National Restaurant association complains to CCI against Zomato, Swiggy

NATIONAL RESTAURANT ASSOCIATION OF INDIA Vs. ZOMATO LIMITED & OTHERS
CASE NO. 16 OF 2021
COMPETITION COMMISSION OF INDIA.
DATED: 04/04/2022

THE HON'BLE COMPETITION COMMISSION OF INDIA (CCI): held that, in the case of both Swiggy and Zomato, prima facie there existed a conflict-of-interest situation, warranting detailed scrutiny into its impact on the overall competition between the Restaurant Partners vis-à-vis the private brands/entities which the platforms may be incentivised to favour.

BRIEF FACTS

1. An information had been filed under Section 19(1)(a) of the Competition Act, 2002 by National Restaurant Association of India (Informant/NRAI) against Zomato and Swiggy (OPs) alleging that the practices of Zomato and Swiggy were in violation of Section 3(4) read with Section 3(1) of the Act.

2. NRAI submitted that the Operational Platforms provide restaurant partners (RPs) a listing service and allow consumers to interact with them through their platforms.

3. Further, NRAI stated that it is only because of the network effects of the OPs that, despite their anti-competitive practices, RPs are still dependent on the platforms to earn revenues, which shows the absence of countervailing buyer power with the RPs.

4. Bundling of Food Delivery

It was alleged that the stated delivery services are not optional for the RPs who wish to avail listing service and they are forced to take the delivery service of the platform.Adding to the above, NRAI stated that the bundling of delivery services is an unfair imposition.

It is violative of Section 19(3) of the CCI Act.

SECTION 19(3) OF THE CCI ACT,2002

Inquiry into certain agreements and dominant position of enterprise.—

(3) The Commission shall, while determining whether an agreement has an appreciable adverse effect on competition under section 3, have due regard to all or any of the following factors, namely:—

(a) creation of barriers to new entrants in the market.
(b) driving existing competitors out of the market.
(c) foreclosure of competition by hindering entry into the market.
(d) accrual of benefits to consumers.
(e) improvements in production or distribution of goods or provision of services.
(f) promotion of technical, scientific, and economic development by means of production or distribution of goods or provision of services.

5. Data Masking

RPs receive no data or information about the end-consumers to whom the food is delivered, which is a practice of OPs.
Due to the above-stated, RPs are not aware of where the foods are being delivered, to whom and in how much time, which creates a lack of transparency.

6. Vertical Integration

NRAI has further alleged that 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 in the platform's role as an intermediary on one hand and as a participant on the other hand.

7. One-Sided Contracts

It was alleged that Zomato and Swiggy enter into one-sided contracts with RPs owing to their superior bargaining power.
Further, NRAI has alleged that Zomato and Swiggy often compel the 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. This creates/strengthens barriers for a new entrant into the market which would find itself deprived of essential and interdependent inputs like RPs and customers which would be locked-in to the incumbents' platforms.

Infact, price parity terms have also been imposed on the RPs through their respective contracts.

NRAI has also alleged that the commissions which are charged by the OPs from RPs are unviable and are to the tune of 20% to 30%, which are extremely exorbitant for the RPs.

In view of the above allegations, NRAI sought an inquiry under the Act against the OPs.

ANALYSIS AND DECISION

8. The Commission states that it emerged from the claims made by Zomato and Swiggy that bundling delivery with ordering enables them to control the time taken for delivery and qualitatively standardise such delivery for the end consumer.

9. In Commission's opinion, bundling did not seem to raise any competition concern as such. Even otherwise, the Informant was not able to substantiate its claim that bundling of delivery with ordering, in itself, led to cause Appreciable Adverse Effect on Competition (AAEC) either between restaurants or between hyperlocal delivery service providers.

10. Moving further, the Commission was of the view that prima facie a conflict-of-interest situation arose in the instant case, both with regard to Swiggy and Zomato, because of the presence of commercial interest in the downstream market, which may come in the way of them acting as neutral platforms.

11. The commission added that the above-said required detailed examination and further, remarked that,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 like a potential contravention of Section 3(4) read with Section 3(1) of the Act.

SECTION 3(1) of the CCI Act,2002- Anti-competitive agreements

(1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.

SECTION 3(4)-Any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services, including

(a) tie-in arrangement.
(b) exclusive supply agreement.
(c) exclusive distribution agreement.
(d) refusal to deal.
(e) resale price maintenance, shall be an agreement in contravention of sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India.

Explanation.—For the purposes of this sub-section,—

(a) "tie-in arrangements" includes any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods.

(b) "exclusive supply agreement" includes any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person.

