India’s restaurants and hotels are not giving online aggregators enough credit

All things online.
All things online.
Image: Reuters/Francis Mascarenhas
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As travel and eating out resume in post-pandemic India, the love-hate relationship between hotels and restaurant owners and online aggregators of their services has come to the fore—yet again.

On Feb. 26, the Federation of Hotel & Restaurant Associations of India (FHRAI) initiated the #GoDirect, #BookDirect, and #OrderDirect campaigns on social media to urge patrons to connect with businesses directly instead of going through popular travel portals such as MakeMyTrip and Yatra, and food delivery apps such as Swiggy and Zomato. The association, which represents 55,000 hotels and 500,000 restaurants across the country, believes that intermediaries are biting into the revenues of their members, and making it hard for them to survive amid a tough business environment.

“Unsuspecting maverick startup founders entered the industry with online apps and have now stifled hoteliers and restaurateurs to a point where they have very little choice but to shut shop today, or slowly bleed to death,” said DVS Soma Raju, honorary treasurer of FHRAI. “We are hoping that with our customers’ support, we will be able to give hotels and restaurants a fighting chance at sustaining business.”

While removing an intermediary could mean more revenue per booking or order, it could also rob restaurants and hotels of perks like better chances of discovery, data-based business insights, and smoother payments. Ultimately, such businesses may suffer equally, or more.

“Other than a really well-known and large scale business, I would imagine it is difficult to expect consumers to go directly to smaller ones,” Anindya Ghose, Heinz Riehl Chair professor of business at New York University’s Stern School, told Quartz. “There definitely is a vital positive role that these aggregators provide to the ecosystem and I believe they are a ‘net positive.’ The issue here is that the commission structure is a bit higher than it needs to be and perhaps over time they will cut the fees to a more reasonable level.”

Why #GoDirect?

This is not the first time the FHRAI has voiced such opposition towards online aggregators. In August 2019, its member companies had launched the #LogOut movement in reaction to deep discounting and high commissions by aggregators. According to FHRAI, aggregators charge between 20-30% of the revenue on every order or booking made through them.

“Even if customers do switch to this practice (#GoDirect) temporarily for the next few months, it will help the hospitality industry immensely,” said Gurbaxish Singh Kohli, vice-president of FHRAI.

The hospitality industry in India has hit rock-bottom due to the Covid-19 pandemic. Even as the country reopens, several hotels and restaurants are still looking down the barrel of a gun as the business remains sparse. Retrenchments in some hotels were up to 80% and those who were still employed had salaries slashed in half, a June 2020 report in Times of India said.

At such a time, every penny counts. “The amounts saved (from platform commissions) will certainly help hotels and restaurants in rehiring redundant employees or maybe even pay utility bills,” said Surendra Kumar Jaiswal, vice-president, FHRAI.

But disassociating with online aggregators could also mean fewer bookings and orders, to begin with. Online aggregation platforms have been very effective in helping lesser-known hotels and restaurants reach potential customers and manage their logistics at lower costs.

“While offline customer loyalties ran deep—with customers going repeatedly to a favourite restaurant—the same customer is fickle online, and can be swayed by better deals, or offers, or simply others popping up much higher in search results,” Prasanto K Roy, a public policy consultant, told Quartz.

Addressing the high commissions, experts say the 20-30% figure being quoted by the lobby group may be higher than the industry standard. Zomato and Swiggy, the leading food aggregators in the country, charge between 10-20% on every order, according to GlobalData. UberEats used to charge the highest commission of between 30-35% but it couldn’t survive with that—Zomato acquired the business in January 2020. Some aggregators also follow a dynamic commission model with a lower commission charged in case of higher restaurant ratings.

What online aggregators bring to the table

In recent years, online aggregators have become wildly popular in urban India.

For instance, Bengaluru-based Swiggy has over 42 million users, while Gurugram-based Zomato has over 40 million. The two unicorns also have exhaustive catalogues with Swiggy listing over 140,000 restaurants on its app, and Zomato having more than 150,000.

“Even for a restaurant outing I look at what’s new, at reviews, and offers and discounts on aggregator sites,” said Roy. “Even a roadside chaat stall wants the discoverability of being on Google, and the added home-delivery boost from being on Swiggy or Zomato, despite the hefty commissions.”

Apart from a higher reach, experts list the following as benefits restaurant and hotels can get from working with aggregators:

Standing out: Most aggregators offer consumer ratings and reviews, the time taken to deliver, and other factors. Even a small restaurant can stand out among potential consumers if it fares well on these parameters.

Data-driven demand: Registering on aggregator websites can provide businesses a gold mine of sensitive customer information like peak order timings, customer cuisine preferences, average spend, and so on. This can help a business tailor its services better.

Fewer overhead costs: Besides just getting orders, aggregators also help restaurants in making timely delivery through their network. “Many restaurants do not have the back-end infrastructure to serve customers directly,” said Yugal Joshi, vice-president at Everest Group. “Even for some of those who do, the user experience is poor.” This is particularly helpful for smaller independent operators, who can not afford their own delivery fleet, Anuran Dhar, food service analyst at GlobalData Consumer, told Quartz.

Payment features: Aggregators offer myriad contactless payment options, which make them a go-to among customers. “Shopping, dining, payments, they’ve all gone contactless,” said Roy. “So the demand for online platforms, with discovery, booking, menu orders, and payments, has increased.”

Of course, there’s a flip side. The very machine that boosts visibility can limit it, too.

“Given apps work on machine learning algorithm they may not be showing the most relevant restaurants to the consumers, but the one that has historically more hits,” said Joshi. “Therefore, it becomes difficult for newer restaurants to do well.”

A post-Covid world

There is no doubt that these are trying times. “Most restaurants are left with less than 20% gross margins after paying for commissions, cost of delivery, packaging, and food,” Piyush Surana, early-stage venture capital investor, wrote in a LinkedIn comment in mid-2020. “That is not sustainable in the long run.”

However, in the current market scenario—what with coronavirus still wreaking havoc—sticking with existing online platforms may be the best bet since a majority of orders and bookings are happening there.

In June 2020, the National Restaurant Association of India was working to build its own app to rival Swiggy and Zomato to take back control of the ecosystem, but it is yet to see the light of day—and understandably so. Going up against seasoned players like Zomato and Swiggy is no easy task. They’re both established multi-billion dollar unicorns that are constantly raising funds—even in the middle of a pandemic. Zomato closed a $660 million round in December and Swiggy is reportedly in talks to raise upwards of $700 million.

“We need to understand that in the absence of aggregators the restaurant industry would have collapsed during the pandemic. Therefore, restaurant owners need to give credit to the aggregators where it is due,” said Everest Group’s Joshi. “It is a symbiotic relationship and both the entities need to work together to build a win-win solution that creates value for the entire ecosystem. Fighting over discounts, commission, etc, needs to be sorted out mutually rather than taking an obstinate position.”