This article has been written by Dyuthi Sutram and Kanika Jain, second year students pursuing BBA LLB(H) from Symbiosis Law School, Pune.

The UberEats acquisition showdown has been in the works since December 2019, and Zomato has finally managed to consolidate the $4.2 billion food delivery market, by acquiring UberEats in an all share buyout. In exchange for 9.99% stake in Zomato, and a consideration of about $300-350 million, Zomato has managed to whittle down the number of dominant market players in the food delivery sector to just itself and Swiggy, while managing to grab a foothold in Southern India as well. Prior to the move, the market shares of the companies were dispersed with Swiggy having the average lead. Post the acquisition of UberEats, Zomato expects, as per their CEO’s interview, to gain approximately 20% new users on a monthly active basis and manage 25% extra orders, with an expectation of about 80% of UberEats’ user base to shift to Zomato. Prior to this, Swiggy maintained its position as the leading player by not only offering food deliveries from big restaurants but also small ones operating in the unorganized restaurant segment. On the other hand, Zomato focussed on increasing its repeat user rate through its subscription, Zomato Gold, and other exclusive products.

The recent UberEats acquisition is not the first one of its kind for Zomato. It has expanded its business by acquiring 13 start-ups closely linked with the food delivery business, including Runnr, which majorly operates the delivery fleet. Zomato’s fleet amounts to 150,000 which is 60% of which are fulfilled by its acquisition, Runnr. The importance of fleet delivery systems cannot be understated in the sector since a higher number of ground partners implies greater reach and speed of delivery. Speed is intrinsically crucial for delivery caps, since it attracts consumer satisfaction. The acquisition of Runnr is a typical example of vertical acquisition in the same service providing cycle, wherein, Zomato acquired the next step in the food delivery app business which is the fleet runners. Such acquisitions are usually appreciated since it provides ease in operation of business and amounts to a win-win situation for both. The same, however, cannot be stated for acquisitions of competitors, especially where market consolidation is increasingly likely. Zomato’s acquisition of UberEats will redirect Uber’s delivery partners transferring to Zomato. This move additionally, increases Zomato’s foot hold in the South, where Swiggy continues to dominate. With UberEats’ profitable operation, there was an increasing amount of cash burn for all companies since they struggled to attract customers, by offering competitive discounts, often resulting in cash burn. Now, competition has stifled to majorly 2 players, attracting interesting ramifications for the future in food delivery sector. 

Legality of the acquisition

Mergers and acquisitions between two firms by means of transfer of control, shares, assets or voting rights, are intrinsically bound by the provisions and objects of the Competition Act, 2002 which seeks to control practices which are likely to have Appreciable Adverse Effect of Competition in India. Combination is defined by Section 5 of the Act as the acquisition, merger or acquisition of an enterprise by another. The need to regulate combinations arises from the premise that the company emerging as a result of the combination may abuse the power and market share it acquires by exercising its ability to alter prices and eliminate competition in the relevant market. Horizontal mergers have the most potential to directly curtail competition in the market since the number of competing firms reduces and the emerging company exercises more effective control over the market. Combinations that are likely to have an AAEC on competition within India are void by virtue of Section 6 of the Act. The Competition Commission of India considers the following factors in determination of the effect of a combination on the relevant market: 

• The market share of the entities and the extent of barriers to entry that the combination may create;
• Existing degree of countervailing power level of combination in the market;
• Likelihood of the combination resulting in the parties to the combination being able to significantly and sustainably affect market price;
• Extent of effective competition likely to sustain in a market;
• Relative advantages or benefits of the combination to outweigh the adverse impact of the combination, if any.

Appreciable adverse effects of the impugned acquisition

The effect of a combination on the market must be assessed by analysing its effects on the primary stakeholders of the same. The impugned merger will primarily affect the competitors, the customers and the restaurants that supply food.

With the elimination of UberEats from the list of dominating entities in the food delivery sector, the customers of the company will shift to either of the two dominating entities. This would result in the market share of Swiggy and Zomato to increase even more and create and create a situation of duopoly. Moreover, the companies will be in a position to affect the price and non-price factors in the market. With increase in the market share and revenues thereto, the two companies will enjoy economies of scale and reduce cost of sustenance and growth. This duopoly creates huge barriers for entry of new companies in the food delivery sector owing to the huge investment costs since to break consumer loyalty, the company must offer discounts and other benefits to customers. Moreover, owing to the battle of availability of delivery partners, the new company need to be in a position to provide competitive perks to these partners. Since Swiggy and Zomato will be in a position to offer better services at low cost to their customers and better perks to delivery partners, owing to the huge revenue from dominating market share, it is near to impossible for any new entrant in the market to sustain.

The effect of combinations on the customers is a well established factor to be considered while assessing the legality of the same since one of the objects of Competition Act is to protect the interest of the customers and ensure that they are not exploited by an entity or a group of entities abusing its dominance in the market. Fierce competition in the market is beneficial to the consumer since the competing firms try to offer as much price and non-price offers as possible and the situation is close to equilibrium since the firms will earn normal profit. The emergence of this duopoly will confer greater control of market price on the two companies which may lead to a deduction in the discounts and offers enjoyed by consumers.

