10 October 2019 12:08:16 IST

Can Zomato continue its deep discounting strategy?

As part of the Zomato team, find a way to ensure diner loyalty that is acceptable to all stakeholders

Since August 2019, Zomato, one of India’s leading food service aggregators (FSAs), had been engaged in a conflict with restaurant partners over its practice of offering high discounts to customers. While the FSAs were credited with creating a digital platform to bring restaurants closer to customers, the National Restaurant Association of India (NRAI) alleged that in their oneupmanship to acquire customers, they resorted to deep discounting, spoiling customers and eroding loyalty. NRAI alleged that restaurants bore the brunt of these heavy discounts, which came at the expense of their brand image, core value proposition and bottom-line.

On August 15, hundreds of restaurants under NRAI launched a logout campaign and delisted themselves from the platforms of FSAs such as Zomato, EazyDiner, Nearbuy, Magicpin and Dineout. Zomato, in particular, came under severe scrutiny as its premium subscription-based dining out service Zomato Gold (ZG) had 6,500 restaurants partners and a total of 1.1 million subscribers in India as of August 2019. As part of the campaign, around 2,500 restaurants logged out from the ZG service.

Zomato’s co-founder and CEO, Deepinder Goyal, urged restaurants to stop the logout campaign in the interest of consumers. He admitted that Zomato had made some mistakes and therefore listed out some corrective measures. NRAI contended that these changes did not resolve the issue of deep discounting and many participating restaurants refused to rejoin.

While other aggregators such as Eazydiner, Nearbuy and Dineout agreed to limit discounting, Goyal hardened his stand and even expanded the ZG service to food delivery. NRAI threatened that the restaurants would remain logged out permanently from ZG, saying that restaurants could survive without FSAs, but FSAs would not survive without restaurants. With NRAI joining hands with the Federation of Hotel & Restaurant Associations of India (FHRAI) and other city-based associations in their fight against FSAs in October, time was fast running out for Goyal to find a solution that would be acceptable to all the stakeholders.

Zomato

Zomato was co-founded by Deepinder Goyal and Pankaj Chaddah in 2008, as a restaurant search and discovery service, but later extended to include table reservations, online ordering, point of sale (POS) systems and cashless payments. In 2011, the company introduced its digital app. Zomato was successful in obtaining funding from a number of sources and expanded in India and overseas.

In March 2018, Zomato became a ‘unicorn’ with a valuation of $1.3 billion. By August 2019, Zomato was one of the largest FSAs in the world, with presence in 24 countries and more than 10,000 cities. It operated in over 200 cities in India, up from 15 cities in 2018, and served more than 70 million users monthly. For FY2019, Zomato’s revenues increased to $206 million (See Table 1).

 

Zomato Gold

To recap a bit, in FY2016, Zomato had been incurring losses, that had increased over three times that year, to ₹4.41 billion. The company’s cash burn was also very high, at an average of $4.2 million a month, flagging concerns around its heavy investments in online food delivery services. In order to curb losses and capture the dine-in market in India, Zomato launched a premium, subscription-based programme called ‘Zomato Gold’ in November 2017.

The exclusive membership programme offered customers complimentary food (1+1) and drinks (2+2) for every order they placed at select participating restaurants. Customers also get exclusive invitations to food and drink events, such as wine tasting sessions, new menu previews, pub crawls, chef cookout sessions and restaurant openings.

Initially, when launched, ZG was meant to be an exclusive, invite-only service, targeted at high-end restaurants serving niche customers. The subscription started with a launch price of ₹999 per year with a limit of 10,000 subscribers. But eventually, ZG was made available to everyone and the subscription fee was raised to ₹2,000 a year. Benefits could be availed at any Gold partner restaurants and bars, for an unlimited number of times.

