Whalesbook
The Restaurant Bind: Platforms Drive Revenue Amidst Commission Rage
A recent joint study by the National Council of Applied Economic Research (NCAER) and Prosus sheds light on the complex relationship between Indian restaurants and the food delivery platforms they increasingly rely upon. While these digital marketplaces are crucial for revenue and customer reach, rising commission rates are creating significant friction within the industry. Restaurants find themselves caught in a bind, dependent on platforms for survival yet struggling with escalating costs.
The Core Issue: Soaring Commissions and Frustration
The most contentious point identified in the report is the sharp increase in per-order commissions charged by food delivery platforms. Data shows these commissions have surged from an average of 9.6% in 2019 to a staggering 24.6% by 2023. This escalating cost is a major concern for restaurateurs, with approximately 30% explicitly calling for reductions, alongside demands for greater transparency and flexibility in commission structures.
Financial Implications and Dependence
Despite these grievances, restaurants show a strong reluctance to abandon the platforms. Only 35.4% of those surveyed indicated they would consider ceasing operations with delivery platforms. Reasons cited for potential exit include high commissions, poor customer service, and a perceived lack of sufficient orders or customer acquisition. This hesitancy underscores a growing dependence, with the average share of restaurant revenue generated by these platforms climbing from 22.1% to 28.8%. For small restaurants, this reliance is even more pronounced, accounting for about one-third of their total revenue in 2023.
Navigating Cost Structures and Negotiation
Understanding the various charges levied by platforms remains a challenge for many. The report indicates that only 55% of restaurants felt platforms adequately explained their payment computation methods. Awareness of onboarding fees, which averaged ₹1,841.8, was also low, with a significant majority unable to clarify their fee structures, suggesting a lack of clarity on cost components like delivery, discovery, and order management. Negotiation power appears to differ, with medium and large restaurants possessing more leverage than their smaller counterparts.
Perceptions of Fairness and Benefits
Despite the commission concerns, perceptions of platform fairness are mixed. Nearly half of the restaurants found grievance redressal mechanisms helpful. The tangible benefits of platform integration were also acknowledged. Around 67% of restaurants highlighted the advantage of being part of a larger network, enhancing customer-restaurant matching. Increased customer reach, advertising support, and operational expansion were also cited as key gains. Platforms have also been instrumental in extending business hours for many establishments, with 67.7% reporting that peak platform delivery demand differs from dine-in demand, thus expanding overall operational periods.
Financial Performance: A Double-Edged Sword
Financially, restaurants integrated with delivery platforms reported higher net profits compared to those operating independently. However, their net profit margins were observed to be lower. This indicates that while platforms contribute to overall profitability, the increased operational costs associated with them can compress margins.
Future Outlook
The findings suggest that while commission rates are under scrutiny, food delivery platforms are deeply embedded in the operational fabric of India's restaurant industry. For the foreseeable future, most restaurants are expected to focus on negotiation and adaptation rather than outright departure.
Impact
This situation could lead to increased operational costs for restaurants, potentially impacting menu prices for consumers. It also highlights a dynamic where digital platforms hold significant influence over traditional businesses, necessitating ongoing negotiation and potential regulatory attention to ensure fair practices. The continued reliance on these platforms underscores their essential role in modern food service delivery across India.
Impact Rating: 7/10
Difficult Terms Explained
- Commission: A fee paid by a restaurant to a food delivery platform for each order processed through the platform.
- Net Profit: The profit remaining after all expenses, including taxes and interest, have been deducted from total revenue.
- Net Profit Margin: A profitability ratio that measures how much profit is generated as a percentage of revenue.
- Onboarding Fee: A charge levied by a platform for the initial setup and integration of a business onto its service.
- Tier 3 Cities: Smaller urban areas in India, typically characterized by a smaller population and less developed infrastructure compared to Tier 1 and Tier 2 cities.
- Dine-in: The act of eating a meal at a restaurant establishment, as opposed to taking it away or having it delivered.
- Cannibalise: In a business context, when a new product or service reduces the sales of an existing product or service from the same company.