Restaurant Franchise Opportunities

Investment May, 01 2017

Will liquor ban push growth of new age QSRs and snack cafes

The worry over inability to service rentals is fairly widespread among F&B operators in Sector 29, Gurgaon and on Sohna Road as well.

By Ashutosh Limaye
JLL India

With the recent Supreme Court ruling banning the sale of liquor from establishments located within 500 meters of the National and State highways, a new real estate dynamic is at play. Two different categories of establishments have been impacted, with corresponding effect on real estate:

  • F&B outlets located within malls and stand-alone restaurants located along ‘within city limits’ highways
  • Liquor shops and bars located along national and state highways beyond the urban jurisdiction of the city

In the category of organized F&B players with establishments located within urban jurisdictions in cities like Gurgaon, ingenuous methods to increase the distance from the highway have been arrived at. Gurgaon’s Cyber Hub is an interesting case in point. Until now, proximity to main roads and highways was a key positive for a location. Now – at least for liquor-based F&B outlets and retail establishments, the reverse is becoming true.

The process of de-notification of many of these highways is underway, but there is a general sense of insecurity amongst bar and restaurant operators. In Mumbai, the Western and Eastern Expressway highways are being de-notified. From an urban planning perspective, this may not be a bad thing at all. Though the de-notification process is a reaction to a ban rather than a carefully thought-out change, it is a much-needed one.

In Mumbai, both the express highways (Eastern and Western) currently function more like city roads than highways. Within the urban jurisdiction of Mumbai, the character of these highways - flooded as they are with snail-paced vehicular traffic throughout the day - is that of a city road. Their definition as ‘highways’ in the classic sense is therefore highly debatable.

In the rest of Maharashtra, the Government has received proposals from Jalgaon, Latur and Yavatmal municipal corporations seeking to de-notification of highways, which have been okayed. In Pune, however, the municipal corporation has not yet sought to de-notify key highways. In this city, while some restaurants continue to function without liquor along the Mumbai-Pune Expressway, some others are relocating to areas beyond the 500-meter limit because going ‘dry’ is simply not an option.

The challenge is to maintain visibility and accessibility to transiting customers despite moving further inside the city. Hotels close to IT business hubs in Hinjewadi and Kharadi are most impacted. In Bangalore, hotels located on the outskirts of the city are understandably far from happy. In Tamil Nadu, the de-notification of Anna Salai in Chennai as a state highway is likely. The natural question of what happens to the upkeep of the all these highways post de-notification arises, and this is still a big question mark...

The Real Estate Perspective

From a real estate perspective, for the first category of impacted establishments, the nature of lease agreements (the commonly prevalent revenue sharing plus minimum guarantee model) is largely followed across malls in India. This may undergo a change if liquor-serving F&B outlets in malls close to highways are to survive. Liquor accounts for a sizable sum of the total monthly revenue generated in F&B outlets that serve it. With fall in revenues from liquor, overall F&B revenues have suffered heavily and meeting the demand of the minimum guarantee amounts needed to be paid to mall owners may become a big challenge.

The worry over inability to service rentals is fairly widespread among F&B operators in Sector 29, Gurgaon and on Sohna Road as well. A substantial mindshare of F&B operators has been taken up with the aim to resolve the issue of the liquor ban, and cash flows have been significantly impacted for now.

Will all this lead to the earlier fixed rentals model coming back into play? F&B operators are hoping the blanket ban may be revoked, because the current revenue share model works well and gives the lessee (tenant) the comfort that the risk attached with his business is shared by the lessor (owner). However, the landlord may want to lock into a fixed rental once more.

The Supreme Court ruling has come at a time when F&B presence is slowly becoming a massive differentiator between one mall and another. It is now a unique selling proposition of a mall, as the balance retail space is taken up by brands which are more or less uniform across major malls. The duration of stay at a mall - as well as the spends on other categories – are both largely being dictated by the kind of F&B present in a mall.

F&B’s percentage share of total leasable area of a mall has also gone up over the years. Whatever impacts F&B outlets will definitely impact the performance of other tenants in a mall, as well. The liquor ban will have a trickle-down impact on other retail categories in malls.

The second category of players - small restaurants, bars and liquor shops located along highways beyond cities’ municipal limits - may witness another kind of real estate impact. Currently, most highways in India are dotted with liquor shops as well as small bars serving quick snacks.

  • Will there now be a growth of several quick service restaurants (QSRs) – the likes of McDonald’s, KFC or Dominos - which will replace liquor-serving bars and restaurants?
  • Will more tea and coffee outlets like CCD or Chaayos crop up in locations close to highways?
  • Will a larger number of Kamat-style restaurants and local snack joints emerge in such locations?

Landlords may consider looking at these QSRs or café and tea outlets as tenants now, as vacancy from current liquor-serving establishments is likely to grow.

The impact on both categories of players - the larger organized F&B operators within mall spaces and star category hotels, and the unorganized sector - is quite perceptible right now. If de-notification of the major highways does indeed take place and not rolled back, the blow to the sector will be softer. We will have to wait to see how the de-notification process unfurls across India. Hopefully, the fortunes of the F&B sector will soon recover.

Related: Where’s the investor betting for growth

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