From unicorn to popcorn?

Ritesh Agarwal, the college dropout who started budget hotel start-up OYO, checked into the unicorn club last September after raising $1 billion from Japan's Softbank and other investors. While the story of its newly acquired status was making the rounds globally, a different script was simultaneously shaping up in the home market.

OYO got caught in a fight between hotel asset owners and online travel agencies (OTAs), mainly MakeMyTrip.com and GoIbibo over unethical practices, high commission rates and deep discounting practices. Another major allegation was that it had a sizeable percentage of illegal motels, hotels, bed and breakfast accommodations and guesthouses on its platform.

Calling itself a hotel chain, OYO continues to deny the accusations made by hotel associations including the apex hospitality industry body, Federation of Hotel and Restaurant Associations of India (FHRAI).

A similar turbulence is building up in the food tech space involving some of the unicorns like Zomato and Swiggy in addition to Foodpanda and Uber Eats. Partner restaurants and food business operators (FBOs) are up in arms against these online food delivery platforms (OFDPs) for hurting their business and rendering it unviable.

The OFDPs of course don't think so because, according to the operators, they are acting as catalysts in expanding the food delivery market through food options and delightful user experiences.

If everything is hunky-dory with the business model of these digital unicorns, what's the reason for all the commotion with their partners?

The real problem

On the hospitality side, experts believe players like MakeMyTrip, GoIbibo and OYO have spoiled the market by under-pricing the room inventory on their platforms. Rubbing salt to the injury of hotel partners is their cash back strategy that further discounts the room rates.

“So a hotel room priced at say Rs 4,000 is offered at Rs 3,000 and is topped up with Rs 1,000 in cash back. The end user gets the room at Rs 2,000, that's a 50% discount on the original rate. This also pulls down the rates of rooms that are not on the OTA or hotel room aggregator's platform making it unfeasible for the hotel asset owner,” said a top executive from a leading hotel chain.

The business model of OTAs and room aggregators basically involves absorbing the room discounting and cash back losses by creating a huge war chest or funds raised through various rounds from private equity firms like in the case of OYO. This is done not only to acquire customers and build stickiness on their respective platforms but also to cross sell and run push/ targeted marketing and promotional campaigns through the database thus collected. This has restricted the growth of increase in room rate for partner hotels in particular and the hotel industry in general which is clearly visible from the disparity in demand versus price growth.

The story isn't very different with the online food delivery platforms and their restaurant / FBO partners either. The attractiveness of ordering from a web portal or mobile application comes at a cost to restaurants and FBOs as well as end users placing those orders. While OFDPs indulge in discounting and loss funding (cash back) through private equity money, some part of it gets recouped through commissions (charged to the restaurant/ FBO partners) and delivery fees (charged to partners and sometimes to customers as well) to cover operational expenses. Advertising is another revenue stream that's been used to force restaurants/ FBOs to spend on the OFPDs.

Enlightenment

As time went by, according to food and restaurant industry consultant Ravi Wazir, competition between food tech platforms increased as did the pressure from their investors to garner returns. While charges to FBOs began heading north by cutting down their margins, it still made sense for FBOs as they were not dealing with the headache of setting up a delivery mechanism, managing it efficiently and incurring expenses on marketing/ promotional exercises.

Then came a stage when FBOs realised something critical. “Their customers had been so spoiled for options coupled with cash backs by OFDPs that their entire ordering habits had changed. Only on rare occasions would their patrons call for delivery directly from their favourite restaurants/ FBOs. Their customers had now become so habituated to multiple options from OFDPs that even if FBOs created their own app, their customers were unlikely to use it,” said Wazir.

Exiting their relationship with the OFDPs due to high fees wasn't an option either for FBOs. That's because the FBOs would not only loose a large chunk of business through loss of patronage but also cease to exist in the minds of their customers with whom they were no longer in touch with directly.

