CCI DIRECTS INVESTIGATION AGAINST ZOMATO AND SWIGGY FOR ALLEGED ANTI-COMPETITIVE PRACTICES

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The fair market watchdog , the Competition Commission of India (“CCI/ Commission”) vide its order dated 04.04.2022 , after finding  a prima facie case , has finally  directed an investigation with respect to some market conducts of online food delivery platforms in India ,  Zomato and Swiggy, to inquire whether the conducts  have  resulted in adverse effect on competition in the market , in contravention of the provisions of Section 3(1) read with Section 3(4) of the Competition Act, 2002 (the Act), through their agreements with the downstream restaurants partners (RP) . The investigative wing of CCI, the Director General (DG), has been directed to carry out a detailed investigation, in terms of Section 26(1) of the Act.  

The information was filed by the National Restaurant Association of India (“NRAI”/Informant), in July 2021 under Section 19(1)(a) of the Competition Act, 2002 against Zomato Limited (‘Zomato’) and Bundl Technologies Private Limited (‘Swiggy’) (Zomato and Swiggy, hereinafter, collectively referred to as the ‘Opposite Parties’/ ‘OPs’) alleging that the market practices of Zomato and Swiggy violate Section 3(4) read with Section 3(1) of the Act. Noticeably, the NRAI had been threatening of approaching the CCI against these online food aggregators for   such as unfair terms of contract for listing, excessive commissions, and deep discounting etc with the online food aggregators since 2018 but the issues are understood to have been aggravated during last two years of the lockdown due to the COVID 19 pandemic.

This prima facie order assumes importance since it is a detailed order passed after hearing both sides and a detailed economic analysis of the market conditions after duly considering the unique business model of both the food aggregators. An overview on each allegation made by NRAI, and the CCI analysis, after considering the response by the food aggregators and rejoinder by NRAI to the responses ,  given below.

NRAI Allegations:  The main thrust of NRAI Information is that the OPs have taken unfair advantage of their significant market power and compounding “network effects” by use of advanced algorithms to enforce vertical agreements and impose vertical restraints on the RPs, which are anti-competitive in nature, in violation of Section 3(4) read with Section 3(1) of the Act. The allegations in brief are summarised as under –

1. Coerced bundling of food delivery services with the core listing services – for availing food ordering services on their platform by Zomato and Swiggy. Allegedly, such delivery services are not optional for the RPs who wish to avail the listing service, and they are forced to take the delivery service of the platform.
2. Data masking – The RPs receive no data or information about the end-consumers to whom the food is delivered. The RPs receive temporary landline number instead of customer’s phone number. The effect of such data masking is that the RPs are not aware of where the food is being delivered, to whom and in how much time. The same creates lack of transparency from the perspective of RPs and they receive least information despite being accountable for the services offered by them . Such data is never shared with the RPs and is instead used by the OPs to their advantage, especially for the creation of their private labels.
3. “Cloud kitchen” leading to promotion of private labels and preferential treatment – OPs are engaging in a dual role on their platform where they list their own cloud kitchen brands exclusively on their platform, akin to private labels, thereby creating an inherent conflict of interest in the platform’s role as an intermediary on one hand and as a participant on the other hand. Such vertical integration may create an incentive to improve the platform’s own/related entity’s market position relative to its competitors, by engaging in preferential treatment.
4. One sided conditions of contracts with RPs- Owing to their superior bargaining power, both Zomato and Swiggy. Both have retained the sole right to terminate the contractual agreement with RPs, pursuant to any noncompliance of the terms and conditions. This creates a” locked in”  effect on RPs who become dependent on the e platforms .
5. Exclusivity – Zomato and Swiggy often compel the RPs to commit exclusively to be listed on their respective platform through incentives, lower commissions etc. to maintain their competitive edge in the market, at the exclusion of other new entrants. For instance, Exclusivity Contract of Zomato offers exclusivity contract with 0% commission with the RPs. Also, Merchant Enrolment Form is annexed which shows that Zomato charges 3.75% commission for exclusive listing of partner restaurants on its platform and variable commission of 7.5%/10%/15% commission if such exclusive listing is not followed by those restaurants. Zomato also offers minimum guarantee in the form of order volume guarantee and order value guarantee to some restaurants subject to fulfilment of certain conditions such as minimum rejection and promptly acceptance of order by the RPs. Similarly,
6. as per the signage policy of Swiggy, the RP/merchant is obligated to only display the co-branded signage and cannot display nor enter into any arrangement/agreement for the display of signage of competitors of Swiggy during the term of this Signage Policy without prior approval of Swiggy.
7. Use of MFN /Price parity clauses – both the OPs have imposed price parity terms on the RPs through their respective contracts with such RPs. The price parity clauses in the agreements are in the nature of Wide price parity restrictions, which restrict the restaurant from charging lower prices or providing better terms on their website or offline shop, as well as through any other sales channel, including other online food aggregator platforms. For instance, as per the Zomato Pro contract (which Zomato has with its customers who have opted for the same) RPs at all times have to maintain parity in the pricing for all products offered for sale to such Zomato Pro Customers via the platform as against that made available for sale otherwise, including but not limited to any online aggregator and at its restaurant locations.
8. Excessive commissions- commissions charged by the OPs from RPs are unviable and are to the tune of 20% to 30%, which are extremely exorbitant for the RPs. Zomato is alleged to be charging approximately 27.8% of the order value to the RPs listed on its platform, whereas for Zomato cloud kitchens, Zomato does a guarantee of certain sales per month, but the commission rate is as high as 37%. Similarly, Swiggy charges 24%.
9. Deep discounts forced on RPs- OP’s, who together corner more than 95% of the market, have been engaging in the practice of deep discounting, through schemes and incentives offered by them to customers. Although earlier , OPs were funding such discounts themselves, now the discounts have been mandated to be funded by the RPs to maintain adequate listing on their platform. ‘Proper listing’ of RPs happens when they incur discounts. OPs successfully capitalised on network effects, attracting a critical mass of consumers on their platforms to ensure they assumed the role of an
10. unavoidable trading partner for restaurants. Once such a position was assumed, OPs proceeded to successfully increase commission rates, and began requiring RPs to fund such discounts in exchange for visibility on the platform. This meant that RPs are dealt a double whammy, as increasing commission rates mean lesser revenue from orders, and increasing discount funding means an increase in expenses.

