You have 3 monthly subscriptions to gift as an added subscription benefit.

Gift
now

INDIA

RESTAURANT REBOUND

The new math for India’s $50 billion

restaurant industry
Covid-19 has turned up the heat on Indian restaurants—
orders are dropping by 60-70%; revenue is expected to
fall by more than 40%. Restaurants are now turning to
other options to bring home their bacon

Abinaya Vijayaraghavan, 29 Apr 2020

Nearly 30-35% of the restaurant industry may not exist post-Covid
Revenues are down, but fixed costs like rent and salaries will still have to be paid
The industry must reimagine the business—from dine-in services to hygiene practices
Restaurants may also have to rent out kitchens and move to revenue-share agreements

Read a 200 word free summary.

SHOW SUMMARY
Uncertainty and fear were the overriding emotions of the nearly 1,000 Indian restaurateurs who tuned into an hour-
long webinar last week. Appropriately called “After the Bloodbath, Emergency Revival Plan for the Restaurant
Sector,” the webinar was replete with questions and strategies to salvage their businesses.

But many will not survive.

“30-35% of our industry will not exist post-Covid,” Jimmy Shaw, managing director at luxury hotel The Waterfront
Shaw told The Ken. The ones that do will not see business bounce back in a hurry, added Shaw, a member of The
Federation of Hotel and Restaurant Associations of India (FHRAI).

That’s a dire prognosis for an industry that directly employs over 7.3 million people and has an annual turnover of
about $50 billion, as per the National Restaurant Association of India (NRAI). The industry body asked the
government for a bailout as early as March.

Rahul Singh, founder and CEO of the Beer Café chain, estimates that it will be a year before restaurants see full houses
again, even with reduced seating capacity. In the same period, he warns, the industry’s revenue will plunge more than
40% as costs won’t fall in tandem. Rent and staff costs typically account for 40-50% of fixed expenses each month,
seven restaurateurs told The Ken—bills that continue to be paid while their shutters are down.

For restaurants that reopen, stricter hygiene practices will be compulsory, further increasing costs by 4-5%, Kapil
Chopra, investor and chairman of table-reservation platform EazyDiner said. Since hygiene will be a primary concern,
restaurants will have to absorb this cost to reassure customers.

Restaurants will also have to actively practice social distancing. That means fewer tables in the same restaurant,
which makes balancing revenue and costs tricky. The Delhi outlet of SodaBottleOpenerWala, a popular Parsi food
chain, has a 48-seater licence. If social distancing cuts seating in half, there is no point in reopening, said Manu
Chandra, chef-partner at food and beverage company Olive Bar & Kitchen Pvt Ltd., which also owns and operates
SodaBottleOpenerWala.

The small slice of the industry that is open during the lockdown—those still offering home delivery—are also taking a
hit as customers prefer to cook at home fearing contamination. Last week, in an ominous portent for the industry,
food tech aggregator Swiggy cut 1,000 jobs across its 1,000-odd cloud kitchens. Both Zomato and Swiggy have also
decided to stop footing discounts to customers. This will now be at the discretion of restaurants, something they have
lobbied for for a while.

Restaurateurs must now reimagine the entire business—from hygiene to the very business models they’ve honed
over the years. Milkshake chain Shake It Off, which has outlets across Chennai, Delhi, and Bengaluru, is contemplating
pivoting from its small-store format to a delivery-driven business model, said co-founder Anil Paremal. Others are
hoping to convince landlords to move to a revenue-sharing system rather than fixed rentals.

Cost Control
Even renting out kitchens is now on the table. Anurag Katriar, the NRAI president, said he might rent out his central
kitchen in Mumbai to other restaurants. Katriar is the CEO of deGustibus Hospitality, which runs 27 fine-dining and
cloud kitchens. For the majority of restaurateurs, though, it’s not about extra income, but lowering costs.

Shake It Off’s orders have already dropped 60-70%. While only three of its outlets are still operational for deliveries,
Paremal continues to pay rent—about 20% of his monthly revenue for each store—for all its stores. He is negotiating
with his landlords to defer or waive off rent for March and April, and to switch to a revenue-sharing agreement.
“There is simply no other way out,” says Katriar, whose monthly rent is about 25-26% of revenue across 27 fine-
dining and cloud kitchens.

Pushpa Bector, executive director of the DLF Shopping Malls, was asked about the prospect of revenue-sharing on the
webinar. Bector agreed that collaboration was crucial and said DLF would provide subsidies, but stopped short of
agreeing to a revenue-sharing model.

Crucially, most contracts have no provision for such a switch. Moreover, for mall developers like DLF, 90% of their
revenue is from rent. This makes it a Catch-22 situation for them.

“The mall has a much larger financial risk, leverage, and exposure as compared to the store. This fact needs to be
appreciated by all stakeholders,” Manoj Agarwal, CEO of Mumbai-based Viviana Mall said in an email to The Ken.
Viviana will re-evaluate contracts based on terms with each tenant and their performance over the years, he said.

But lower rents are unlikely to be low enough. They won’t drop by more than 10% on average, estimates Singh of
Beer Café, much less than his estimate of a 40% drop in revenue. Stalled negotiations have led many Indian chains to
invoke the force majeure clause to seek rent waivers until May.