“FBOs thus found themselves with little choice but to stay on in the relationship. The newest aspect of the OFDP model is that based on the consumer data collected, some of them have created / invested in their own dedicated kitchens thus directly competing with their partners. If FBOs find their margins and even their very survival under threat, what else can they do? If OFDPs simply justify their position and hide behind legalities, then they are in fact themselves forcing FBOs out of a dialogue and into legal recourse,” said Wazir.

In fact, the case with individual hotel asset owners, small and large hotel chains and their relationships with OTAs and aggregators and the tech-focussed hotel companies is quite similar. While the trouble is currently building up in the economy and budget hotel segment, the large hotel companies in India who feel they are insulated from this problem would start feeling the heat in the near future. Going by global trends, large chains might soon find themselves in a similar situation unless corrective actions are taken before things get sour. Internationally, global hospitality firms like Hilton have already started pushing for direct booking on their website while simultaneously negotiating lower commission rates from OTAs/ aggregator platforms. Latest reports suggest that hospitality major Marriott is understood to be negotiating new commercial terms globally with hotel distribution player Expedia – something experts feel will lead to a massive shake-up and could see other large hotel chains flexing their muscles as well.

Start of the tussle

Concerned about the immediate and long-term impact on their business, hotel asset owners as well as restaurant/ FBO players have begun protesting against OTAs, aggregators as well as online food delivery platforms to protect their turf.

When contacted, MakeMyTrip/ GoIbibo did not respond to DNA Money queries. However, Deep Kalra, founder and chief executive officer, MakeMyTrip.com, was quoted in media reports last month saying their contracts are with individual hotel asset owners and chains, and that FHRAI has no jurisdiction in this matter. Miffed by their stand, Gurbaxish Singh Kohli, vice-president, FHRAI, and president, Hotel and Restaurant Association of Western India (HRAWI), has now sought intervention from the Ministry of Tourism in this matter post their failed attempts to arrive at an amicable solution with MakeMyTrip, GoIbibo and OYO.

On its part OYO claims that is not a room aggregator, nor an online travel agency or for that matter a marketplace. Responding to DNA Money queries, a company spokesperson said, “OYO is a full- fledged hotel chain that leases and franchises assets. We have invested over thousands of crores in capex, appointed hundreds of general managers to oversee operations and customer experience, created job opportunities for over one lakh people in India and set up over 22 training institutes for hospitality enthusiasts across the country.”

The spokesperson added that OYO owns 100% room inventory of all the hotels that are either leased or franchised and hence there is no question of issues related to under-pricing, high commission rates or deep discounting.

“We manage two star and three-star hotels that usually run on market-led revenue per available room (RevPAR), similar to other branded hotel chains while maintaining a price point that is ideal for customers and help generate fair yields for our assets owners. On an average, over 75% of hotel owners associated with OYO Hotels have seen between 20% and 30% increase in occupancy, a 2.5 times jump in RevPAR and significant jump in profit for every asset operating as an OYO branded property,” the spokesperson added.

The fight with OYO management could take a nasty turn as the Budget Hotel Association of Mumbai has formed a new pan-India body Hotel Association Confederation of India with plans to initiate a complete boycott of OYO if push comes to shove.

There are also numerous instances of budget hotels being listed at lower room rates on the OYO and MakeMyTrip platforms despite asset owners calling off the association. “A few months ago, I had booked accommodation through MakeMyTrip. After reaching, the hotel said they haven't received my booking via the portal. Thankfully, they had vacant rooms and I didn't face any problem. However, later, I came to know that non-communication by MakeMyTrip to member hotels is a common problem,” said Rashmikant Thakkar, a Mumbai resident.

The silent game

The food delivery platforms are abstaining from making any statements on their tussle with restaurant/ FBO partners. When contacted, executives from Zomato, Foodpanda, Uber Eats did not respond to DNA Money queries. In an earlier response towards December-end when the issue started building in the Ahmedabad market, a Zomato spokesperson had in an email response to DNA Money said, “We are discussing the matter with the involved restaurant partners to achieve an amicable solution, which would benefit all the parties in the ecosystem.”