In addition to the consumers, the combination will also have an adverse impact on the restaurants that supply food. Since delivery apps account for a crucial segment of potential orders, restaurants are not capable of disengaging with these delivery apps. Consolidation of this market therefore, will further reduce the little bargaining power held by restaurants, as it leaves them no option other than Zomato and Swiggy. Restaurant owners have been economically exploited by food delivery applications in the past decade since they are pushed to offer maximum permissible discounts and other offers. For instance, the Zomato Gold offers on dine-in in selected restaurants led to a huge decline in the revenue of the restaurants. Owing to the deteriorating situation and declining revenue, restaurants initiated and executed a Zomato Gold Logout Campaign. By emergence of this duopoly, restaurants will be further exploited since the competition for exclusivity and terms of profit sharing and commission between food delivery applications will further reduce. Therefore, the combination is anticompetitive since it would result in increased market share of the two companies which provides them with an opportunity for abuse of dominance.

The only defence available for combinations likely to cause adverse effects in the market is that its benefits to other stakeholders outweigh the adverse impact on the competition in the relevant market. The present merger takes UberEats out of its loss making position and gives Zomato and Swiggy a larger market share but the determination of the weighs cannot be considered from the perspective of the aggregators alone. With increasing market dominance, the two entities would have the ability to subjugate price determination and rights of other stakeholders.

Ubereats takes all

An analysis of the alternatives to this acquisition provide grounds to establish how this decision ends up giving Zomato the ability to control the food delivery market, atleast for a short while.

Upon examination of the options available with both the parties, this decision, as per most market analysts seems to have turned the tables squarely towards UberEats. With this decision, Uber has acquired a 10% stake in one of the leading food delivery markets in India, a market which sees an expansion rate of upto 150%. Additionally, UberEats was able to cut its losses. According to the Ministry of Corporate Affairs Filings, UberEats was expected to post a loss of INR 762.5 Cr ($107.6 Mn) between August 2019 and December 2019. UberEats is the most benefited player from this acquisition since it has managed to both have its cake and eat it too. It still maintains a presence in the Food delivery space, via Zomato, but does not continue to suffer the same amount of losses or cash burn that it used to face, thus allowing the entire entity to grow further in other directions.

Zomato has presently the transitory opportunity to capitalize on its customer acquisition, and it’s jumped at the chance. By offering free subscription to Zomato Gold for three months, it has broadened its net in order to entice customers to follow the Zomato version, rather than jump ship into Swiggy. However, the real gain for Zomato starts post 3 months. An active discount war between both Swiggy and Zomato is unlikely to continue, as with one significantly less competitor, the market remains consolidated with only the two players. Hence it becomes easier for both companies to sell restaurants on their promises, as a huge chunk of restaurant revenue can be made from deliveries, and with only two access points, their importance becomes steeper- giving these delivery apps more bargaining power. 

Zomato, in the end essentially paid for not only it’s growth, but Swiggy’s growth as well. However, in order to consolidate a market like this one, someone had to bite the bullet. An alternative to an all-share buyout would have been for Zomato to continue to operate UberEats through its own interface, while controlling the decision making. However, that too would not have been an economical decision for a multitude of reasons:

It would have put Uber at a strategic position for setting price control, with the trademarks, goodwill and patents of the app being bought by Zomato. A price significantly higher than the amount bargained for would have been the starting point. Further, Uber would have had a higher degree of control in the business as well, while not offering more than the current share of profit. Customers would have to be sold double the amount of discounts both on Zomato and the Uber Eats interface– thus resulting in this conglomerate. Therefore, this option was not really sustainable in the long run.

Therefore, this acquisition, while yielding higher control to the delivery apps, bears a striking resemblance to the trajectory of ride hailing apps as well. Ride Hailing apps have also been through a similar transition. The similar precedent being- Ola acquired TaxiForSure. All while slowly deteriorating the control the original ride hailing vehicles– the individual taxi/ auto Taxi unions/ Auto Unions had in the first place– by forcing them to adapt to the standards set by these applications. It wouldn’t be so surprising to see the same happen with this food delivery market. In fact, this trajectory is already in motion.

In light of the above discussed effects of the impugned combination on the competition in the food delivery sector, the acquisition of UberEats by Zomato must be declared void by virtue of Section 6 of the Competition Act. The adverse effects of the combination can be significantly observed by its impacts on all its stakeholder including the competitors in the market, the consumers, the delivery partners and the restaurants. With the emergence of duopoly and dominance by two entities in the relevant market, the choice and bargaining power available to the other stakeholders has significantly reduced. Therefore, it is the prerogative of the Competition Commission of India to protect the interests of these stakeholders (and the interest of our taste palates as well) and uphold the principles of anti-trust law by declaring this combination void.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.