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Startup 03 Sep 2014

How Healthy Is Our Restaurant Industry?

The scene in Indian F&B industry is changing with investors eyeing fast casuals and QSRs (Quick Service Restaurant)formats giving them scalability in business.

By Nusra Deputy Features Editor

Seasonal Factors

Seasons play a very important role for Indian F&B industry. Over the years the restaurants in India have witnessed a tremendous change from changing formats to investor’s desires and the ongoing trend. The current financial year has noticed various on-going issues in the industry. For example – In the first quarter this year, consumers felt betrayed over payroll taxes being imposed on them in addition to bad weather conditions. Speaking on the effect of seasons on the food service market, Samir Kuckreja, President, NRAI says, “Seasonal factors do affect restaurant sales. While holidays, summer vacations and festive seasons like Christmas, Diwali see spurt in sales, extreme climatic conditions play a deterrent to the eating-out activities.”

Adding to the same line, other experts in the industry believe that eating out is not a seasonal business and is largely unaffected by climatic conditions. However, there is an increase in sales during holidays, summer vacations and festive seasons like Christmas, Diwali, Durga Pooja, etc.

Sustainability in Business

Restaurant have seen major changes in the trend with fine dining and QSR ruling the industry to fast casuals and casual dining now conquering the mind of investors. Since fine dining tends to be more expensive, it is more sensitive to consumer budgets and the health of the economy.

On the other hand, casual dining is convenience and value makes them attractive. Stating the reason for investors inclination towards the casual dining segment, Siddharth Bafna, Partner & Head (Corporate Finance), Lodha & Co says, “I believe that there will be a lot of opportunities for new restaurant chains to emerge and for the able ones to raise venture capitals or PE in times to come. The restaurants are using fast food segment or the casual dining segment because these segments focus on the scalability of food – i.e., tasty and fresh food prepared in a customized way. It is half the price of fine dining because with less money consumers are getting what they want. Thus, sustainability is becoming the key to these segments.”

The Cafe Story

At the same time, both national and international cafe players are paving a way into the Indian market, Di Bella Coffee which has shut down its India operation few years back has made a comeback in the country. On the other hand, the international coffee chain Starbuck has seen a successful growth in the last one year of its opening. According to the NRAI report, the size of the cafe market is expected to grow at a CGAR of ~20 per cent to reach Rs 3,775 crore ($725 million) by 2018.

Speaking on how café’s are trying to tap consumers in the volatile market in order to stay afloat, Venu Madhav, CEO, CCD says, “At CCD, we understand the importance of listening to the youth. So the idea is to first expand our digital footprint and then listen, understand and engage with the youth. For example – CCD has co-created its existing look and feel based on our consumer feedback. A few items in the menu have been introduced after engaging with the youth in these spaces and understanding their desires. We always strive to introduce some amount of newness in our menu each quarter and change the look and feel of the café at regular intervals.”

Not only this, Costa Coffee which entered India in 2005 in a master franchise agreement with Devyani International has introduced a wide variety of international ranges of cakes seeking the evolution of Indian customer towards international eating habits.

Vishal Kapur, CEO, Costa Coffee says, “The Indian palate has internationalized faster than anybody expected. Our new range of quality cakes is a testament to the Costa customer’s taste and appreciation for high quality confectionery.”

Food Law and Policies

In 2013, the government has imposed a service tax of 12.36 per cent on all air-conditioned restaurants which made leading chains increase their offering prices by 5-10 per cent. When consumers struggled amidst slowing economies, the fast food chains witnessed slow business and the reason for this can be clearly attributed to the fluctuating food costs. Food retail sales slowed down by 5-6 per cent in the first quarter this year and prompted the industry to dole out its most aggressive promotion and value deals.

In the recent development, the new government is committed to providing support to the food processing sector with a view to reduce the losses of supply chain. The losses range from about 16-18 per cent in various crops and during certain seasons, especially in the rainy season, the losses can be as high as 30 per cent.

Commenting on how the government is working on sustaining the food products, Siraj Hussain, Secretary, Ministry of Food Processing Industry says, “The government is concerned about the losses especially in fruits and vegetables because it reduces the availability of food products and also causes inflation. Hence, the govt is providing a slew of incentives to food processing and food preservation industry so that there is facility of integration from farm to the fork.”

He further shares his insights on taxes imposed on restaurants, “I don’t think that the taxes on restaurants are very high. In fact, there is a need to ensure that the payment at restaurant is done through card, cheque or with mobile transfer so that the restaurant business is able to collect their money through reportable channels.”

Restaurants are now having access to processed food products which can be used in cooking to keep product fresh, reliable and increase the shelf life. All these will surely benefit the restaurant owners in the days to come.

The Hard Fact

One would assume that the restaurant industry is healthy, if people are spending money and new restaurants (both large and small) are coming up everywhere. On evaluating the industry by activity, you will see that the industry is going good. Yum! Restaurants are eyeing smaller towns for expansion in India, KFC and Pizza Hut are doing good business in Kochi and other South Indian cities as well. McDonald's has invested around Rs 500 crore to set up 250 restaurants in West and South India.

At the same time, more and more new formats and innovative concepts like Chaayos, Atchayam Foodbox, 4700 BC popcorn and Travel Khana and YatraChef are increasingly coming up in the industry. Capitalizing on an innovative format is a straight forward strategy and usually the main driver of revenue.

But the hard fact about the restaurant industry is that it becomes increasingly tricky to capture benefits as the chain grows in size. As a result, the sales in restaurants are on the decline and are not happening in adequate volumes in chains and they are failing to achieve their targets. 

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