Not reacting specifically on the issue with partner restaurants/ FBOs, Vishal Bhatia, chief executive officer - new supply, Swiggy, said, “We strongly believe that consumers should get access to great food choices, wherever they are. Being the largest food aggregator in the country, it is our responsibility to identify and fulfill current and future gaps. We also want to encourage expansion for quality food brands, create more success stories in the restaurant industry,” said Bhatia.

The apex restaurant industry body National Restaurant Association of India (NRAI) has taken note of the critical situation and is taking corrective steps. Rahul Singh, president, National Restaurant Association of India (NRAI), said the delivery task force had its first meeting with Swiggy, Zomato, Uber Eats and Foodpanda recently earlier this week. “Concerns of the standalone and chain business operators regarding deep discounting, data masking, rights to use own logistics, private labels and ad hoc campaigns were put forth. Concerns have been well taken by all of them. We aim to continue these meetings on a bi-monthly basis for communicating feedback from the restaurant industry to the aggregators to ensure a healthy business environment for all stakeholders.”

Striking the balance

Industry players feel the OTAs and food delivery platforms are just using technology and funds to their advantage but lack domain knowledge. “They are clueless about the flip side of the business, lack operational expertise, are low on the customer satisfaction grid and many such critical aspects of doing a successful business. It is about time OTA's and Food Delivery platforms join hands with existing players and work together for better business for all,” said a chief executive of a leading restaurant chain with operations in India and overseas.

The web/ mobile app economy is an evolving space and an adaptive approach needs to be taken by the regulators to set the framework for players wanting a play. “Their approach is definitely predatory in nature and at the same time there is bound to be a compromise on safety/ quality standards of business. It is very important to bring in some kind of regulation in their way of doing business while not threatening the existence of conventional players,” said another top industry executive.

Future of digital businesses

Digital business promoters should ideally rationalise their discounting strategy to make businesses viable for themselves as well as a trusted and comfortable technology platform for their partners to associate with. However, will it happen is a question that no one has an answer to.

A digital business with upwards of a billion dollar in valuation banks on discounts to clock-in say millions of orders annually. The valuation of this business is a function of the orders generated and not on profit. The start-up will lose its attractiveness the moment it pulls back the discounting and cash back strategy. As a result, the five million orders being generated by the e-commerce player will decline to a million or less and the billion dollar valuation will drop down to a 100 million or less.

“Digital businesses will continue to prosper as long as there is this misalignment of incentives. No investor backing the business is asking whether you are making money or not. The focus is on more and more loss-making transactions on the platforms. And if the valuation is a function of this loss-making strategy, then you are definitely asking for trouble,” said an industry expert, adding that investors like Softbank are like a cowboy or a goonda outfit that will put in the money if they like your business, drive up valuations and vice versa.

Experts believe that in the next two to three years there will be a big shakeout in the e-commerce space in India. In fact, many of the unicorns, who are currently the poster boys in the start-up space, may go bust. “You have already seen what has happened to Snapdeal. The market is closely watching this trend and sooner or later funding for such businesses will dry up because you can't run a business till eternity without making any money,” said an industry expert.

“As far as the app industry is concerned, there are still a plenty of vanity metrics in the play. I think in the next 18 to 24 months some sense will have to prevail where actual return metrics will be looked at to call a business successful or otherwise,” said Patanjali Keswani, managing director, Lemon Tree Hotels. 

Share of daily delivery done by restaurant and food-tech partners

Delivery by Food-tech players and 3PLs – 76%

24% – Restaurant Delivering 

Note: Interviews with 200+ restaurants across top 10 cities food-tech players are present in

Source: RedSeer

(With inputs from Ateeq Sheikh)