Relevant Market – As per NRAI, for assessment, the relevant product market to be a ‘restaurant marketplace with delivery services’ as the market is hyperlocal as food delivery is restricted to a range of only a few kilometres. Since the platforms of Zomato and Swiggy work in such hyper-localized markets, the market position of any of the platforms would change significantly from one region to another. As per NRAI, in the southern region, Swiggy commands an overwhelming market share of nearly 70% and in northern India, it is Zomato that commands an overwhelming market share of 70%. Owing to the nature of the model that is followed by both these platforms which work in hyper-localized markets, the analysis has to be region-specific and the whole of India should not be considered as one single relevant geographic market. Therefore, the relevant market as a whole has been proposed to be a ‘restaurant marketplace with delivery services in various hyperlocal areas across India’. However, as per NRAI, dine-in/take-outs/direct orders do not form part of the relevant market as there is a fundamental difference in consumer preference between dine-in and delivery. Also, Vertically Integrated food Chains (VIFCs) , such as Dominos etc also do not form part of the same relevant market as they offer their own delivery service.

Zomato and Swiggy , on the other hand , controverted the above relevant market delineation done by the Informant and proposed a wider market. While Swiggy proposed the relevant product market as ‘market for provision of listing and logistics services for cooked food’, Zomato has suggested that relevant product market should include all logistic delivery companies (such as DotPe (backed by Google), Dunzo (backed by Google), Shadowfax, Delhivery, WeFast (Borzo), Pidge, etc.), direct ordering to the restaurants, as well as the entry of players like Amazon and Google .

CCI Observations:

For the purpose of investigation, CCI observed that since allegations are stated to be in contravention of Section 3(4) read with Section 3(1) of the Act a stricto sensu delineation of the relevant market is not required as per the provisions of the Act to carry out the assessment, though, to contextualize the discussion and to assess the impact of the alleged conduct of the OPs, some broad understanding of the market and OPs’ business model is imperative. Suffice to say that Zomato and Swiggy are prominent online food delivery platforms and operate as online intermediaries for food ordering and delivery.

After careful perusal of the allegations as well as the submissions made by the parties, the Commission was of the view that prima facie a conflict-of-interest situation has arisen in the present case, both with regard to Swiggy as well as Zomato, because of the presence of commercial interest in the downstream market, which may come in the way of them acting as neutral platforms. This requires a detailed examination. Given that platforms are vertically related with the RPs, including their private brands and those operating through their respective cloud kitchens, such arrangements whereby preferential treatment is accorded to some entities can be looked as a potential contravention of Section 3(4) read with Section 3(1) of the Act.

The Commission, at the outset, observes that bundling of services has been alleged as a contravention under Section 3(4)(d), which mandates a rule of reason analysis-. CCI observed as under on each allegation.

