When Restau­rants Run Out of Steam

The Economic Times - - Saturday Feature -

Glob­ally, the fail­ure rate of a res­tau­rant is es­ti­mated at 90% within the first year—In­dia has an ad­di­tional set of chal­lenges. and re­port

Evenings in Con­naught Place are promis­ing: Glitzy rooftop restau­rants at New Delhi’s colo­nial-era busi­ness com­plex, where rentals match those in Mid­town Man­hat­tan or Lon­don’s West End, vis­ually broad­cast the city’s cos­mopoli­tan iden­tity, with colour­ful and re­volv­ing neon lights telling peo­ple that the cui­sine here is as di­verse as it gets.

Morn­ings, by con­trast, are strik­ingly busi­nesslike at the com­mer­cial nerve-cen­tre that charges about $170 a square foot in an­nual rents: Along the vast cir­cu­lar plaza named af­ter the First Duke of Con­naught and Strat­hearn, the neon lights are switched off, and some never come back on as the sun sets. Like many be­fore them, these restau­rants join the list of moth­balled dreams.

The lat­est to ac­knowl­edge the harsh re­al­ity of an in­creas­ingly crowded foods in­dus­try was a Con­naught Place gas­tropub out­let backed by some of the big­gest names in In­dia’s res­tau­rant busi­ness. Many en­trepreneurs across ur­ban cen­tres are drawn to the glam­our and glitz of fine­din­ing at the peak of busi­ness cy­cles: They soon pect to break even be­fore two years. In­clud­ing a year of rent, a good res­tau­rant could cost any­where up­ward of ₹ 1 crore, while high-end restau­rants need about ₹ 2-2.5 crore per out­let. “When they fac­tor in the in­vest­ments, they never fac­tor in the ges­ta­tion pe­riod. So that’s one of the pri­mary rea­sons restau­rants run out of steam. You have to with­stand other is­sues like salary etc. for a pe­riod of six months so if you do not have that kind of back­ing, there is a 90% chance that you will go bust,” said food con­sul­tant and restau­ra­teur Marut Sikka. Ac­cord­ing to him, a res­tau­rant do­ing rea­son­ably well should make about 20% mar­gins, but those en­ter­ing the busi­ness over­es­ti­mate it at 45%.

Con­curred Zo­rawar Kalra, founder of Ever­stone Cap­i­tal-backed Mas­sive Restau­rants, which runs Farzi Cafe and the crit­i­cally ac­claimed Masala Li­brary. “This is a high-risk pro­fes­sion. Restau­rants that do well will al­ways be the ones that aren’t un­der cap­i­talised. The pro­fes­sion is also prone to cycli­cal de­mand and most restau­ra­teurs don’t re­alise that. A good res­tau­rant only makes a 20% profit and most peo­ple get into it think­ing it’s a glam­orous pro­fes­sion to be in.”

To be sure, glob­ally, the fail­ure rate of a res­tau­rant is es­ti­mated at 90% within the first year: And only 50% sur­vive un­til the sec­ond year. In­dia, how­ever, has an ad­di­tional set of chal­lenges con­tribut­ing to a tough en­vi­ron­ment for restau­rants: Tax­a­tion, over­sup­ply, the Supreme Court ban on the sale of liquor along high­ways, con­sumer dis­cre­tion on ser­vice charges, and the cur­rency swap have added to the stress the busi­ness al­ready faces.

In its an­nual food ser­vices re­port for 2016, NRAI had es­ti­mated that the res­tau­rant sec­tor would con­trib­ute ₹ 22,400 crore in taxes and cre­ate 5.8 mil­lion di­rect jobs in 2016, but the or­ga­nized sec­tor ac­counts for only 33% of the mar­ket.

The in­dus­try also bears the brunt of chal­lenges like poor in­fra­struc­ture and high costs. The col­lapse of a por­tion of a Con­naught Place build­ing re­cently led to New Delhi Mu­nic­i­pal Cor­po­ra­tion ban­ning rooftop meals at 21 restau­rants that in­clude Ware­house Café, Kitchen Bar, Lord of the Drinks, Open House Café, Café OMG, and Un­plugged Court­yard. Ac­cord­ing to Samir Kuck­reja, trustee at NRAI and the for­mer MD of Nir­ula’s, Con­naught Place it­self has 177 restau­rants, and the sit­u­a­tion is some­what sim­i­lar at Mum­bai’s BKC and Link­ing Road. “There can only be those many bars in the same area with­out any di f fer­en­tia­tors. Ben­galuru too, is quite crowded in cer­tain ar­eas but in cities like Mum­bai and Delhi, the prob­lem is quite acute as they have over­es­ti­mated the de­mand,” he added.

With com­pe­ti­tion in­ten­si­fy­ing, res­tau­rant own­ers are find­ing it hard to dis­tin­guish them­selves from the rest. Rak­shay Dhari­wal, direc­tor at Pass Code Hos­pi­tal­ity that runs Pass Code Only (PCO) bar and A Ta Mai­son, said he can name sev­eral “funded” restau­rat­uers who be­lieve in gim­micks rather than tasty food and a good am­bi­ence.

“What has caused the surge in out­lets shut­ting down is the surge in out­lets that have been crop­ping up. Peo­ple will go to ex­pe­ri­ence a gim­mick once, but af­ter that, the ex­pe­ri­ence gets old and that out­let would be­come a ‘strug­gling’ out­let,” he said. The gov­ern­ment’s move to swap the cur­rency on Novem­ber 8 and overnight with­draw bills of 500 and 1000 de­nom­i­na­tions has also hit the in­dus­try. Food out­lets across cat­e­gories and for­mats re­ported up to 40% drop in sales im­me­di­ately af­ter the an­nounce­ment. Sources say about 50 restau­rants across the BKC Vile Parle stretch alone in Mum­bai have shut down since Novem­ber. In­dus­try ex­perts ex­pect many more clo­sures in the next 6-12 months.

Fund flow to the in­dus­try has also dried up af­ter the gov­ern­ment’s move. “Peo­ple thought that it was a sim­ple busi­ness to get into and were directing sur­plus funds pre-de­mon­eti­sa­tion. Per­haps there would not be as many restau­rants mush­room­ing for the next few years un­less a sim­i­lar f low of money makes its way into the sys­tem,” said Sikka. Sau­rabh Khanijo, man­ag­ing direc­tor of the Kylin chain of restau­rants, said the busi­ness can never work if peo­ple only choose to be in­vestors. Kylin had wit­nessed a 40% drop in sales in their QSR for­mat in the week­end fol­low­ing the gov­ern­ment’s cur­rency-swap move. “From the out­side it looks easy, but once you get in, you re­alise how tough it is. There are many is­sues plagu­ing the in­dus­try and if you treat it as a side busi­ness, it will never work.”

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