Running a restaurant is no mean task. Though it may seem glamorous, especially with all the #foodgasm posts on Instagram, many restaurateurs have actually been bleeding money. The operational cost is high, while margins are low. In fact, coronavirus is not the first blow but possibly the final blow to this industry, believe experts. One of them is Riyaaz Amlani, CEO, Impresario Handmade Restaurants, which operates restaurant chains including Social, Smoke House Deli, Salt Water Café and Mocha. In this candid interview, the veteran restaurateur takes us through the underlying problems of the F&B sector, impact of the COVID-19 lockdown and what lies ahead for the industry in these testing times.
What are the key challenges that restaurant owners face in India?
First, rents across Indian cities are pretty high. For instance, the rental cost in Mayfair or Times Square is comparable with that of Khan Market in Delhi or Linking Road in Mumbai. While you are paying as much as a restaurateur in a developed market would, you are pricing your products differently. The purchasing power here is only about one-third of what it is in those cities. Moreover, we expect great service for that price. We expect someone to open our door, someone to park our car, someone to regularly top up our half-filled glasses and someone to take away the ashtray that has just one cigarette butt. For that, the restaurant has to employ a lot more people than they do in the West. Meanwhile, this industry is probably the only one that cannot claim input tax credit on GST. Typically, other industries are allowed to set it off against payables. But the restaurant industry hasn’t been given that privilege. So, even though our expenses have gone up by 18%, there is no input tax credit.
You have also been vocal about the industry being highly “over-regulated” and even compared it with “opening an arms factory” in terms of licences…
To run a restaurant, we need about 36 different licences that have to be renewed annually. Virtually, we are spending every day dealing with some or the other government organisation, instead of focusing on our business. Some of these laws are archaic. So, it gets very difficult to operate a business within the parameters that the government wants us to operate in.
In spite of the challenges you mentioned, we see new establishments every day, including mom-and-pop shops…
A lot of people dream of owning a restaurant. Mom-and-pop shops should be encouraged more than [restaurant] chains, because they are the custodians of the rich heritage in our culinary pursuits. If it were up to restaurateurs, butter chicken would be on every menu! At the same time, it is sad to see the businesses getting crushed so easily because the working conditions in this country have been hard, even before the coronavirus. There are 9,000 McDonald’s outlets in China, but the chain is struggling in India with just 700-odd outlets. Similarly, there is one-tenth the number of Starbucks in India as compared to China. You can do the same math with any other chain. Our business is not thriving, because the cost of operating a restaurant is way too high but our pricing is not commensurate because of lower affordability.
When did you start feeling the impact of Covid-19 on your business?
It was all good until three to four days post Holi. But immediately after that, business fell by 25%. Around March 15, it fell by 40%. By that time, restaurateurs had started questioning whether it was worth staying open, especially considering the safety of the staff. Many had started shutting shop three to four days before the government implemented the complete lockdown.
Due to the lockdown, what kind of loss is the industry expecting?
The annual revenue for the sector is about #4 trillion, 35% of which is organised. We actually did a back-of-the-envelope calculation about more than a week ago, where we estimated that the lockdown would amount to a loss of #850 billion to #950 billion for the organised segment. Anything beyond that would mean complete decimation for the industry. For Impresario specifically, we are estimating a loss of #200 million to #220 million.
Could you explain the cost structure of running a restaurant business in this country?
It is subjective to how well a business is doing. Ideally, the rough cost of occupancy or real estate should be around 16-17% of the total; goods should be near 35%; labour at around 18%; and utilities and other operating expenses at 22%. So, a restaurant that is doing really well, could hope to report 18% Ebitda at the store level. The next batch of restaurants, doing ‘well’, would see single-digit Ebitda. To put it simply, while gross margin is pretty high, net margin is usually very low in this sector. For example, if you own a 1,000 sq ft restaurant in a city such as Mumbai, the cost of occupancy would be #400,000-500,000 per month. Thus, you would have to generate a business of about #2 million just to break even; otherwise you are losing money, which is the case for most restaurants. On the other hand, it is difficult to estimate the profit and loss for the unorganised sector since the data is not abundant. Even when the restaurant-owner owns the property, the cost structure differs.
Which restaurants according to you will be affected more — the big chains or the standalones?
There are over 500,000 restaurants in the Indian organised space and everyone from the smallest guy to the biggest chain will be hit. Both are in need of oxygen and ventilators right now. But the corporate sector will be hit harder than the smaller players because, say a McDonald’s store has to pay corporate costs and franchisee fees. What’s more crucial is that approximately 1.3 million people are immediately hit due to the lockdown. If this goes on for a month more, I don’t know how many businesses will survive.
Do you see several business casualties, given that many may not have the resources to take care of fixed costs without any footfalls?
The government has to protect the private sector to ensure businesses don’t close down and jobs don’t run out. You can feed the population for a few days, but you need businesses to feed them for life. If the situation continues for another month and the government does not step in with very clear incentives, then the industry will collapse. Right now, restaurants only have enough capital to pay salaries for the month of March. After this, we won’t have the money to pay rents, more salaries, telephone bills, GST or even buy goods. The government needs to step in quickly.
The NRAI has been giving suggestions to alleviate the adverse impact on the industry. What has been done and what hasn’t?
One of the steps that has helped is allowing provident fund withdrawals of up to three months’ worth salary. The ESIC must kick in too, because it was meant for a calamity. Meanwhile, we have other clear demands. Besides EMIs, they need to waive off all statutory dues. There needs to be a holiday or deferment of tax payment. Also, the government needs to provide salary support in any form for the employees. Third, there must be a complete suspension of any kind of coercive rental or utility demands. A force majeure saying contractual obligations need to be put on hold is necessary. This will ensure that when everybody comes out of the lockdown, they don’t fall under a pile of debt on the back of accumulated losses. If these measures are not implemented, we will end up going into bankruptcy proceedings. The government must also immediately ease the burden of over-regulation and allow input tax credit, which alone would reduce our costs by 18%.
How are the industry leaders supporting the labour force?
We are lobbying with the government to allow access to the ESIC and PF for the duration that the business is impacted. Our biggest concern is people who work with us on contractual basis, small vendors that depend on us — our fruit, vegetable, and meat and fish suppliers. They will also see a big impact. We normally hold inventory worth 15-20 days, but with a hit to our cash flow, we don’t know how we will pay these vendors.
By when do you expect things back on track? Will footfalls remain low or will people over-indulge outdoors once the lockdown is over?
It all depends on how the pandemic plays out. According to studies, the number of cases will peak in June. Only then we will start seeing a decline. We see the impact flowing into July-August. If we have a cure for it by then, businesses will come back to full normalcy. But if we don’t, then social distancing will continue to be the new normal. Then we can’t expect business to pick up. If the virus is completely contained, we can expect 60-70% business growth in the last two quarters of FY21.
Has this been a big opportunity for cloud kitchens to flourish in comparison to brick-and-mortar?
The cloud kitchens are facing their own set of challenges. They are putting the staff at risk. A lot of players are reporting 60-70% dip in home delivery as well. The other challenges include acquiring the passes to deliver and a smooth supply chain.
How are you keeping your spirit high during the lockdown?
I have two little boys who uplift me with their sweetness. I am working harder than ever for the company and the industry. Right now, all we are thinking is survival and revival. Once the lockdown is lifted, we will party like there is no tomorrow and do whatever we can to reward our customers patronage.