(Saturday Deep Dive) - Are Swiggy and Zomato killing "real" restaurants?

Swiggy and Zomato have revolutionized how Indians order food, providing consumers with unprecedented ease and variety at their fingertips. But for the restaurants on the other side of the transaction, the story is less about growth and more about survival.

The promise of increased visibility and sales comes at a steep price—both financially and in terms of sustainability. As commissions, ad costs, and discounts continue to erode margins, restaurants find themselves trapped in a cycle that’s difficult to escape.

In this article, we’ll explore the hidden financial burdens restaurants face, the rise of cloud kitchens, and the data transparency issues that further complicate their struggle to stay afloat. All this while Swiggy and Zomato are under increasing pressure to improve their own margins.

Enjoy!

The Indian food delivery landscape is dominated by two major platforms: Swiggy and Zomato. Together, they control almost the entire app-based food delivery market in the country. On the surface, these platforms seem like a golden opportunity for restaurants, promising increased sales and wider visibility. But the reality behind the scenes tells a different story—one where profitability often takes a severe hit.

The Hidden Costs of Doing Business with Swiggy and Zomato

For restaurants, the partnership with these platforms brings with it a significant financial burden. The main culprit? The hefty commission fees, which range from 22% to 24% of each order’s value. For every ₹100 a restaurant makes in sales, almost a quarter goes to the delivery platform, leaving little room for profit. But it doesn’t stop there.

To stay competitive, restaurants are also expected to invest in Cost-Per-Click (CPC) promotions, which help boost their ranking on the app and increase visibility. Without this investment, a restaurant’s listing may fall to the bottom, far from the eyes of potential customers. Additionally, there are the ad campaigns offered by the platforms. These include both simple banner ads and more expensive video campaigns, further eating into restaurant margins. And then there are the discounts—fully borne by the restaurants, despite these being the primary reason many customers order in the first place.

Together, these costs paint a bleak picture for restaurants. With commissions taking up 22-24% of revenue, CPC fees adding another 8%, ad campaigns siphoning off 5%, and discounts chipping in another 10%, nearly 45% of a restaurant’s sales vanish before it can even cover its fixed and variable costs. For many, the remaining 55% simply isn’t enough to run a sustainable business.

The Price Inflation Dilemma

To survive, many restaurants inflate the prices of their dishes on Swiggy and Zomato compared to their in-house menu. This is an attempt to offset the high commissions and other platform costs. However, savvy customers quickly notice these inflated prices, often calling out restaurants on social media, damaging their reputation in the process. While some restaurants also increase their packaging fees to recoup losses, this tactic only works to a limited extent.

For smaller restaurants struggling to stay afloat, some have resorted to cutting corners on food quality. This has led to a rise in food safety inspections and scandals, with several cases of substandard practices exposed by authorities.

The Dark Side of Paid Reviews

Another growing problem in the online food delivery ecosystem is the prevalence of paid reviews. In a bid to improve their ratings, almost 70% of restaurants (excluding big brands) pay influencers or individuals to leave positive reviews. These paid reviews typically cost between ₹50 and ₹200, depending on the influencer's reach. While these reviews may boost visibility and ratings temporarily, they undermine trust in the platform and raise ethical concerns about the legitimacy of customer feedback.

The Cloud Kitchen Experiment

To minimize costs and maximize profits, some restaurants have pivoted to operating cloud kitchens. These delivery-only kitchens are set up in remote locations to reduce overheads, focusing solely on fulfilling online orders. However, the cloud kitchen model hasn’t been as successful as expected. Many struggled to maintain quality and taste, leading to customer dissatisfaction and, ultimately, failure.

More recently, a new trend has emerged—shared cloud kitchens, where five to six different kitchen brands operate from a single space, sharing fixed costs. These kitchens often use multiple brand names to increase their market reach and appeal to different customer segments, providing a glimmer of hope for profitability. In what is clearly a conflict with the restaurants active on the platforms, some of these cloud kitchens can be owned and operated by the platforms themselves.

A renowned restaurant in Alpha-1 sector of Greater Noida saw 4 cloud kitchens opened by Zomato next to his outlet. The owner asked for his and his restaurant’s names not to be mentioned because of potential reprisals by the platforms.

“Zomato used our data to understand food requirements in this area, and opened 4 cloud kitchens last month. My daily deliveries through Zomato halved, and I couldn’t do anything about it,” he said.

Luck favored him, and Zomato closed those 4 cloud kitchens after 14 months.

Data Opaqueness: A One-Sided Game

One of the most significant challenges for restaurants partnering with these platforms is the lack of transparency. Zomato, in particular, has been criticized for being opaque in sharing customer metrics. Restaurants often don’t have access to crucial data like the number of page visitors, menu-to-cart conversion rates, or cart-to-order conversion metrics. Without these insights, restaurants are left in the dark, unable to make data-driven decisions to improve their operations and marketing efforts.

The platforms also withhold customer information, fearing that restaurants might bypass them to serve customers directly. Zomato, which once operated its own cloud kitchen business, has previously faced criticism for allegedly routing the majority of orders to its in-house kitchens. However, this venture was short-lived, closing down after just two years due to unsustainable operations.

An owner of famous Biryani outlet in Noida said, “Zomato doesn’t share any data with us. I can understand this for customer data, but they don’t share conversion data such as menu-to-cart, cart-to-order, etc. They just call us to run discount campaigns, but never share the campaign data. And therefore its impossible to create any online delivery strategy for my outlet.”

Traditional vs. New-Age Restaurants: A Battle for Survival

Established restaurants, with years of experience, have an advantage in this struggle. They typically control their costs more effectively, ensuring that food expenses stay under 35% of their total sales. Online sales, meanwhile, are kept below 30% of their revenue mix, ensuring a healthy balance. These traditional restaurants rely less on food delivery platforms, maintaining profitability through a loyal customer base.

In contrast, newer restaurants and cloud kitchens that depend heavily on Zomato and Swiggy find themselves in a vicious cycle of underpricing to stay competitive. This pricing pressure has taken a toll on traditional restaurants, which have had to face increased competition from low-cost players trying to capture the same customer base. The prices of their dishes are different when customer walks in, vs. when customer orders through Zomato/ Swiggy.

The Future: Will Balance Ever Be Achieved?

There’s no denying that Swiggy and Zomato have revolutionized the way people in India order food. With rising disposable incomes and a culture increasingly oriented toward convenience, these platforms have seen exponential growth. But the big question remains—is this sustainable in the long run?

The only truly satisfied stakeholder in this ecosystem seems to be the customer, who benefits from deep discounts and convenient delivery. The platforms themselves, particularly Zomato, have recently turned profitable, with increased platform fees and delivery charges contributing to their bottom line. Restaurants, however, remain in a precarious position, struggling to balance growing sales with shrinking margins.

Will the industry reach an equilibrium where all stakeholders—platforms, restaurants, and customers—can thrive together? Only time will tell. For now, Zomato and Swiggy and necessary evils for new restaurants and the food delivery sector in India remains a double-edged sword.