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To swell its numbers & valuation, Zomato made restaurants pay bill; standoff deepens



Zomato 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.

At the heart of the standoff between restaurateurs and online restaurant discovery platform Zomato is a telling fact: by scaling its Gold programme that offered customers deep discounts at the expense of restaurants, Zomato raised as much as $400 million in funds — almost 60 per cent of what it has raised since its inception.

Riding on Gold, launched in 2017, which has led to restaurants bearing additional costs, Zomato has been shoring up the number of its revenue-generating users that reflected in its subsequent fund-raising rounds.

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.

Zomato founder Deepinder Goyal.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 — this 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. Its findings are expected any day.

Zomato describes Gold as a programme that offers “either 1+1 on food (one dish paid, the other free), or 2+2 on beverages, allowing users to get more bang for their buck each time they dine out”. Similar programmes are offered by other online aggregators such as Dineout, Eazydiner, magicpin, etc.

During the NRAI’s #logout campaign — in which restaurants pulled out of Zomato — Zomato 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. In a later mail, the company waived this if they joined back before a particular date.

Sector experts have pegged that Zomato expanding the Gold programme — which is essentially an offering of discounts to the subscriber — is part of its strategy to ramp up the number of transactions and paying customers on its platform.

A similar strategy was adopted by online retailers that drove up their gross merchandise values (GMV) by offering discounts, even though it led to heavy losses, as it helped companies increase their valuations.
The practice of driving up numbers to boost company valuations may be a trick borrowed from the e-commerce sector but the one key difference between what online retailers do to boost GMVs and what food-tech companies are doing now is that the bill for buying out of these transactions is being paid by the restaurants in case of programmes such as Zomato Gold.

“Both Zomato and Swiggy are in the market to raise funds. The only way they can raise their valuations and pick more funds is by showing transactions on their platform — whether it is in delivery or offline restaurants. They are almost buying out the transactions by giving heavy discounts. Flipkart and Snapdeal used to fight the same way in 2014 to shore up their GMVs that directly reflected in their valuations,” said Satish Meena, forecast analyst at Forrester Research.

Zomato did not comment on a specific set of queries from The Indian Express on why it expanded the purview of Gold beyond a limited set of users and why restaurant owners were not kept in the loop on the scaling up.

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, in a set of tweets, had said earlier this month: “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.

“The one thing that restaurants seemed to have realised is that Zomato can almost blackmail them with new products like Gold and Infinity. They just have to work with Zomato. The company should be engaging the restaurants and should work with them while designing such products,” Meena said.

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