(c) "exclusive distribution agreement" includes any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of the goods.

(d) "refusal to deal" includes any agreement which restricts, or is likely to restrict, by any method the persons or classes of persons to whom goods are sold or from whom goods are bought.

(e) "resale price maintenance" includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.

12. Both Swiggy and Zomato operate as major intermediary platforms in the food delivery space, underscoring their market power and ability to adversely as well as appreciably affect the level playing field.

13. Commission also observed that a holistic examination is required to ascertain whether the intermediaries prevent competition on merits, creating an ecosystem likely to cause an appreciable adverse effect on competition.

14. Further, the price parity clause may discourage the platforms from competing on a commission basis as RPs need to maintain similar prices on all platforms and provide similar prices to the customers, regardless of the commission rates paid to the platform. Hence, the said arrangements can cause AAEC on the market, therefore investigation is made out.

15. In Commission's opinion, the allegations pertaining to delayed payment cycle, imposition of one-sided clauses in the agreement, charging of exorbitant commission etc., they did not seem to influence competition.

16. Concluding the matter, Commission held that prima facie with respect to the conduct of Zomato and Swiggy, investigation by the DG to determine whether the conduct of the OPs have resulted in contravention of the provisions of Section 3(1) of the Act read with Section 3(4) was required.

17. The Directorate General (DG) is, thus directed to carry out a detailed investigation, in terms of Section 26(1) of the Act,2002 , and to submit a report to the commission within 60 days from the date of receipt of Order.

SECTION 19 IN THE COMPETITION ACT, 2002

Inquiry into certain agreements and dominant position of enterprise.

(1) The Commission may inquire into any alleged contravention of the provisions contained in sub-section (1) of section 3 or sub-section (1) of section 4 either on its own motion or on—

(a) receipt of a complaint, accompanied by such fee as may be determined by regulations, from any person, consumer or their association or trade association; or

(b) a reference made to it by the Central Government or a State Government or a statutory authority.

(2) Without prejudice to the provisions contained in sub-section (1), the powers and functions of the Commission shall include the powers and functions specified in sub-sections (3) to (7).

(3) The Commission shall, while determining whether an agreement has an appreciable adverse effect on competition under section 3, have due regard to all or any of the following factors, namely:—

(a) creation of barriers to new entrants in the market.
(b) driving existing competitors out of the market.
(c) foreclosure of competition by hindering entry into the market.
(d) accrual of benefits to consumers.
(e) improvements in production or distribution of goods or provision of services.
(f) promotion of technical, scientific, and economic development by means of production or distribution of goods or provision of services.

(4) The Commission shall, while inquiring whether an enterprise enjoys a dominant position or not under section 4, have due regard to all or any of the following factors, namely:—

(a) market share of the enterprise.
(b) size and resources of the enterprise.
(c) size and importance of the competitors.
(d) economic power of the enterprise including commercial advantages over competitors.
(e) vertical integration of the enterprises or sale or service network of such enterprises.
(f) dependence of consumers on the enterprise.
(g) monopoly or dominant position whether acquired as a result of any statute or by virtue of being a government company or a public sector undertaking or otherwise.
(h) entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers.
(i) countervailing buying power.
(j) market structure and size of market.
(k) social obligations and social costs.
(l) relative advantage, by way of the contribution to the economic development, by the enterprise enjoying a dominant position having or likely to have appreciable adverse effect on competition.
(m) any other factor which the Commission may consider relevant for the inquiry.

(5) For determining whether a market constitutes a "relevant market" for the purposes of this Act, the Commission shall have due regard to the "relevant geographic market" and "relevant product market".

(6) The Commission shall, while determining the "relevant geographic market", have due regard to all or any of the following factors, namely:—

(a) regulatory trade barriers.
(b) local specification requirements.
(c) national procurement policies.
(d) adequate distribution facilities.
(e) transport costs.
(f) language.
(g) consumer preferences.
(h) need for secure or regular supplies or rapid after-sales services.

(7) The Commission shall, while determining the "relevant product market", have due regard to all or any of the following factors, namely:—

(a) physical characteristics or end-use of goods.
(b) price of goods or service.
(c) consumer preferences.
(d) exclusion of in-house production.
(e) existence of specialised producers.
(f) classification of industrial products

SECTION 26(1) OF CCI Act,2002

(1) On receipt of a complaint or a reference from the Central Government or a State Government or a statutory authority or on its own knowledge or information, under Section 19, if the Commission is of the opinion that there exists a prima facie case, it shall direct the Director General to cause an investigation to be made into the matter.

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