Zomato’s predicament has much to do with the dynamics of the online food aggregator business in India, but also some missteps at a fundamental level. India’s food ordering sector has seen partial rationalisation in 2019, with restaurant partners logging out of the Zomato platform protesting against the deep discounting strategy used by Zomato since 2018.
The delistings followed as a specific reaction to Zomato’s introduction of a plan called ‘Infinity Dining’ for subscribers of Zomato Gold, which gave subscribers the option to order anything from the entire menu of partner restaurants at a relatively nominal price, for a limited period of time. The crux of this issue lies in the business model of players like Zomato.
Two-sided platforms and network effects
Zomato started as a platform to list restaurants and their menus, and allowed customers who visited the restaurants to give a review. The company soon moved to a two-sided platform, which is the norm among online food aggregators across markets. A typical two-sided platform model enables two heterogeneous sets of users to come together to conduct commercial transactions. The two sets of users complement each other’s usage. The platform’s success depends on the number of users on each side and the usage across them.
In the case of Zomato we have the consumers on one side and the partner restaurants on the other. The success of the platform depends on the volume of orders placed by consumers that lead to an increase in footfalls and business for partner restaurants as a result of the ‘network effects’ . However, the value offered by such platforms depends on the ability to interconnect the two sets of users in a win-win format.
Behind Zomato's strategy
It is important to understand the reasons that have led to Zomato’s preference for approaches that are aimed at only increasing the number of platform users which, in turn, pushes up order volumes on the platform. This can be understood in terms of the type of funders and funding, and the nature of the two users of the platform (consumers and restaurants).
Venture funding: Zomato has nearly a dozen investors that include Delivery Hero, Shunwei Capital, Saturn Shine Steam Detailing, Glade Brook Capital Partners, Ant Financial, Vy Capital, Neeraj Arora, Info Edge India, and Sequoia Capital India. Most of them are Chinese investors looking to push up volumes and recreate China’s food-delivery success story in India. This helps attract funds and increases the valuation for the food service aggregators (FSAs).
It is an absolute ‘land grab’ situation, as every FSA is trying to increase their sales volume and market valuation. The ‘ network effect’ in platform businesses also means that every time Zomato or its rival attracts more funds, investors find it less attractive to back the other. So it has also become an all-out war to starve the competition of cash. This has become a means to an end but it is also the end in itself as platform businesses have a tendency to become a “winners take all” market.
Increase user base and order volumes: Pricing is one of the important strategies in a two-sided platform model. Typically, one set of users is subsidised while the other pays a premium depending on the price elasticity of demand. In other words, service seekers are subsidised by service providers. Zomato adopted a deep discounting strategy to increase users. As such Zomato started Zomato Gold (ZG) as an exclusive, invite-only club and later offered it to all diners visiting its partner restaurants.
This was further diluted with the introduction of a plan called “Infinity Dining" for subscribers of Zomato Gold, which allowed them to order anything from the menu of partner restaurants at a relatively nominal price, for a limited period of time, again with the objective of increasing users. Besides, valuations for the online food aggregators are dependent on the order volumes since the founders and funders need ‘critical mass’ of users and transactions on the platform for possible exits.
Lose-lose scenario
In its quest for ‘volumes at all costs’ and a ‘winner takes all mindset’, Zomato has dug itself into a hole. Restaurants have been bearing the brunt of the two-sided platform strategy of Zomato. They have been subsidising the various loyalty programmes of Zomato to an extent that the costs (of being a partner) outweigh the benefits (more footfalls and orders). Restaurateurs have begun feeling that all the growth of FSAs have been coming at their cost. This led to the mass delistings from the platforms.
Zomato’s earlier foray into cloud kitchens through Zomato Infrastructure Services (ZIS), launched in March 2017 that provides real estate and kitchen equipment support to restaurant brands to scale their order volumes in new localities without having to invest in setting up restaurant branches, also has not gone down well with the restaurant partners since cloud kitchens lead to more online orders rather than increase in footfalls and dine-in customers.
At the same time, Zomato has failed to focus on the longer-term customer franchise building. Loyalty programs such as ZG should ideally lead to customer retention, brand differentiation and help generate valuable customer data that would help provide better services to the customers in the future. But if everyone is eligible for the programme then the exclusivity is lost and customers do not really feel that they are being treated in any special way. It does not necessarily lead to true loyalty, and it erodes profits (especially for the restaurants that end up absorbing all the costs associated with the discounts being offered as part of ZG).
So Zomato did use promotions that are designed to accelerate the purchase decision process and generate immediate increase in orders, but not in a way that is customer franchise building. Customers who were initially delighted by the big discounts offered by loyalty programme, eventually start expecting it. Since ‘ multi homing’ is not a big problem for the FSA market, the same customers could easily switch between apps and choose the bigger, better deal.
Need of the hour
It is imperative for Zomato to re-look at both sides of its business model. The number of customers on the platform depends on the number of restaurants in the platform, and vice-versa. Zomato cannot afford to have a large section of its restaurant partners delisting, as it will spoil the experience for the other customers.
It cannot afford to take a belligerent stand when other FSAs are seen to be complying with the requirements set by the restaurant associations. Zomato’s co-founder and CEO, Deepinder Goyal, should focus on defusing the tension with restaurateurs and finding a solution. Zomato’s September decision to expand its ZG option on delivery from thousands of restaurants, amidst a standoff with a section of restaurant partners, may be a business imperative but does not help the situation either.
Moreover, getting into a personal war or public spat with Rahul Singh, president of the National Restaurant Association of India (NRAI) is counter-productive, The changes brought about in ZG is the first step, and it should work with the restaurant partners to make further changes so that the loyalty programme cannot be abused by certain customers.
Customers: Zomato needs to begin focusing on Customer Loyalty through customer franchisee building and focusing on offering a dining experience rather than relying on pricing strategies alone. It won’t be easy as Zomato has itself to blame for ‘spoiling’ customers along with other FSAs, by offering them deep discounts.
Discounts like ‘Infinity’ result in food wastage and customers trying to make the most of the offer end up ruining the dining experience. It can focus on other aspects such as convenience, exclusivity, or even discounts that are aimed at inducing trials, limited period offers (flash sales), or based on amount and frequency of purchase.
Restaurants: Zomato needs to go beyond volumes driven by low-priced meals and make the proposition more enticing for restaurant partners and delivery firms with reasonable margins, especially given that it is high time Zomato begins to grow its topline. It should work with restaurants to develop the loyalty programme that will help provide a differentiated experience to customers going beyond just discounts and rebates.
When offering discounts, Zomato should work out schemes that would help restaurants in revenue management by leveraging excess capacity, lean hours, and so on, or otherwise by making their brands more visible.
(Debapratim is Dean and Head, and Jitesh is a Research Faculty, at the Case Research Centre, ICFAI Business School, Hyderabad.)