Why do restaurants list on Zomato Gold? FOMO

Brand loyalty has long been the Holy Grail for consumer-facing companies across the world. Look at Amazon Prime. From providing free shipping to Prime members for an annual fee in 2005, subscription benefits today include the streaming of music and television content. Last year, it crossed the 100 million paid subscribers to mark globally.

But consumer behavior is changing rapidly.

Differentiating the providers

“Nearly 70% of Indian consumers surveyed perceived little differentiation between providers, 50% were not satisfied, and 25% were awaiting a competition trigger to switch,” wrote Vineet Ahuja, managing director (partner) – Accenture Strategy, in a co-authored piece for The Hindu Business Line.

Here’s the thing though. In the mass market, discounts equal loyalty. And when that is the case, customers don’t take time to switch brands. Or loyalties. Like a restaurateur said, “with great discounts comes great vulnerability”.

However, platforms like Zomato Gold may continue offering cheaper deals to make new customers because that is what will drive their revenues. With investor support, they can afford some cash burn, but not all restaurants can. And yet, the entire cost liability of the deals lies with the partner restaurants. Ouch?

Zomato is a bit like that rich kid in class everyone likes hanging with, except doing so burns a hole in their pockets.

Utilizing the full capacity

It’s that FOMO. Mostly. And also to ensure full capacity utilization. Gold was launched as an “exclusive dine out and social drinking membership program” in November 2017. The company reached out to restaurants for partnerships with the pitch to a) get “premium” customers b) new customers, and c) fill up empty seats beyond peak hours in most restaurants. In return, partner restaurants were to offer either a 1+1 offer on food or a 2+2 offer on drinks.

“It made sense to us. On two counts—Zomato had the data to pull something like this. Plus, premium customers are not your regular discount hunters. They come to a restaurant for the experience,” says Thomas Fenn, partner at Delhi-based restaurant Mahabelly. “The opportunity to raise more revenue than what you are offering as a discount is much more when it comes to premium customers. This is also why the concept of happy hours works.”

When it launched in November 2017, 40,000 customers signed up. In three short days. Seats were filled, surely money would follow, right? But here was the catch. Everyone was a Gold member and they could all unlock membership benefits at the same time at the same table. Footfall increased for restaurants, but did revenue?

Zomato says Gold partnerships are driving 25-30% of partner restaurants’ business and the number is bound to only increase over the months. But the restaurants, however, don’t see it.

What is the average expenditure?

“They (Zomato) might say it has increased footfalls but the truth is that it hurts businesses mostly. Because average expenditure per customer, or the unit price, is coming down drastically. And so there was a pushback from the industry as well,” says Fenn.

On average, about 30-35% of a restaurant’s total input cost is on food, explains Fenn. Then there are other expenditures such as rent, staff salaries, electricity, and other infrastructure costs, taxes, and miscellaneous overheads. If you run a really tight ship, your margins lie somewhere around 15%. “Now, on every incremental order under the Gold program, you’re cutting your margins really thin and there are even chances of running into losses,” says Fenn.

But then again, if they are losing money in the Gold partnership, why are restaurants signing up for it?

“Because otherwise, they lose out on business anyway since there would be no visibility,” says Singh. “Because today’s consumer is so discount-oriented, they look for dining options which offer discounts. They have stopped visiting restaurants without Zomato Gold membership.”

Restaurants are thus caught between Zomato’s “devil” and getting lost in the deep blue sea of no visibility. Sign up with Zomato Gold or don’t, Zomato doesn’t lose much. Restaurants though.