Food services is one of the worst hit sectors from the outbreak of coronavirus. Even as the restaurants association NRAI (National Restaurant Association of India) is expecting its 500,000 members to lose upto Rs 80,000 crore in 2020, they are asking landowners, including malls, to forgo rentals and common area maintenance (CAM) charges for over 100 days till end-June.
How this is going to help? Nearly 90 per cent of the restaurants in the country are operated on lease. Around 20 per cent of the organised restaurants are located in malls, and the remaining on high streets and commercial areas. Depending upon the format, restaurants pay anywhere between 15 and 30 per cent of their income towards rentals. Some restaurants pay an extra 5-6 per cent of CAM if they are located in malls. CAM costs can be as high as Rs 2.5 lakh per month for a 3,000-sq ft outlet. However, lease cost is the largest fixed cost component for a restaurant besides payroll, and energy expenses, which together account for 20-25 per cent of the overall costs. For a large chain, the hit has been more severe as compared to standalone operators.
While some large mall owners like Lulu Group, Lodha Group, Forum and Vegas have voluntarily waived off the rentals for an interim period, the restaurants want others to follow suit in these challenging times. Anurag Katriar, president of NRAI, and CEO of deGustibus Hospitality, a chain of 27 restaurants, says that it's a difficult-to-imagine scenario for the sector in the post-coronavirus world. His dilemma comes from the fact that spending on foods and beverages is driven by general sentiments in the economy. If all the major sectors in the economy are taking a beating, people would not go out to eat in large numbers. Of course, there will be some dining-out activities immediately after the lockdown is over as people might get bored of eating too much at home. But that's going to be temporary as health scare would resist people from going to bars and eateries.
Eating out is considered a discretionary spending which means that consumers cut down on visiting restaurants (or ordering in) when the economy is in doldrums. It's quite likely that post-coronavirus status of the economy, along with the job market, would be dramatically different from 2019 or early 2020. This point has been prominently highlighted by the Reserve Bank of India (RBI) and several ratings agencies in their recent estimates. In a grim scenario, people would consume more of what's important and less of non-essentials like eating out. In China, for instance, where things are getting back on track, restaurants like Domino's Pizza are clocking in just 30 per cent of the revenues that they earned prior to this crisis. "If that's the scenario in China, where people on an average dine-out 28 times per month, it's hard to imagine what would happen in India where the comparable number is 4.1. We don't see demand coming back for at least a year," says a leading restaurant owner.
"We are looking at 50 per cent restaurants to shut down if this lasts till May. There are only 5-6 chains that have cash reserves to sustain more than a month. That's because restaurants work on about 15 per cent EBITDA (earnings before interest, taxes, depreciation, and amortization) margins," says NRAI's Katriar.
So even after the resumption of businesses, restaurant owners have proposed to their landlords to work out new lease contracts (post-June) for a period of six months that include rationalisation of minimum guaranteed rentals and lowering of revenue shares.
"Like other players, we have a force majeure clause in the lease contracts with landlords. This clause is applicable for a minimum of three months, and after that either party can terminate the contract. I think personal relationship with the landlords will matter a lot after three months," says Priyank Sukhija, CEO of First Fiddle Restaurants that operates 25 restaurants on lease in addition to one company-owned outlet. Sukhija says that he has paid the salary of some 1,100 employees for March but there are not enough reserves to pay April salaries. "I don't think anybody has that kind of reserves. If this lockdown extends till May, we would need government support," he says.
Sources say that the food delivery business has shrunk to a negligible size. Since most restaurants are temporarily closed, Zomato and Swiggy are serving customers through their cloud kitchens, and doing just about 10 per cent business as compared to the pre-coronavirus period. The food services sector is pegged at about Rs 4.5 lakh crore, out of which organised segment is around Rs 1.75 lakh crore. NRAI has estimated initial job losses of 1.5 million people across the sector that employed about 7.3 million people at the last count.