Funding of Food Aggregators & Competition law: A Post Covid Analysis

By Rohan Mandal and Jeezan Riyaz, fourth and third year students at USLLS, GGSIPU, Delhi and NLIU, Bhopal respectively.

In an exclusive arrangement as part of its strategic push, the food delivery giants, Zomato and Swiggy are all set to raise more than $1 billion, which will help them to leverage a position of dominance in the food delivery business. Duopolistic designs, coupled with pricing below the belt, and the viability of recuperating losses have led to a strategic dominance for these entities in the food delivery market, thereby harming the consumers in the long run.  Accordingly, the food aggregators have been under the constant radar of the Competition Commission of India (“CCI”) for manipulating pricing, deep discounting and offering of rebates with an intention to distort competition.

At the heart of the Competition Act, 2002 (“The Act”), lies the principles of fair competition and therefore any activity or strategy that abuses the ongoing competition in the marketplace, is said to fall within the ambit of the anti-competitive activities.  The Act in the explanation under section 4(2) defines “dominant position”, as a position of strength or dominance, enjoyed by any enterprise which enables it to: (a) individually dominate or function without the competing opponents in a marketplace; or (b) manipulate the consumers in a sense, that is grossly disadvantageous to the other forces of the market. This gains more traction particularly in light of the increased use of these apps and reluctance to dine out in light of Covid.

  • Abuse of Competition & Appetite for market dominance

Section 4(2)(a)(ii), of the Act disallows an enterprise from engaging in predatory pricing, which is understood as selling goods below cost to drive out competition. While, 4(2)(c) prohibits those activities that deny access to the market and lead to foreclosure of competition. Economies of scale may lead to dominance, and if deep discounting and new rounds of funding received by the food aggregators is viewed holistically, a conclusion to that effect can be drawn.

With Zomato having acquired Uber Eats and other small start-ups alongside its strategy to rechristen Zomato gold to Zomato pro (a premium subscription model), it gets a strategic edge to dominate the marketplace. Swiggy, on the other hand has launched their initiative called Swiggy Super, which has forced small start–ups to wind up their operations by diverting the consumer base to their platform. This comes at a time when people do not have the luxury of going out to a restaurant due to the ongoing pandemic and are reliant on food delivery apps. Section 19(4) lays down relevant factors to be considered to ascertain abuse of dominance, which include the economic power of the entity vis-à-vis their competitors and market share of the enterprise. The Food aggregators have control over the listing of restaurants and have access to consumer data, which is being leveraged for their benefit and to promote their in-house kitchens. Therefore, an argument can be made thatabuse of dominance is prevalent in the marketplace.

Further, CCI in its report on e-commerce states that the food aggregators have benefitted immensely by establishing cloud kitchens (cooking spaces without a dine-in-option). These aggregator-run-establishments have an edge over normal restaurants on the app in terms of the user data available to them, preferential listing provided and by forcing other restaurants to purchase items from them. This has led to an unequitable profit earning structure, thereby exhibiting anti-competitiveness from the legal standpoint. Therefore, with data in the hands of these in-house-kitchens in the present digital economic paradigm, they are in a better position to maximize sales and entice consumers.

In Ltd. v. Google LLC, Google was accused of violating anti-trust provisions by manipulating their search algorithms and giving preferential listing to its own products and features. This caused the complainant to be listed lower, and thereby affected their business. It was held by the CCI that Google was directly manipulating the consumers by diverting their attention from rival services to their own. Google abused its dominant position to exert pressure on other players to exit the market, which was accordingly dealt with under section 4(2)(e). The CCI has laid down in MCX v. NSE, that  activities which are covered under section 4 such as predatory pricing and denying access endanger competition in the market. In a similar vein, it can be argued that the food aggregators are abusing their position of dominance through their in-house kitchens.

  • Assessment of dominance and abusive conduct: CCI analysis

Fueled by the stiff domestic competition among restaurants, lack of alternative dine-in-options and buoyed by the ever-expanded funding inthe food delivery business, it has paved a way for a duopoly in the Indian paradigm. This makes it imperative on the part of the CCI to conducta thorough investigation from a competition law standpoint.