The business model of ZG involved restaurants upselling a few additional items to customers and covering the cost of the complimentary item offered. The expenses toward the additional free drink or meal were entirely borne by the partner restaurant and Zomato did not pay any percentage to the restaurant from the subscription fee it collected. Moreover, restaurants had to pay a fee upwards of ₹40,000 to sign up as a Gold partner. Restaurants were willing to partner with Zomato as it provided them more visibility, leading to a potential increase in footfalls.

By April 2018, ZG had about 180,000 subscribers across 20 Indian cities, contributing to about 12 per cent of the company’s revenue. In July 2018, Zomato introduced the Infinity Dining plan for its ZG subscribers that enabled them to have unlimited a la carte along with an open bar at partner restaurants, at a fixed per-person price. By March 2019, ZG had 12,000 partner restaurants on board across the world, of which 6,500 were in India. By August 2019, ZG had about 1.1 million subscribers in India, making it the biggest such loyalty programme for any unicorn in India.

Grounds for conflict

The food service sector in India was valued at around ₹4,238 billion as of March 2019, according to a report by NRAI (See Table 2). Much of the growth was attributed to the rise of FSAs. According to consulting firm Redseer, the number of orders placed on such ordering apps increased from around 1.7 million a day in 2018 to about 2.2 million in 2019. Major FSAs offered deep discounts to attract customers and increase orders placed on their platforms.

 

Customers not only gained huge discounts through FSAs but were also exposed to wider choices, convenience and greater transparency. The dine-in market contributed 92 per cent of the overall organised food service market in India. As FSAs shifted their attention to dine-in, competition grew and led to market distortions such as deep discounting. Customers were spoilt for choice and often switched loyalties to the FSA that offered the highest discounts (See Tables 3 and 4) .

 

 

For restaurants, signing up for dine-in and table booking programmes came at a cost as the aggregator charged a commission of 18-22 per cent of the bill. Additionally, any discount given by the delivery platform had to be fully borne by restaurants, rendering their sales unprofitable. The discounts were a burden for many restaurants as they had to also contend with rising rents amounting to nearly 20 per cent of costs, food at 30 per cent and other expenses like labour and marketing at 20 per cent.

The O2 scheme

In August 2019, Zomato announced that ZG, which was earlier only for dine-in, would also be offered to ZG members for online food delivery. The new service was named “Zomato Gold O2 (Online Ordering)”. Under the O2 scheme, the restaurant would have to offer a free item of customers’ choice when they paid for a higher-priced item; as well as pay 18-25 per cent commission on the net order value.

The partner restaurant would realise only about 38-42 per cent of the gross invoice value. Zomato did not bear any part of the discount, neither did it reduce its commission. This did not resonate well with the partner restaurants as there was no incentive left for them, with no potential for upselling and recovering the cost of the complimentary item in an online transaction.

On August 13, 2019, the NRAI held a meeting with restaurateurs in Gurgaon to discuss issues related to FSAs and it was unanimously decided by restaurateurs to immediately delist themselves from all the dine-in platforms as a protest against deep discounting. A nationwide campaign against deep discounting, called the ‘logout campaign’, was launched by NRAI, urging restaurants to opt out of the dine-in discount programmes of FSAs. The campaign was supported by the FHRAI which, in a letter to the aggregators, called for a review of their schemes.

Within a week, thousands of restaurants in several major cities across India logged out from the dine-in programmes of FSAs. Zomato faced the most heat, as over 2,000 of the 6,500 ZG restaurant partners opted out of the programme. Zomato was lambasted for allegedly using its market position to continually reset the terms of the trade, and making policy shifts without any consultation with the restaurateurs. Some restaurateurs said that Zomato was simply transferring the cost of customer acquisition to restaurant owners, while minting money from customers’ annual subscription fees and the joining fees from restaurants.

NRAI then held a series of meetings with FSAs where it was decided that all aggregators would relook at their programmes and that discounts should be capped at about 15 per cent.

Too little, too late?

As the campaign intensified, Goyal announced Zomato’s willingness to make modifications to ZG and appealed to restaurant owners to stop the logout campaign in the interest of consumers. On August 16, 2019, Goyal wrote an email to the association and all the partner restaurants informing them of modifications made.

