The ongoing battle between the online food delivery aggregator Zomato and restaurateurs has take a turn as Zomato finally admits to making mistakes but puts the blame on “bargain hunters” for impasse.
Riding on Gold, a programme launched by Zomato in 2017 that offers attractive discount offers like either 1+1 on food or 2+2 on beverages Zomato has raised as much as $400 million in funds — almost 60 per cent of what it has raised since its inception where on other hand restaurants had to bear additional costs.
Restaurant owners said this is a sharp contrast to what was initially envisaged. Gold was to be extended to a limited number of users 5,000-10,000 across the country to whom they could have extended discounts to attract customers and drive sales.
However, the number of Zomato Gold users has increased to over 13 lakh, leading to restaurants running businesses with “deep discounting”. This has rendered Zomato Gold, along with other such programmes, unsustainable for restaurants after the number of users exceeded what their margins could afford.
In addition to charging a subscription fee from the users to gain benefits of Gold at its partner restaurants, Zomato also charged eateries a joining fee of Rs 40,000, as claimed by restaurateurs which was subsequently increased to Rs 75,000.
For its part, Zomato admitted the company had “made mistakes” and the industry’s stand against deep discounting was “a wake-up call”. But then it took the unusual step of blaming some customers for misusing Zomato Gold.
Restaurateurs, led by the National Restaurant Association of India (NRAI), have taken up the issue of “deep discounting” with the Competition Commission of India, which has asked for a study on discounting in the food, beverages and hotel segments in India findings of which are expected any day.
During the NRAI’s #logout campaign in which restaurants pulled out of Zomato, the online food delivery aggregator told partners that discontinuing Gold at their outlets would mean that the restaurants would have to pay the Rs 75,000-fee again to sign up but later waived this in the next mail if they joined back before a particular date.
According to Zomato’s annual report for 2018-19, Zomato Gold had over 1 million active subscribers globally as of March 31, 2019, compared with 170,000 active users as on March 31, 2018.
“Deep discounting hurts unit economics at two levels. Firstly, in our business, the proportion of fixed operating expenses is very high and therefore the contribution margin is a very sacrosanct milestone for us. Discounting directly impacts our contribution margin,” said Anurag Katriar, head of NRAI’s Mumbai Chapter, and executive director of restaurants company deGustibus Hospitality.
“Secondly, typical outlet level EBIDTA (earnings before interest, depreciation, taxes and amortisation — a measure for operating margins) for a good restaurant is around 15%. Therefore any discount in excess of 15% logically and effectively renders the business unviable,” he said.
Responding to concerns raised by restaurateurs, Zomato’s CEO Deepinder Goyal, earlier tweeted:
“Zomato Gold has been a major hit, but we understand that bargain hunters have also joined Zomato Gold and they are hurting some segments of the restaurant industry very badly…Somewhere, we have made mistakes and things haven’t gone as planned. This is a wake up call that we need to do 100x more for our restaurant partners than we have done before”.
Soon, Zomato announced changes to Gold policies effective September 15 to “drive better profit margins” for the restaurants: restrict Gold usage by a single user to one unlock per day to bring down the net effective discount by preventing users from hopping “between places on a busy evening, claiming 1+1 starters at one place, 1+1 main course at another, and 2+2 drinks at some other”.
The NRAI termed the change in Zomato Gold policies as “a knee-jerk reaction” to the #logout movement. “It was a validation of the fact that Zomato acknowledges the deep discounting epidemic,” the association said in a statement.
Moreover, Katriar pointed out that customers were not to be blamed as they were only enjoying benefits provided to them by Zomato. He said the restaurants are working with other aggregators and are close to a truce with these aggregators.
In addition to restricting usage, Zomato also told restaurants that it would invest in their brands and provide them with ads credit should they cross a certain threshold of Gold unlocks in a given quarter.
