India File

Done in by discounts?

Forum Gandhi | Updated on September 10, 2019 Published on September 10, 2019

Unpalatable trends It is a win-win only for the app players. The service providers are left to fend for themselves, say those running offline operations   -  Bloomberg

Undercutting by online aggregators has made business unviable, be it food delivery, hotel booking or cab services, complain offline operators. How to deal with digital disruption, is the question

For Daizy Rustomjee, online food aggregator platforms such as Zomato were a boon when she started the Where Else Diner in Pune five years ago. But two months after she signed up for the Zomato Gold scheme in 2018, Rustomjee exited the programme despite climbing to number one rank on the platform. While she did get new customers, the scheme required Daizy to offer 50 per cent discount from her pocket when the restaurant’s average profit margin was not more than 7 per cent.

“We expected that investing in such a scheme, in the short run, would result in repeat customers. Alas, that was merely a fantasy: over 85 per cent of the customers gained through this deal never showed up again post its expiry. While we wished to form relationships with our customers, with Zomato Gold all we got were one-night-stands,” says Rustomjee.

Kishor Mishra, a 34-year-old driver in Ahmedabad, is looking for an exit from Ola’s cab-hailing platform after being part of the aggregator’s network for nearly five years.

In 2014, Mishra sold his auto-rickshaw and mortgaged property to buy a car when he saw his friends make as much as ₹70,000 a month after signing up with Ola’s cab network.

“Initially, the returns were unimaginably high and many others also signed up on the platform. But a higher number of cars brought down the average daily trips for me, from 15-18 trips to 8-10 now. The aggregator companies started asking for a higher commission of up to 20-25 per cent on our earnings. The earnings have dropped to a meagre ₹20,000-25,000 a month. Now it feels as if we are earning for them,” says Mishra. Rustomjee and Mishra are just two of the many hit hard by the disruption caused by the entry of online players across different sectors, including hotel booking, ticket reservation, food delivery, online retail and cab-hailing services, over the past 2-3 years.

The crux of the problem , for many, is that some of the online players have started increasing their commissions and are indulging in schemes that offer deep discounts to consumers.

“A deep discount, very much like the character out of Dexter’s Laboratory, is a very short-sighted, slightly irrational marketing tool. Deep discounting is also very loud, so loud that it overwhelms you. The discount with or without cross funding can go up to 50 per cent, permanently eroding the perceived worth of your product in the eyes of the customer and decimating your P&L,” explains Munaf Kapadia, who quit his job at Google to start The Bohri Kitchen.

Last year, in Ahmedabad, 270 hotels had upped the ante against online travel agencies (OTAs) such as MakeMyTrip.com and Goibibo.com, who allegedly charged heavy commissions and offered huge discounts to customers, making the hotel business unviable for offline operations.

“They (online aggregators) are backed with huge funds. Their game is different. They calculate the users or customers registered on their apps. This, they will use to further raise funds from the investors. It is a win-win only for the app players. The service providers are left to fend for themselves,” says Rohit Khanna, member of food committee of the Gujarat Chamber of Commerce and Industry (GCCI), a State-level trade body.

Similar uprisings have been reported by hotel owners across Mumbai, Delhi, Mysore, Bengaluru, Nashik and Hyderabad, alleging unfair practices by online room aggregators.

Recently, there was a huge protest against programmes such as Zomato Gold following which as many as 3,000 restaurants logged off the scheme. “After these online players came in, we don’t know how to make money because our margins are dropping. The only way to recover our cost is by getting it back from the customers. If we have to offer deep discounts, where are we supposed to earn the money from?,” asks Thomas Fenn, who quit his high-paying management consultant job five years ago to start MahaBelly, a specialty restaurant serving Kerala cuisine in Delhi.

Profitable platform, for some

To be fair, the digital platforms have benefited the industry stakeholders in terms of getting more customers and wider reach. For example, when the Indigo Burger project was started by deGustibus Hospitality in 2018, it was getting only a few thousand orders. Now it gets 15,000-17,000 orders every quarter through online platforms. Similarly, e-commerce platforms like Amazon and Flipkart have been a boon to many who hold full-time jobs and augment their monthly income by selling online — like Govind Raj, a 26-year-old from Delhi.

Raj has been selling home decor and kitchenware worth ₹80,000-90,000 every month and nets ₹32,000-36,000 after paying commission, shipping/promotion/returns charges to the e-tailers.

Consumers have also gained, not just in terms of huge discounts but also regarding transparency and access to more options. “Customers used to get cheated earlier as they would not get what was promised. Since the arrival of companies such as Oyo and Airbnb, people are travelling more often now because they have an array of hotels, homestays and hostels to choose from at different price points,” points out an analyst.

“Consumers, today, are exposed to an assortment of choices, pricing that adds to an evolved experience and convenience at its best. They have the digital know-how to fully understand the quality as well as the value of services they are being provided,” says a Zomato spokesperson.

Growing valuation

According to Anurag Katriar, Executive Director & CEO, deGustibus Hospitality, and Mumbai Chapter head, National Restaurants Association of India, it is not right to push the consumer into the argument.

“The only thing that is growing is the valuation of these enterprises (online aggregators). That is really the crux of the matter. 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? That is where regulators need to come in.”

Experts stress that the industry needs to adapt to the changing dynamics. “That digital would disrupt existing businesses was always expected. However, this got exacerbated with the rapid spread of connectivity, impacting everything, from online shopping, ride-sharing, food ordering, music streaming, ticket and hotel booking to online learning — leaving many legacy businesses flat-footed and unviable. This is a natural process during disruptive change and will gradually settle,” says Lloyd Mathias, strategic investor and former HP and Motorola executive.

While associations representing uber/ola drivers, hotel owners, online retailers, and restaurateurs have been pushing for regulation to address their concerns, some believe that discussion between all stakeholders is the best way to move forward.

Karan Tanna Co-Founder, Yellow Tie Hospitality, says, “Tech aggregators are a reality and in the last 2-3 years there has been a sudden rise in their influence on the industry. Of course, they are going to create disruption so either you adapt to the changing business models or you have a dialogue with them and negotiate with them to make their business models more in sync with on-ground reality.”

Zomato has conceded that the friction between the various stakeholders has brought out issues that need to be discussed. “The friction has brought up issues that needed to be discussed. It has given the industry a nudge in the right direction bringing lesser-known but necessary facts on both sides to the forefront.”

With inputs from Rutam Vora in Ahmedabad, Abhishek Law in Kolkata and Sangeetha Chengappa in Bengaluru

Published on September 10, 2019
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