Mark-up and deliver: Why you can't count on online food discounts

If monopoly hurts, then duopoly also does no good. It can create barriers for new entrants, limiting competition and stifling innovation.
 
Let’s start with the first side of the coin. “Restaurants are forced to resort to such practices due to steep commissions charged by Swiggy and Zomato,” laments Savar Malhotra, working partner at Delhi-based The Embassy Restaurant, which traces its origin to 1948. “I have not yet added GST,” he says, adding that the bleeding food delivery aggregators are trying to squeeze restaurants as much as possible to reduce their bulging losses. “They (aggregators) are a pain for restaurants and are trying to make a profit by charging more from food players,” he rues. Restaurants, Malhotra underscores, are the first side of the coin.
 

Let’s analyse the second side of the same coin. “Aggregators are unlikely to voluntarily stop such practices,” notes JM Financial in its latest report on the foodtech sector. The practice won’t stop, the brokerage house underlines in its note released late last month, unless there are regulatory changes or a severe backlash from customers. “Both of which do not seem to be happening at present,” the report adds. While theoretically, the organised food services industry can survive without the aggregators, practically that is unlikely to ever happen. “Aggregators now contribute around 30 percent to the turnover of restaurants listed on their platforms,” the report notes, pointing out the value of the ‘second’ side of the coin: Aggregators.  
 
Now comes the ‘invisible’ side of the coin, which is paying through the nose for using the coin. “Such practice misleads customers by not reflecting the true cost of the food item,” reckons Bakshish Dean, a celebrated chef and founding director of Culinary Quotient, a food consultancy firm. It (such practice) may lead to dissatisfaction when customers realise that they paid more for the same item through the platform compared to dining in or ordering directly from the restaurant. “This can potentially erode consumer trust in the foodtech platforms and tarnish the overall experience,” underlines Dean.


 
The ‘practice’ highlighted by Malhotra, JM Financial and Dean is known as ‘markup’, which means jacking up or inflating online menu prices. In simple terms, what it means is that restaurants are charging more—some even go to the extent of pushing it over 50 percent—for food items and listing them on food aggregating platforms as compared to what the same set of food items would cost at a restaurant. A marked difference in the delivery and in-store price, points out JM Financial, has become a norm in the foodtech industry. “More than 85 percent of the restaurants surveyed said that they had marked up their online menu prices,” the report highlights. Though restaurants claim that markups are necessary to recoup upfront customer discounts and compensate for high commissions charged by the food delivery aggregators, the latter are unlikely to stop such practices. The reason is obvious. Forcing price parity, underlines the note, with restaurants’ offline menus will either increase the friction on commissions or force them to scale down discounts. “Both of which would be undesirable outcomes from the aggregators’ perspective,” it adds.



Also read: Momos, idlis and a pinch of salt: Can Zomato deliver on time?
 
With consumers at the receiving end, the obnoxious practice of ‘inflated price’ for the online menu is not confined to India alone. Take, for instance, a study conducted last year in the US. Self, a credit building site, tried to find out how the price of food delivery changes across the US. It reportedly placed McDonald’s orders in the 100 largest metropolitan areas on Uber Eats, DoorDash and Grubhub. The results were startling. Seattle emerged as the most expensive city for food delivery apps. With a restaurant cost of $23.95, and the cost on the food app at $55.35, there was a markup of 135 percent! (See box)


 
Back in India, the markup has become widespread and deeply entrenched. The practice also brings into question the sham of discounts. “40% off” screams the offers section on one of the top food delivery apps. Two weeks ago in Greater Noida, Sagar Ghosh was ‘fooled’ by the 40 percent bait on one of his favourite Chinese food restaurants. A week later, when he took his family to the same Chinese brand in a nearby mall and ended up ordering the same stuff at the restaurant, he was pleasantly shocked. “I paid at least 40 percent less for the same quantity of food that I ordered online,” he fumes. “This is cheating,” he says, pointing out a vicious blame game. The restaurants, he underlines, hold aggregators responsible. The aggregators, meanwhile, have maintained that they have no say in deciding the price of the food items listed on their platforms. “Consumers don’t have a choice. If you want the food to be delivered, you have to pay more,” he rues.
 
