Dubai F&B businesses stew over rental issues
WITH COSTS SOARING, IT IS TURNING INTO MORE OF A HIT-AND-MISS ENTERPRISE AS RENTS ARE A BIG CHUNK OF OPERATIONAL EXPENSES
The heat is becoming intense for the restaurant trade in Dubai, and it’s not from what is being cooked in the kitchen.
For a second straight year, the local food and beverages (F&B) sector and its many players have seen their growth being cut and sliced. And for some F&B businesses, it has meant stepping out of the kitchens for good.
Across the city, some properties have seen their F&B ground floor tenants move out as they lower the shutters, because of a lack of sustained cash flow. But, it must be said, these same properties do manage to get in new tenants — and most likely new F&B ventures hoping to try their potluck.
“It’s turning into a hitand-miss industry for most entrepreneurs,” said Samer Choucair, vice-president of CE-Creates, the business incubation arm of Sharjah-based Crescent Enterprises and which recently launched an upscale cafe network, Kava & Chai. “It seems to be attracting anyone who thinks they can make a good product and make a business out of selling it.
“If the location chosen is brand new or still emerging as an attraction, a new player has to hit its targets within the first 12 months. If the restaurant is at an already up-and-running location, you need to do so within the first three to six months itself,” Choucair said.
This is where things get difficult in the Dubai F&B space. Industry sources say that, typically, rents represent 8-10 per cent of an outlet’s running costs. But in Dubai, for some F&B businesses, it could shoot all the way to the 20-25 per cent range. This is as true for established names as for new entrants.
Falling rent-to-sales
For a stand-alone F&B venture, these are the operational costs that could soon turn the business sour. In an ideal world, an operator should be able to start recording profits from an ■ operational perspective from the sixth month or so. Because with most such start-ups, it is unlikely that the promoters can call in unlimited funds as working capital beyond the initial four to six months.
The issue of rents — and landlords unwilling to see reason — is a concern for global F&B brands to pick on as it is for domestic players.
“Occupancy costs are commercially unreasonable in some cases,” said George Kunnappally, managing director at the UAE operations of Nando’s, which offers its signature periperi chicken on the menu, ■ owning and operating 22 locations in the UAE.
“Landlords who charge increasing base rentals year-onyear and have turnover rent and net effective rent to benefit them when the tenant does exceptionally well are not very supportive in reducing these when the same business starts to generate lower revenues, for reasons beyond the tenant’s control,” said Kunnappally.
“Any rent-to-sales ratio above 15 per cent is unsustainable for our sector. In many cases, even above 12 per cent becomes very dicey. Shopping centre managements by and large refuse to accept the ground reality and tend to blame tenants for reducing footfall and the quality of the footfall in most malls.
“The irony is that our bestperforming Nando’s restaurants are not located in any of the major malls. We strongly hope that landlords will take a cue from the government and regulatory For CE-Creates, its venture into the F&B business comes as part of a wider strategy. Its parent company, Crescent Enterprises, is an established player in logistics and energy. “We wanted to set up something in consumer-facing, sustainable businesses,” said Samer Choucair. “And why F&B specifically? We have a disproportionately low number of home-grown brands. CE-Creates is a platform to build regional brands that can go internationally.”
Even F&B suppliers are dropping out
During the best phase for the local F&B sector, between 2013 and 2016, there were as many new speciality food suppliers being launched as the number of new restaurants. “It was a particularly fertile period for anything to do with organic food supply,” said Sailesh Israni of Sunn and Sand Group, which operates the Qiso cafe at Silicon Oasis. “But their numbers are coming down — it’s showing up in our supplier lists. It could be that many of their clients may have exited the F&B game, which in turn is forcing suppliers to follow that path as well.” bodies who have overwhelmingly reduced and/or waived off fees and tariffs to support local businesses, to grow and prosper in such challenging times,” Kunnappally added.
He’s got a point there — Dubai authorities are reviewing retail sector dynamics and expected to come out with their suggestions on how the industry can tackle the many challenges it faces, both from online and within the brick-and-mortar universe itself.
Major retailers are offering their insights to entities such as Dubai Chamber and Dubai Land Department.
And with the saturation coverage that food delivery platforms provide these days — at seemingly on a 24x7 basis — casual dining/quick service restaurants are having to cope with volatile traffic numbers to their outlets. But when it comes to rents, these changes in how UAE consumers order and eat are not fully reflected.
Rebalancing needed
From a mall owner’s perspective, it is easy to see why raising rents on their F&B tenants seems like fair game — at least to them. Food courts are no longer sideshows at malls, and stand-alone restaurants have been allotted prime spots at the top of the corridors rather than down the aisle. Because these days, the malls’ F&B options are as much a crowd puller as the retail stores, if not more.
“Considering global brand standards and in some cases dictated by mall lease agreements, most casual dining outlets carry out a shell-and-core renovation every five years,” said Kunnappally. “This would require the unit to break even in 30 to 36 months to be able to recoup the initial investment and make some profits before it reinvests some of that to renovate and start all over again.”
Many in the industry believe that some form of government direction and changes brought in voluntarily by malls/landlords could yet bring about change. Then again, there is also the state of the market that can accelerate the move towards a much-needed rebalancing.
Choucair says as much. “We do have some leverage with mall owners and we are taking advantage of that. Plus, a lot depends on the nature of the F&B business itself.
“The start-up costs are lower for QSR [quick service restaurants] operators, and less opex (operating expenditure) can translate into slightly higher margins. Most of the staff are behind the counters and we only require smaller store spaces. It all shows up eventually in the bottom-line,” Choucair said.
That’s very much the ingredient F&B operators need to work on — manage costs and make it show on the bottomline. In the meantime, hope for a lot more understanding from their landlords.