CCI calls for DG investigation into cloud kitchens, price parity, entry barriers by Zomato and Swiggy

The Competition Commission of India (CCI) has called for a Director General (DG) investigation into alleged anti-competitive behaviour on the part of food delivery platforms Zomato and Swiggy..Specifically, the Commission has asked the DG to probe the conflict of interest that arises out of Zomato and Swiggy (opposite parties/ OPs) listing their own cloud kitchen brands exclusively on their platforms; price parity arrangements by which restaurants are not allowed to maintain lower prices for food items; and entry barriers created to prevent new entrants into the food delivery market..The order was passed on the basis of information received by the CCI from the National Restaurant Association of India (NRAI) claiming that the actions of Zomato and Swiggy were in contravention of Section 3 of the Competition Act, 2002.NRAI submitted the following information before the Commission:.The two major online food platforms do not face competitive pressures from other players and/or the restaurant partners (RPs). There has not been any effective credible entry in the market since last three years and other players have been absorbed either by Zomato or Swiggy, demonstrating significant entry barriers; OPs have taken unfair advantage of their significant market power and compounding network effect to enforce vertical agreements and impose vertical restraints on the RPs; Delivery services are not optional for RPs who wish to avail the listing service, and they are forced to take the delivery service of the platform. Such bundling of delivery services is an unfair imposition; RPs do not have the option to self-deliver. RPs are severely affected because of inter alia non-availability of delivery partners, delay in pickups and delay in delivery, which directly affects the business of the restaurant, especially those that majorly depend upon delivery of their food. OPs engage in the practice of data masking, where the RPs receive no data or information about the end consumers to whom the food is delivered. 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; 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; Zomato and Swiggy both enter into unfair and one-sided contracts with their RPs, owing to their superior bargaining power. They often compel 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. Both the OPs have imposed price parity terms and restrict restaurants 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; The commissions which are charged by the OPs from RPs are to the tune of 20% to 30%, which are extremely exorbitant for the RPs..On the allegation of bundling of services and restaurants being prevented from undertaking deliveries on their own, the CCI found that this point did not merit an investigation. "The integrated service of food ordering and delivery provided by the OPs, when opted for by consumers, appears to be in alignment with user interest and preference of availing a hassle-free ‘one stop’ service. 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 ordering, in itself, has led to or has the likelihood to cause AAEC either between restaurants or between hyperlocal delivery service providers," it held..It, however, held that the preferential treatment given to cloud kitchens in which Zomato and Swiggy own a stake, requires a closer look."...the Commission is 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."It further held,"It 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.".The allegations of charging of exorbitant commissions and one-sided clauses with RPs did not cause an AAEC, the CCI noted."The Commission has given 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.".On the point of price parity agreements and creation of entry barriers for new platforms, the Commission held,"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...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 is 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.".The DG is required to submit a report on its investigation into these aspects within 60 days of the order..[Read Order]