Cloud kitchens are delivery-only restaurants that have no dine-in facility. They operate only as a food production facility (saving on dine-in infrastructure and labour costs) which helps them to expand rapidly into newer territories. For most of these cloud kitchens, platforms such as Zomato, Swiggy and Uber Eats (“food aggregators”) are the only medium to receive customer orders.
In the past 2 (two) years, food aggregators have aggressively promoted the inclusion of cloud kitchens on their platform.[4] Apart from on-boarding independent food suppliers, services such as #SwiggyAccess provide free real estate to select restaurants and charges them on a revenue sharing model per delivery.[5] Food aggregators also own certain cloud kitchens on their platform.[6] This dual role of the aggregator of acting both as a supplier and operator of the platform creates competition law concerns and might flout India’s policy on Foreign Direct Investment (“FDI Policy”).
The FDI Policy identifies the marketplace and the inventory models of e-commerce. The marketplace model requires the e-commerce entity[7] to only act as a technology facilitator between buyers and sellers.[8] The inventory model on the other hand puts no restrictions on the e-commerce entity to own the goods and services on its platform.[9] While no FDI is allowed for inventory model of e-commerce, 100% FDI is allowed for the marketplace model.
Most food aggregators in India hold FDIs and are permitted to operate only as marketplaces. Hence, by profiteering from incubation services and owning private labels on its own platform, food aggregators might be crossing the line between the two e-commerce models under the FDI Policy.[10] Further, having a vested interest in the suppliers on the platform goes against the spirit of the marketplace model which is modelled to provide a free market to suppliers. E-commerce entities providing a marketplace are not permitted to give any services to a vendor that are not made available to other vendors in similar circumstances.[11]
This development also pushes the alleged anti-competitive practices of food aggregators on their platform. The National Restaurants Association of India (NRAI) reports that cloud kitchens privately held by the aggregators are given preferential treatment in terms of listing, ratings and offers on the platform.[12] In August 2018, over 300 restaurants logged out of from dining-membership driven by #ZomatoGold, #Dineout and #EazyDiner citing similar competition law concerns.[13]
While cloud kitchens have been instrumental in bridging India’s food supply gap, the platform governance practices adopted by food aggregators needs deliberation. These issues were recently discussed by the Department for Promotion of Industry and Internal Trade (DPIIT) with the relevant stakeholders and an industry-wide notification will soon follow.[14] It will be interesting to see whether the DPIIT takes a strict interpretation of law or do we have another case where laws are carved-out specifically for technology businesses.
This post has been authored by Sarthak Doshi (Associate at Ikigai Law) with inputs from Tanya Sadana (Principal Associate at Ikigai Law).
References:
[1] Competition Commission of India, Market Study on E-commerce in India: Key Findings and Observations, 8th January 2020, Para 20 (Chapter 2), Page 8, see https://www.cci.gov.in/sites/default/files/whats_newdocument/Market-study-on-e-Commerce-in-India.pdf.
[2] Sandeep Singh, Massive Demand And Finite Supply: The Conundrum For India’s Food Delivery, Inc42, 27th December 2019, available at https://inc42.com/datalab/massive-demand-and-finite-supply-indias-food-delivery-startup-market/.
[3] Sandeep Singh, India’s Booming Cloud Kitchen Opportunity And The Challenges In A Tight Market, Inc42, 4th October 2019, available at https://inc42.com/datalab/indias-booming-cloud-kitchen-opportunity-and-the-market-challenges/.
[4] Rahul Sachitanand, Why are food aggregators leveraging the delivery-only model?, Economic Times, 6th May 2019, available at https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/why-are-food-aggregators-leveraging-the-delivery-only-model/articleshow/69178702.cms?from=mdr.
[5] Avi X., Swiggy will invest another Rs 75 crore to expand its cloud kitchens, Tech Story, 20th November 2019, available at https://techstory.in/swiggy-will-invest-another-inr-75-crore-to-expand-its-cloud-kitchens/.
[6] Salman SH, Swiggy’s cloud kitchens now service 1.5 million monthly orders, Live Mint, 20th November 2019, available at https://www.livemint.com/companies/news/swiggy-s-cloud-kitchens-now-service-1-5-million-monthly-orders-11574235229476.html
[7] Para 5.2.15.2.2 (Definitions), Consolidated FDI Policy Circular 2017, Page 37, available at https://dipp.gov.in/sites/default/files/CFPC_2017_FINAL_RELEASED_28.8.17.pdf.
[8] Ibid.
[9] Ibid.
[10] Competition Commission of India, Market Study on E-commerce in India: Key Findings and Observations, 8th January 2020, Para 86 (Chapter 4), Page 29, see https://www.cci.gov.in/sites/default/files/whats_newdocument/Market-study-on-e-Commerce-in-India.pdf.
[11] Para 5.2.15.2.4 (Other Conditions) , sub-clause (x), Consolidated FDI Policy Circular 2017, Page 38, available at https://dipp.gov.in/sites/default/files/CFPC_2017_FINAL_RELEASED_28.8.17.pdf.
[12] Neha Alawadhi, NRAI slams online food delivery aggregators for predatory market practices, Business Standard, 26th August 2019, available at https://www.business-standard.com/article/companies/nrai-slams-online-food-delivery-aggregators-for-predatory-market-practices-119082601215_1.html.
[13] Bhumika Khatri, No More Discounts: 300 Restaurants Delist from Restaurant Reservation Aggregators, Inc42, 15th August 2019, available at https://inc42.com/buzz/over-300-gurugram-restaurants-logout-from-dine-in-aggregators/.
[14] Alnoor Peermohamed and Aditi Shrivastava, Cloud kitchens on boil as DPIIT checks FDI compliance, Economic Times, 9th January 2020, available at https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/cloud-kitchens-on-boil-as-dpiit-checks-fdi-compliance/articleshow/73165259.cms?from=mdr.
