Assessing Competition and FDI Policy Concerns over Cloud Kitchens

[By Sanchit Khandelwal and Shreya Iyer]

The authors are students at NALSAR University of Law.

Over the past decade, Indian market landscape driving on the shoulders of technology and innovation has changed drastically. Convenience and comfort have now become an important consideration in the lives of people, especially millennials. Such alterations in the lifestyle of the society or part of the society have stimulated and pioneered the emergence of certain business opportunities like food deliveries. The advent of food aggregating platforms like Zomato, Swiggy, etc. has made food delivery service an intrinsic part of our lives and the restaurant industry. Hectic lifestyle, economical rates, promotional schemes and multiple cuisines have contributed to this growth.

According to the CCI market study on e-commerce in India (hereinafter referred to as CCI’s study), growing at a rate of 12% annually, food deliveries today make for 29% of restaurant revenue and 78% of restaurants can be found online. High demand, coupled with increased purchase power is likely to ride the Indian online food delivery industry to touch $5Bn by the end of the year 2023. Banking on the promising prospects of the food delivery business, there has been an emergence of a distinct delivery only restaurant model known as ‘cloud kitchen.’

Cloud kitchens are delivery exclusive restaurants that do not offer dine-in facility. Lower fixed cost, variable cost and operating cost adds flexibility to the new model and enables rapid expansion into newer territories, which is evident from 80% growth in non-metro cities. Most of these cloud kitchens take orders through food aggregators. In the last 2-3 years, several food aggregators have invested significantly in cloud kitchens, and some have even launched their own private labels. Food aggregators like Swiggy and Zomato have promoted the inclusion of these cloud kitchens on their platforms. For example, Swiggy through its #SwiggyAccess service provides free real estate to select restaurants and bills them on a revenue sharing model per delivery.

Such developments wherein the food aggregators (owning or having a stake in cloud kitchens) have assumed the dual role of the operator of the platform and the seller not only draws competition law related concerns but also seems to be at cross with the FDI policy of the country.

Competition law related concerns

The dual role assumed by the food aggregators as a platform sketches an inherent conflict of interest between the platform’s role as an intermediary between the consumer and the seller on the one hand and as a market participant on the other. The market outcome of platforms lacking neutrality is likely to be compromised by being under the influence of the food aggregators (marketplace) rather than being a result of pure competition based on merits.

The absence of platform neutrality allows the food delivery platforms to establish their leverage in their favour through access to transactions data and ranking of search results. The food aggregators role as an intermediary platform provides them with competitively critical data such as price, quantities sold, demand patterns, etc. pertaining inter alia to each product, seller and geography. Access to such data allows the platforms, which are also the sellers, to enhance the sale of its preferred sellers and better target the introduction of their own private labels. As per the CCI’s study, several restaurant owners have alleged that with the cross usage of data, several food aggregators have launched their own cloud kitchens in high demand food categories in hyper-local markets.

Seller’s interaction with customers on the platform depends upon the seller’s ranking on the platform in response to related search queries generated by customers. The organic search ranking which any restaurant obtains is generated by the platform’s algorithm. It is the platform that tunes the algorithm and is in control of the search parameters and results. The duality of the platform hints towards biases that may creep in search rankings, a critical determinant of consumer traffic that one can attract. Several respondents (restaurant owners) of the CCI’s study complained that platforms’ algorithms are devoid of transparency and cloud kitchens, in which platforms themselves have stakes, are placed better on the platforms.

Such manipulation by platforms with search results, seller’s data and user reviews hamper the ability of independent restaurants to compete effectively with the vertically integrated entities or the platforms’ preferred entities. The European Commission in the Google shopping case charged Google with $2.7Bn fine for using its position as a search engine to push its own shopping comparison website to top of search results. In 2019, the CCI had fined Google $21 million for ‘search bias’ and abusing its dominant market position.

In the Indian food aggregators marketplace, Zomato and Swiggy are the two major market leaders and after the acquisition of Ubereats by Zomato, Zomato is likely to become the dominant market leader in the relevant market. Unfortunately, the CCI unlike its foreign counterparts has disregarded the prospective and potential effects of such conduct on the existing as well as future competition. However, it seems that the new policy on FDI in e-commerce has come to the rescue, as it lays down general restrictions on the activities of the e-commerce in India.

Do cloud kitchens flout FDI policy?

The new FDI policy that came into effect in February, 2019 mandates business models of online players to realign themselves with the new guidelines. Additionally, the new policy restricts the sale of those goods by the platform in which they have an equity participation. The FDI policy identifies two types of e-commerce models, the marketplace model and the inventory model. According to the marketplace model, the e-commerce enterprise should solely act as a technology facilitator between buyers and sellers. Whereas, under the inventory model there exists no such restriction on the e-commerce enterprise to own goods and services that it trades on its platform. Further, up to 100% FDI is allowed under the marketplace model and none under the inventory model.

Most of the food aggregators, if not all, are backed by FDIs and therefore, are allowed to function under the marketplace model. Therefore, by investing into cloud kitchens or owning private labels the food aggregators as platforms are blurring the distinction between the two e-commerce models under the FDI policy. The e-commerce enterprise operating under marketplace model cannot provide different level of service to different sellers on their platform under similar circumstances. The National Restaurants Association of India (NRAI) has condemned the marketplace conduct of food aggregators and has alleged that cloud kitchens owned by the aggregators are given preferential treatment in terms of rankings, reviews, offers and listing on the platform.

Conclusion

No doubt that food aggregators through home food deliveries have made a remarkable contribution to the revenue of the restaurant industry but their involvement in cloud kitchens, a business model which can be utilised and monetised to bridge India’s food supply gap to the benefit of every stakeholder, needs to be pondered upon. Any kind and size of stake or vested interest possessed by marketplace platforms in cloud kitchens goes against the principle of platform neutrality and the intended aim of the FDI policy, i.e., to provide a free marketplace to sellers. The competition authorities around the world have recognised such market conduct to be anti-competitive.

After open condemnation by the NRAI, the Department for Promotion of Industry and Internal Trade (DPIIT) has begun talks with relevant stakeholders of the issue and it remains to be seen whether the DPIIT will look forward to stricter implementation of the FDI norms or leave it out for it to be catered to by laws carved out for technology driven businesses.

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