In the new normal of the restrictions worldwide, the food delivery aggregators are engaging in anti-competitive practices such as predatory pricing, violation of platform neutrality, exclusivity, barriers to entry and obliging the already existing rivals to exit. Thus, impacting footfalls and diverting the entire consumer rush to their own benefit. The National Restauranters Association of India’s (“NRAI”), a body which represents over 5,00,000 restaurants, in their complaint to the CCI also echoes this sentiment, wherein they allege abuse of dominance by the aggregators. In their complaint they allege that aggregators charge restaurants exorbitant fees, give preferential listing to restaurants on payment of fees, and engage in deep discounting (non-adherence to deep discount schemes means lower visibility for the restaurants).

The COMPAT in  Schott Glass appeal case, had observed that abuse of dominance and predatory pricing involves the satisfaction of two important requirements: (i) unequal treatment of similar transactions; and (ii) harm meted out to the competition in the marketplace. This places all the sellers on an unequal footing and is disadvantageous to the interests of the buyers. In another important case, the XYZ v. REC Power Distribution Company related to abuse of dominance, the CCI held that “establishing a denial of access”, indicates exclusivity and sizeable degree of market power being controlled by those in position of dominance.

The NRAI complaint to the CCI has also alleged that the practices of the deep funded aggregators have forced several restaurants to shut down. Consequently, there is a need to reach a middle ground to ensure that there is stability and transparency in the process and that capitalism doesn’t hamper the very essence of competition as abuse of strength can impact both the competition and the consumers in the long run.

  • The Impact of IPO and the new rounds of funding

The Zomato IPO will raise Rs. 9,375 crores against the backdrop of Zomato posting losses of Rs. 886 crores in the last financial year. On the other hand, Swiggy is set to raise Rs. 9,297 crores  in their newfunding round against losses of Rs. 3,768 crores in the 2019-2020 accounting year. This inflow of cash against the continued loss-making nature of these food aggregators, makes the market interesting from a section 4 standpoint as the entities will have the financial capability to strengthen their grip on the market, while posting losses, therefore, adversely affecting competition. In Uber v. CCI, the Supreme Court dealt with a case involving taxi aggregators offering rides at lower rates while making losses. The Hon’ble Court held that continued losses incurred by aggregators is prima facie indicative of abuse of dominance because predatory pricing helps them to drive out competition and control the marketplace at the same time. The CCI was ordered to investigate the activities of the aggregators. Although, the Commission would later give the taxi aggregators a clean chit, but the principle that continued losses merit an investigation by the CCI still stands, and should be applied in the present case.

Zomato and Swiggy have stated that they will continue to make losses in the near future in order to develop business. This would be done by starting operations in new cities, and also diversifying to the item delivery market. At the same time, they also continue to give deep discounts and preferential treatment to certain enterprises. These activities should be investigated under section 4 and the possible appreciable adverse effect on trade under section 3 needs to be looked at. This becomes necessary, particularly in light of the fact that the CCI has also investigated such models in the case of taxi aggregators and e-commerce giants,  Amazon in Lifestyle v. Amazon. In this case the CCI held Amazon guilty under the Act  for not granting visibility to the products of the complainant. The decision of the CCI in Ashish Ahuja v. Snapdeal is also relevant for this purpose, where Snapdeal was accused of granting exorbitant discounts on their platform, which affected the business of their competitors. The CCI held that discounts coupled with harm to the market amounts to abuse of dominance. In the current paradigm, it is evident that the food aggregator market is dominated by two players, whose activities such as continuous deep discounts and preferential listing is prima facie indicative of abuse of dominance, and this merits an investigation by the CCI.

All these factors have been put forward in the NRAI complaint. Further, the new cash inflow means that the aggregators will have the capacity to continue with the above-mentioned activities, which if left unchecked could have serious effect on the market.

  • Conclusion

To sum up the above discussions, the authors submit that two important factors need to be considered, namely, the new funding and the previous activities of the food aggregators. When these two factors are looked at in tandem, it becomes imperative that a thorough investigation is conducted by the CCI, to gauge the market situation and address the apprehensions of the NRAI. Zomato and Swiggy have maintained that they will continue to make losses in the near future in order to develop business, which further makes it important for the CCI to probe the allegations against the aggregators. Covid has resulted in the popularity of food delivery giants soaring to greater heights. Therefore, there is a need to critically analyze the legal impediments of anti-competitive strategies that form the basis of the competition laws in India.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s