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Food in a Tinderbox

The restaurant industry is close to irreparable damage. Can it be saved?
twitter-logoManu Kaushik | Print Edition: June 14, 2020
Food in a Tinderbox
Illustration by Raj Verma

Gurugram-based restaurateur Zorawar Kalra, Founder and MD of Massive Restaurants, is surprised. In the five tranches of the economic stimulus package released by Finance Minister Nirmala Sitharaman, the Rs 4-lakh crore restaurant industry didn't even find a mention. Kalra claims that the industry is the second-largest employment generator in the country after agriculture, and feels that it should have been given some stimulus. Yet, he remains hopeful, primarily because he thinks that the industry is important, and will not be ignored by the government.

"In London, where I am operating an outlet, the government has paid 80 per cent staff salaries. In Canada, the government and landowners are paying 75 per cent of real estate rentals. The government has addressed the concerns of the agriculture sector well, and as a result, I still believe that something is around the corner," he says.

The stimulus, whenever it is announced, would not have come a day too soon. Rahul Singh, Founder and CEO of seven-year-old alco-beverage chain, The Beer Cafe, has the numbers on his fingertips; how much he is losing every day and losses the industry will have to incur in the current financial year. Singh had learnt the business hard way, after failing in his indoor golf venture some years ago, where he realised the importance of the restaurant business. Singh says it's now back to square one for him.

Dineout, a dining out and online table reservation tech platform, says the F&B (food and beverage) industry contributes about 3 per cent to the GDP and employs more than 7.3 million people. With the coronavirus pandemic, nearly 30 per cent of those employed are at the risk of losing jobs; the monetary loss could be as high as Rs 1 lakh crore.

The Unfolding of a Crisis

Since the lockdown started, restaurants have been shut, barring cloud kitchens and some who are delivering food either themselves or through apps such as Zomato and Swiggy. Take Lite Bite Foods. Out of the 200 restaurants that it operates, just eight are functional (for deliveries), in addition to a central kitchen in Gurugram. Zomato has been hit, too; still the COO of its food delivery vertical, Mohit Sardana, urges customers to order food only when they absolutely need to. "Food delivery, in the middle of a pandemic, is an essential service, and not a leisure service," he says.

Revenues of Lite Bite Foods have fallen sharply, yet the chain has been paying full salaries to its 3,300-strong workforce. But time is running out. "We don't have money left. Restaurants are a long-gestation business where corporate-level profits are low," says Rohit Aggarwal, Director, Lite Bite Foods. As per some estimates, most restaurants in India have a cash buffer of 15 days, which they exhausted long ago.

While estimates vary, most industry players are expecting revenues to fall by 50-70 per cent year-on-year for six-nine months after they resume operations. Typically, restaurant ch-ains operate at 5 per cent EBITDA (earnings before interest, taxes, depreciation and amortisation) margins, which are extremely low to weather a crisis of this magnitude. Big players like Jubilant FoodWorks (which operates Domino's Pizza, Dunkin' Donuts and some other brands), which had reserves and surplus of Rs 1,192 crore as on March 2019, might survive. Others will likely report losses, shut shop or shrink their presence.

"It's early to say this but at least 15 per cent of my restaurants will never reopen," says Priyank Sukhija, CEO and MD, First Fiddle Restaurants. Veteran restaurateur A.D. Singh, MD, Olive Bar & Kitchen, says the impact of the pandemic is so huge that many restaurants will just fold up, especially in the unorganised segment. "If there's no government support, 30-40 per cent restaurants may not be able to reopen," he says.

However, the owners are making plans to minimise costs after they restart. As nearly 90 per cent restaurants in the country operate on premises taken on lease, and given that it's the second-biggest expense at the outlet level, most owners will negotiate a lower rent with landlords.

Lite Bite Foods' Aggarwal says the practice of fixed rentals has to be suspended for some time and the industry has to work on a revenue-sharing model. "I will be happy if I can break even at the outlet level in six-eight months. Of course, that will require a series of changes such as reduced menu, more focus on delivery services, lower rents and reduced workforce," says Aggarwal.

But renegotiations are not going to be easy as a large number of restaurants have stopped paying rents despite landlords raising full or partial bills. When services are resumed, this will lead to ugly disputes. "We have been trying to bring down costs by renegotiating contracts with landowners. That's where the relationship with them matters," says Olive Bar & Kitchen's Singh, who runs 27 outlets across nine brands.

Even though most organised chains have resisted layoffs till now, most announced salary cuts in April. At Olive Bar & Kitchen, for instance, the entire senior management has taken salary cuts. First Fiddle has paid basic salary to almost 50 per cent of the 1,100 employees, especially the junior ones. Manpower costs are about 30 per cent of expenses. If revenues drop 50 per cent, this may rise to 60 per cent, which is going to be untenable. Hence, retrenchments are unavoidable, say some owners.

But The Beer Cafe's Singh has an atypical viewpoint. He says saving jobs is crucial for the economy. "There are four wheels of the economy: demand, supply, capital and labour. While demand and supply have gone for a toss, there has been a significant erosion of capital in the past few weeks. The only wheel we can preserve is labour," he says.

