If The Government Does Not Step In With Clear Incentives, The Industry Will Collapse
The headline of this article could well be a common cry for help from several industries but the restaurant industry is one which could use this even without the lockdown inflicted woes. In a candid interview with the Outlook Business, Riyaaz Amlani, CEO of Impressario Handmade restaurants which runs chains like Social, Smoke House Deli, etc bears the industry’s P&L and its wafer thin margins and the consequent vulnerability it brings in situations like the one we are currently.
“What are the challenges the restaurant owners face?: 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.
….[About the ease of doing business or lack thereof] 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.
…[Cost structure] 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, which would be the top 10% companies, 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. 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 it comes to a restaurant-owner owning the property, the cost structure differs.”
Riyaaz alludes to the non-monetary motives of restaurateurs as well…. “A lot of people dream of owning a restaurant”. It is this sort of an intangible return on investment that people derive out of their passion for running their dream restaurant whether it makes any money or not, that pulls the tangible return on capital down for the industry in general.