The changes included limiting Gold usage to one restaurant per day, restricting Gold unlocks to a maximum of two per table, introducing single device logins, issuing hassle-free pro-rata refunds to unsatisfied customers, setting up a minimum Gold membership fee at ₹1,800, discontinuing trial periods for Gold, strengthening its two-way feedback system, providing advertisement credits worth ₹25,000, shooting free promotional videos, and personalising push notifications for non-peak days. Zomato said it would refund users who did not agree with the altered terms of the programme and even offered restaurants that had logged out in protest a free entry back into the system.

However, NRAI remained belligerent and said its members would remain logged out of ZG. On August 20, Zomato sent a legal notice to restaurants, threatening them with legal consequences as they were contractually obligated to serve a 45-day notice period prior to delisting. Goyal accused Rahul Singh, president of NRAI, of unjustly portraying FSAs as bullies and using the logout campaign to sabotage aggregators while he himself was offering similar discounts at his own restaurant, The Beer Café. This elicited a caustic retort from Singh saying that a brand-owner was entitled to provide certain privileges to its loyal customers, but this does not apply for brokers.

Goyal refused to make any further changes to ZG, saying that “Zomato is logging out of the logout campaign”, to which NRAI vowed to stay logged out of ZG permanently .

Finding a solution

For Zomato, ZG was expected to bring in about $25 million in revenue by the end of 2019, and any disruption caused by the logout campaign could destabilize Zomato’s business. Some analysts felt that Goyal would have to take a quick call on this issue, as the company ran the risk of being overtaken by rivals such as Swiggy and Dunzo. Restaurants delisting from ZG could also be painful for customers as many had become accustomed to deep discounts. It could also mean fewer options for them, especially for those who have subscribed to ZG service.

The logout campaign had left many customers annoyed as they felt that restaurants inflated prices to begin with and did not want customers to save on orders. Anurag Katriar, Head of Mumbai Chapter, NRAI, said that it was not appropriate to push the consumer into the muddle. “The only thing that is growing is the valuation of these (FSAs)… Is it fair to have a policy that can kill the entire industry and benefit only a handful of companies in their valuation? Is this any recipe for growth?” he added.

In September 2019, Zomato did engage with NRAI on the issue again; however, a solution to the problem is still not in sight. Meanwhile, Zomato had expanded its ZG option on delivery from 16 cities to 25 cities, eventually reaching 40 cities by the end of September. According to Zomato, it had roped in an additional 13,000 restaurants for ZG on delivery.

Gaurav Gupta, COO, Zomato, was quoted in a September article in Livemint as saying: “Today, Gold drives 25-30 per cent business for its restaurant partners, and more and more Gold users (90 per cent) are exploring new restaurants because of the programme. It, therefore, makes eminent sense to extend this discovery behaviour to the delivery restaurant base.”

However, going forward, major questions remained for Goyal and his team.

Consider yourself a part of Zomato’s core team tasked with finding a solution to the problem that would be acceptable to all stakeholders, by answering the following questions:

1) How can the situation be resolved in the best interest of every stakeholder?

2) How can Zomato build great partner relationships with restaurants, protect their brand equity and minimise the effect of commoditisation? Should Zomato stop deep discounting? Should ZG go back to being an exclusive invite only service, as originally envisioned?

3) How can the scheme be redesigned to rein in deep discounts offered to customers? What will be the action plan to shift the focus of diners from discounts to loyalty?

Send in your strategy, with graphics if needed, to blcasestudies@thehindu.co.in not later than midnight of Sunday, November 10 . You can work in teams of two students, though solo entries are accepted too. Entries should be no more than 900-950 words long. Read the detailed contest rules on this page.

(Debapratim is Dean and Head, and Syeda is a Consultant, at the Case Research Centre, ICFAI Business School, Hyderabad. )