1. RE: Coerced bundling of services – It emerges from the claims made by Zomato and Swiggy that bundling delivery with order enables them to control the time taken for delivery and qualitatively standardize such delivery for the end consumer. In that sense, apparently, ‘delivery of the food’ ordered through their platform, seems to be an important characteristic feature of the business model as well an important parameter of competition that Zomato and Swiggy have adopted. As it appears, the competition between them is primarily a competition among bundles, where the time is taken for delivery of orders and the qualitative aspect of it constitute relevant parameters of competition between these online food ordering and delivery platforms. Thus, the bundling does not seem to raise any competition concern as such. Even otherwise, the Informant has not been able to substantiate its claim that bundling of delivery with the order, in itself, has led to or has the likelihood to cause AAEC either between restaurants or between hyperlocal delivery service providers.
2. RE: data masking – No specific finding. Clubbed with bundling of services as above.
3. RE: Cloud Kitchens etc- Even   if Zomato does not own the kitchen space as claimed by it, prima facie the Commission was satisfied that the revenue interest that exists in favor of Zomato, along with the minimum guarantee obligation, can act as an incentive to divert traffic to the RPs situated in those Access Kitchens. Thus, in the case of both Swiggy and Zomato, from an overall appreciation of the facts, prima facie there exists a conflict-of-interest situation, warranting detailed scrutiny into its impact on the overall competition between the RPs vis-à-vis the private brands/entities which the platforms may be incentivized to favour the aggregators.
4. RE:  Exclusivity – The Commission found merit in investigating the issue pertaining to platform neutrality and felt that  iIt may also be seen during investigation whether exclusivity in conjunction with minimum guarantee obligation is further accentuating the structure which may come in the way of the platform operating in a neutral manner. Thus, the aforesaid conducts require a holistic examination to ascertain whether these intermediaries prevent competition on merits, creating an ecosystem causing or likely to cause an appreciable adverse effect on competition. (Para 76)
5. RE: Price parity clauses- In case of food delivery apps, widely defined price parity arrangements/restrictions may result in removal of the incentive for platforms to compete on the commission they charge to restaurants, may inflate the commissions and final prices paid by consumers and may also prevent entry of new low-cost platforms. ( Para 85). The price parity clauses mentioned in the agreements of Zomato and Swiggy appear to indicate wide restrictions where the RPs are not allowed to maintain lower prices or higher discounts on any of their own supply channel or on any other aggregator, so that the minimum price or maximum discounts can be maintained by the platform. Such price parity clause may discourage the platforms from competing on the commission basis as RPs need to maintain similar prices on all platforms and provide similar prices to the customers, regardless of the commission rates paid to the platform. Given that Zomato and Swiggy are the two biggest platforms present in the food delivery segment, their respective agreements with RPs of this nature are likely to have an AAEC on the market by way of creating entry barriers for new platforms, without accruing any benefits to the consumers. Thus, the Commission was  of the view that an investigation under Section 3(4) read with Section 3(1) of the Act is made out on this aspect as well. ( Para 86).
6. RE: Deep discounts, excessive commissions and one-sided clause –On the allegations of the delayed payment cycle, imposition of one-sided clauses in the agreement, charging of exorbitant commission, etc.  Zomato has submitted that lower commission rates resulting from exclusivity arrangements have the effect of reducing operational costs of RPs, which can be used by an RP to improve the quality of food. Swiggy also averred that the Commission is not a price regulator and cannot review the appropriateness of the commissions/discounts charged by Swiggy, more so because Swiggy does not hold a position of dominance. Concerning discount policies, Swiggy stated that it does not violate the Act as the RPs have the freedom to choose whether they would like to provide discounts on the platform, and the requirement to provide discounts is not a pre-requisite to be listed on the Swiggy platform. Moreover, discounting does not result in any favorable listing on the primary search results.

After giving a thoughtful consideration to the submissions made by Zomato and Swiggy on the allegations pertaining to delayed payment cycle, imposition of one-sided clauses in the agreement, charging of exorbitant commission etc. and based on those submissions, the Commission is of the view that prima facie these do not seem to have an effect on competition in the facts and circumstances of the present case.

Thus , after a detailed analysis of the allegations made , the responses given by OPs and the rejoinder thereto by NRAI, CCI has found a prima facie case in respect of three out of eight allegations , i.e cloud kitchen , exclusivity and price parity restrictions .

Based on the above findings CCI concluded that there exists a prima facie case with respect to some of the conduct of Zomato and Swiggy, which requires an investigation by the Director-General (‘DG’), to determine whether the conduct of the OPs has resulted in contravention of the provisions of Section 3(1) of the Act read with Section 3(4) thereof, as detailed in this order. The DG is, thus, directed to carry out a detailed investigation, in terms of Section 26(1) of the Act, and submit a report to the Commission, within 60 days from the date of receipt of this order.

#Zomato #Swiggy #ecommerce

COMMENT: Coming in the backdrop of ongoing investigations against other category of e commerce like Online Travel Agents (Make My Trip & OYO Case ) and e commerce delivery platforms ( Amazon & FlipKart) this is the third order directing investigation against the online food aggregators ( Zomato & Swiggy) . This culminates into full fledged antitrust probes into almost each variety of e commerce platforms in India , for more or less similar allegations of exclusivity , preferential treatment to private labels , wide parity clauses etc . Given the fact that the jurisprudence on most of these issues have been settled now both in EU and USA, where the concerned parties have opted for settlements and commitments, the outcome of these antitrust probes in India is not difficult to predict and may be on expected lines.

Readers are requested to go through my earlier blog ( Whether Amazon can be tamed in India ) in which I had anticipated the defence arguments by Amazon , which are also seen here taken by both Zomato and Swiggy.