Given up for Lost

Talk to any large restaurant operator in the country, and all you will hear is anger and hopelessness. In the first phase of the lockdown in March and early April, the sector was sanguine about getting some relief from the government. It submitted a list of demands to different authorities, including Finance Minister Nirmala Sitharaman and NITI Aayog CEO Amitabh Kant.

"We are sure in our assessment that our sector is staring at a complete decimation and seek a few urgent interventions from you to keep ourselves afloat... We reckon that our business will take anywhere between six and twelve months to gain any respectable traction in the post-Covid era. We request you to extend support to the extent of 50 per cent salary for employees for the entire financial year...," said a letter that industry body NRAI (National Restaurant Association of India) sent to Kant on April 9.

Like many other stressed industries, the restaurant sector has not been covered in the FM's stimulus package. Though some relief has come in the form of collateral-free loans (of Rs 3 lakh crore) that will be offered to MSMEs (like restaurants) to improve their working capital requirement. These loans, which will come with one-year mo-ratorium period, are termed inadequate by the industry players who were hoping for direct fund injection.

"We are staring at large-scale closedown of businesses and massive loss of employment in the sector. As stated by the FM, F&B industry is a big consumer of the farming products. With imminent closure of many F&B establishments, this will certainly cause a long-term impact on the farming sector...It is also clear that we will perhaps be one of the last sectors to open up, which means we perhaps need maximum support to stay alive," NRAI said in a statement shortly after the fifth tranche of the stimulus.

Another large association FHRAI (Federation of Hotel & Restaurant Associations of India) said that the industry is looking at a major catastrophe, including massive job loss, bankrupt enterprises and definite closure of at least 70 per cent of hospitality establishments across the country.

Industry leaders say improving the sentiment is not just about injecting large sums of money. Even small gestures can make a big difference. For instance, restaurants serving liquor renew their excise licence in April. Since business has stalled, can this be extended for six months? "It costs between Rs 8 lakh and Rs 40 lakh a year depending on the size of the restaurant and state-specific rates. It's not going to be a big monetary relief but swing the perception," says the promoter quoted above.

That's not all. There have been repeated requests from the industry to Employees' State Insurance Corporation of India (ESIC), which had a corpus of over Rs 75,000 crore last year and covers over 13 crore beneficiaries. "ESIC, which is a social security and health insurance scheme, is meant for times like these. They have a large surplus which should go back to employees not just in the restaurant sector but elsewhere as well. ESIC is like an insurance policy. We have given them money, and they can return it to us," says a large restaurant promoter.

"Are we barking up the wrong tree? In India, the government seems to be in a bind," says Aggarwal, who operates restaurants in seven countries.

"We hire the most number of people directly and indirectly. We also pay high taxes. Intervention is necessary if authorities want the sector to survive," says Olive Bar & Kitchen's Singh.

A New World

In the absence of relief, restlessness is rising fast. "Every day, our cash is depleting. We don't know the extent of the problem, whether it's going to take one or four months to restart. Many restaurants have not been able to pay full salaries in April," says Anurag Katriar, President, NRAI.

But some segments within the larger universe of food services business stand a better chance than others. How? Ankit Mehrotra, Co-founder and CEO, Dineout, says fine-dining restaurants will bounce back first as they can follow social distancing measures and provide contactless service more stringently than other segments (casual dining, cafes, etc). "We expect that takeaways and QSRs [quick-service restaurants] will be the next as time spent at these outlets is going to be less," he says.

The crisis is expected to bring nasty surprises. As per consultancy firm Hotelivate, hotel restaurants can capitalise on the expected drop in demand for standalone restaurants in the post-lockdown era. "As standalone restaurants are usually smaller than hotel restaurants, people may be more inclined towards a hotel. Hotels have also traditionally been perceived as better in quality and cleanliness...," a recent Hotelivate report said. A counter-argument is that hotel chains themselves will scale down the number of restaurants - from five-six to two per property - due to lower demand.

As industry players try to make sense of the crisis, consumer preferences are going through a paradigm shift. In a recent survey by Dineout, covering one million people (18-65 age group) across the country, almost 77 per cent are waiting to dine out once the lockdown ends, while over 13 per cent will prefer home delivery. The survey also shows that over 96 per cent people would want to reserve a table before reaching the restaurant (in order to avoid queues) and a vast majority would like to use phones as digital menu (80.8 per cent), to make payments (55.5 per cent) and to give feedback (84.3 per cent). The results are in line with expected consumer behaviour in the post-lockdown world. While most of these digital technologies already exist, their application will become more widespread for maintaining hygiene and driving cost efficiencies.

More wholesale changes are on the cards, too. A large restaurateur says discussions are happening between him and airport operators on the restarting strategy. "We are already good with hygiene but now it's time to play it up in front of customers. It definitely goes beyond keeping sanitisers. We will put TVs in stores, malls and airports that will give customers a glimpse into how we prepare the food," he says.

Indeed, communications and messaging are going to play key role in the near future. "Whenever we restart operations, we will need to refocus communication to bring back customers," says Olive Bar & Kitchen's Singh.

So, while large changes are inevitable, it's important to remember that running a successful restaurant is not rocket science. Of course, a push from the government would have helped. But as an old-timer expert puts it simply: "Treat the customers at your restaurant like you treat guests at your home. That's the only secret sauce."

@manukaushik

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