Some could just stop paying rent, like what sandwich chain Subway did in the US.

But rent is only one part of the equation. The other is staff costs, which can be as much as rent in some cases. While
some are turning to layoffs, a Bengaluru-based brand—which runs a quick-service restaurant and a cloud kitchen—
has cut salaries by at least 30-40% for its 19 employees, said the brand’s head of operations. He did not want to be
named as he was not authorised to speak to the media.

Restaurant retrenchment
The National Restaurant Association of India expects over 1.5 million job cuts after the lockdown
Another way to avoid layoffs is by blurring the divide between the front house and kitchen staff, says Shaw. He says
restaurants will retrain employees to handle more than one job.

A table for two metres

The X-factor, though, remains the customer. And nobody is sure about the general appetite for dining out once the
pandemic subsides.

One bellwether is China. About 80% of the country’s restaurants have reopened, but consumers aren’t spending. “In
China, customers are eating and shopping ‘on a mission’,” Bector said in the webinar.

That’s the fear for Pagdandi Bookstore Cafe in Pune. Vishal Pipraiya, the cafe’s owner, wanted to know how to deal
with customers unwilling to hang out over coffee and conversations—the USP of his business.
 In the post-Covid world, dining out will not be the same
And those who do go to restaurants will likely find staff with protective gloves and face masks. And fewer tables.
“There may be a capacity drop of 50-60% at dine-in restaurants,” predicts Katriar. His Indigo Deli has 74-76 seats,
with an average of 200 customers per day. But he expects to serve just 60-70 people a day for the next three months.

Shake it Off has four to eight tables at each of its stores. Paremal plans to cut that to two tables, with a two-metre
distance between them. That will hurt its revenue per outlet, causing Paremal to potentially charge more. On the flip
side, it would mean lower staff costs and quicker service.

Adding to the uncertainty is the lack of guidelines from the government. “For stand-alone restaurants, it’s not clear.
First they said 50% capacity, and then three feet from each other, but allowed delivery to continue. It’s hard to track,”
said Gauri Devidayal, who owns Mumbai’s The Table.

Meanwhile, some restaurants are looking to reassure customers by investing in safety and hygiene practices such as
sanitising surfaces multiple times a day and introducing digital menus to avoid touching physical ones. DLF Mall is in
talks with its restaurants to create shorter menus that require little to no human touch. At the Bengaluru-based brand
mentioned earlier, almost 40-45% of the items on the menu have been axed to save costs and control wastage.
Slimmer menus also help turnaround times for restaurant staff, which is especially important when it comes to food
delivery.

“We’re going to livestream our kitchens for people who want to know what’s going on inside the kitchen.”

ZORAWAR KALRA, OWNER OF MASSIVE RESTAURANTS PVT LTD

Delivering change
Aggregators, too, will not be the same. The very discounts that propelled the growth of food delivery companies
Swiggy and Zomato will be the first casualty, said Beer Café’s Singh.
This has already come true. Zomato and Swiggy have stopped footing discounts to customers. Like the shift to a
revenue-sharing model, aggregators now have to give restaurants the choice to decide if they want to offer discounts
or a free drink or dessert, says EazyDiner’s Chopra.

But that choice comes at a cost. Both Swiggy and Zomato have raised commissions from 22% to 23% since the
lockdown, citing a 65-70% plunge in orders, according to Waterfront’s Shaw. That could force restaurants to rethink
delivery, or at least who does the delivery. This is happening in Malaysia, as we’ve previously reported.

In the Southeast Asian country, food delivery platforms such as Foodpanda and GrabFood charge high commissions
of 25-35%. This has led to the emergence of smaller rivals with lower take rates. In the US, Uber Eats is facing a
backlash from merchants for refusing to reduce its 25% commission rate at this time.

“Restaurants here [in India] are already creating alternatives to food tech aggregator platforms, with innovative
solutions driven and supported by owners and the industry,” says Shaw. This is also based on the expectation that the
delivery space will become more crowded and competitive as many restaurants pivot to cloud kitchens or delivery-
only models.

Chains like Starbucks and Domino’s—among the few that have operated through the lockdown—will be the first to
recover, says Chopra. Not only does coffee require minimal touching, but these chains also depend on food
aggregators more for orders than deliveries, for which they have their own fleet.

Cloud kitchens will get a fillip, too, due to lower rentals. “Even a quick-service dine-in restaurant will have to pay 1.7X
more rent than a cloud kitchen,” says the head of operations at the aforementioned Bengaluru-based brand.

Delivery, though, is not the answer. Zorawar Kalra, who runs Massive Restaurants Pvt Ltd, India’s largest listed
independent food and delivery chains, said as much during the webinar. Even in the best of cases, it will only be 20-
25% of revenue, according to Kalra. Scant relief for the thousands of restaurants desperately trying to keep their
heads above water.

The consensus is that the restaurant business will require 12-14 months of intensive changes to get back on track.
For Beer Café’s Singh, even though revenues are at rock bottom for the quarter ending in June, he’s expecting dine-in
volumes to be up to 80% by the end of the year. By March 2021, he’s hoping things will finally be back to normal. To
still be around to welcome patrons back, though, restaurants will have to change.

Lead image credit: Lucia Grzeskiewicz/Pixabay