Ankur Bisen explains why consumers are ‘willingly’ paying in spite of being aware of the high markup. “I call it time poverty,” reckons the senior partner and head (retail, consumer products and food) at Technopak. Time poverty, he underlines, means paucity of time, and it is one of the main reasons—apart from convenience, discounts and choice—for shopping online. A bulk of the food delivery market, he contends, is largely restricted to the top four to five cities in India. “All talk about top 20 or an all-India opportunity for food delivery markets is nonsense,” he says. Now if the market is so small, and the burn is so high, one needs to find ways to earn more and bring down losses.


 
Meanwhile, consumers are bearing the brunt of the fight between aggregators and restaurants. Sadly, the balance of power is heavily tilted in the favour of aggregators. “Aggregators now contribute around 30 percent on average to the turnover of restaurants that are listed on their platforms,” points out JM Financial. Some of the branded chain restaurants, the report underlines, maintained that they have limited bargaining power over aggregators on account of the latter’s size, customer loyalty and diversified supplier base. The aggregators’ advantage gets even more amplified when they are negotiating with standalone or new outlets. There are instances where even successful branded chains were not able to leverage their scale while opening a new outlet and ended up paying significantly higher commissions towards the new outlets compared to the more matured ones, the report adds.  
 
Almost negligible size of orders received directly is also hurting their case. In spite of restaurants accepting direct orders—either through their apps, social media or direct calling—the numbers are miniscule when contrasted with the volumes churned out by the aggregators. With the food aggregators slashing discounts and cashbacks to cut losses and move towards profitable growth, the restaurants are forced to step in to maintain the discount. “And this is being done by jacking up the price, and then offering discounts,” says the founder of a South Indian food chain in Delhi-NCR. The duopoly of Swiggy and Zomato, he points out, and their high commission structure prevents them from bringing about transparency. “Globally, there are food delivery players who are looking at ways to tackle markups,” he says.
 
DoorDash, in fact, happens to be one of the players. The American food delivery biggie is reportedly nudging restaurants to bring parity in their delivery and dine-in prices. One of the ways to make them fall in line is to convey the message that the erring ones will be less visible to consumers on the app, and those not resorting to markup will get a boost in visibility.


 
Industry and food analysts reckon that exhibiting more transparency by food aggregators and restaurants can go a long way in tackling, if not ending, markup. Foodtech platforms, points out Dean, should foster transparent communication with their users, clearly indicating that the prices on their platform may differ from what one would see on the restaurants’ menus. Simultaneously, restaurants must carefully review the impact of markups on customer perception and retention as short-term gains could lead to long-term losses. The food delivery market has witnessed intense competition, with Swiggy and Zomato emerging as the dominant players in many regions. “While this duopoly has allowed them to leverage economies of scale, it also raises concerns about market concentration and potential monopolistic practices,” he underlines.
 
If monopoly hurts, then duopoly also does no good. Dean explains. It can create barriers for new entrants, limiting competition and stifling innovation. Smaller foodtech startups may find it challenging to compete with the vast resources and market presence of the dominant players, resulting in a less diverse food delivery ecosystem. This could lead to limited choices for consumers and fewer opportunities for restaurants to partner with alternative platforms that better cater to their needs. To ensure a healthy and competitive foodtech market, he argues, regulators need to monitor the duopoly’s actions carefully and encourage the growth of smaller players. This could involve measures to promote fair competition such as data-sharing requirements, restrictions on exclusive partnerships or even financial incentives for new entrants, points out Dean.
 
The reality for the time being, and also in the near future, is unpalatable for consumers. The food delivery duopoly is here to stay, and so is the practice of markup.