any share of the proceeds that aggregators generate from customers as subscription fees. Not engaging the services of food aggregators isn’t an option either. With the surge in online orders, what is happening is that the aggregators have created FOMO (Fear Of Missing Out) among restaurants to make them sign these deals. Since it is in our DNA to search for bargains and maximise our money, restaurants fear to lose their clientele to their competitors if they do not offer discounts.
Clearly, restaurants cannot end their partnership with food aggregators, nor can they continue with the current terms and conditions. The aggregators, too, cannot function if there are no restaurants registered with them, whose numbers are increasing due to the #Logout movement. Aggregators need to understand that the restaurant is the star and it is their product on which they are providing discounts.
Also, lower prices won’t be able to retain customers in the long run as people are likely to end up at their preferred restaurants in the end. Take, for instance, Swiggy. Despite offering lesser discounts than Zomato and Foodpanda, it has a larger market share in terms of transaction volume. What matters is customer loyalty, building a strong reliable market reputation.
Thus, keeping this in mind, aggregators have decided to work with restaurants towards achieving a balance of user experience, restaurant growth and operational efficiency. For example, Zomato promised to modify its Gold programme by limiting Gold usage by a single user to one unlock per day.
This means you can no longer claim ‘1+1’ starters at one place, ‘1+1’ main course at another and ‘2+2’ drinks at some other. This will bring down the net effective discount. So, a middle ground needs to be found that works for every stakeholder in this three-way arrangement – the restaurant, the aggregator and the consumer. But while this takes shape, enjoy your ₹99 meals!