When Restaurants Run Out of Steam
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.”