The Indian food services industry has contracted severely leading to the permanent closure of over 25 percent of restaurant business just in the last financial year. While 30 percent of the entire restaurant workforce has lost their jobs the profitability to run a restaurant business has dropped down by 88 percent. The numbers are not just scary but a matter of concern for the industry to rethink of their financial wellness. For those who survived the storm (which are mostly the chain brands and the ones who are organised) moving ahead means going through intense restructuring to adapt to the challenges posed by Covid.
While it is true that the restaurant space is ruthless, there are still those who open up and not just survive the business but also lead the industry. What enables them to do it? While multiple factors contribute to the success of a restaurant, managing the restaurant finances the right way and facilitating calculated risk factor ability is a significant reason behind it.
Financial wellness for the F&B ecosystem refers to store-level positive unit economics and sufficient throughput against deployed resources. For the past few years, restaurants and F&B brands have been bleeding, due to a variety of factors like over-saturation, emergence of margin-eating marketplaces and aggregators and ultimately the onset of the pandemic.
“We can't deny the fact that F&B sector was impacted the most due to pandemic but things are gearing up and it happened because of love and affection of people towards food. People are more receptive towards take away and delivery. But somewhere down the line I think financial push is also needed at this point in time to this industry to run to its full potential,” Dawn Thomas, Co-Founder of VRO Hospitality that operates multi-format restaurants, cafes, and lounges across 18 outlets in Bengaluru, commented.
Crucial factors that were missed before
Pre-COVID, brands would play the deep-discounting game to acquire customers. As COVID and never-ending burn began to batter business, restaurants focused on sustainable growth through their own distribution channels.
“I firmly believe that a deeply discounted food strategy is not sustainable even if intended to acquire customers in the short term. Price-sensitive customers belong to a category who are neither loyal to the brand nor its quality and would switch at the first sight of a cheaper alternative,” ZFW Hospitality founder Madhav Kasturia commented.
F&B businesses have now trimmed down variable costs and menu offerings basis the 80-20 philosophy to increase revenue per square feet and per crew member ratios within their facilities. Kasturia added that earlier, most dine-in outlets were forced to increase throughput and ROI by adding more channels to their businesses while now high-street take-outs can be seen shifting into cloud kitchens. Also, larger F&B groups have innovated with scalable and sustainable compact concepts instead of asset-heavy large-carpet restaurants.
Eye on the food cost
Food costs account for a major part of the overall restaurant expenses. While these are fixed, and one cannot really reduce them by much, a restaurant can very much keep them in control. Wastage is the biggest reason for high food costs, thus making proper stock and inventory management a crucial aspect of cost control. Restaurants are now optimizing the menu to ensure that items that are not selling as much and only leading to escalated food costs are removed.
Adding to it Thomas commented, “Food wastage happens due to non-organised way of operations which is the operation without SOP. As per my study, most of the people are going for franchise of any brand for standard operation but some are still trying and setting up their own SOP to operation with trial and error method but still, it's a big challenge for them to reduce food wastage.”
Question of new investment
The business scenario in the past two years has changed and it has further impacted the psyche of people. For an investor, the appetite for risk-taking is lower and investors who are out looking for big investments do not want to invest until the ROIs are fairly assured.
“Due to Covid, there has also been a significant downscaling of fixed costs as franchisees now have a conservative approach towards large stores and big overheads henceforth. The most promising revenue models seem to be dark kitchens, take-aways, and smaller outlet formats,” Chitra M Sharma, Business Head, Skyland Group said.
In pre-Covid times, malls with high rentals were not a big hindrance. Earlier brands focused on outlet locations close to schools and colleges but with these institutions pursuing online education, the focus now is more towards high streets and societies with a good crowd.
“As franchisors, we are more careful now with rental brackets and the strategic location of the outlet to ensure a minimum assured ROI. Hence our strategies around location and the area measurement of the outlet are heavily analysed,” she further informed.
Analysing the scenario in a macro level there has been a six percent decline in private consumption which is happening for the first time in many years as people went low in liquidity impacting the economy as a whole. This indicates the crawling situation of the whole economy which is affecting all the industries, restaurant being one.
The food service industry being one of the largest employers of the country and one that is dependent on private consumption sentiment will continue to exercise caution in the short to medium term.