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Here are the reasons why restaurants run out of steam so soon

Glo​bally, the failure rate of a restaurant is estimated at 90 per cent within the first year. In India they have to counter an additional set of challenges.

Feb 25, 2017, 12.15 AM IST
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At the outset, costs and the expected rate of returns do not match for most entrants. According to industry insiders, capital costs on interiors alone can be as high as Rs 7,000 a sq ft.

Evenings in Connaught Place are promising: Glitzy rooftop restaurants at New Delhi’s colonial-era business complex, where rentals match those in Midtown Manhattan or London’s West End, visually broadcast the city’s cosmopolitan identity, with colourful and revolving neon lights telling people that the cuisine here is as diverse as it gets.

Mornings, by contrast, are strikingly businesslike at the commercial nerve-centre that charges about $170 a square foot in annual rents: Along the vast circular plaza named after the First Duke of Connaught and Strathearn, the neon lights are switched off, and some never come back on as the sun sets. Like many before them, these restaurants join the list of mothballed dreams.

The latest to acknowledge the harsh reality of an increasingly crowded foods industry was a Connaught Place gastropub outlet backed by some of the biggest names in India’s restaurant business. Many entrepreneurs across urban centres are drawn to the glamour and glitz of finedining at the peak of business cycles: They soon realise the challenges involved in building sustainable competitive advantage in an industry that has low entry barriers and high capital and operational costs. The result: Frequent failures.

Riyaaz Amlani, president, National Restaurant Association of India (NRAI), said there is a surge in the number of people entering the business, but most are getting in for the wrong reasons. “Some are in it for glamour, some for a quick ticket to fame or recognition. And then reality hits. The conditions are tough and the regulatory environment is very complicated. If you see any of these best restaurant lists from a year like 2010, out of 20 of them, 15 do not exist anymore. If the quality ones are shutting down, then ordinary restaurants don’t stand a chance,” Amlani said.

At the outset, costs and the expected rate of returns do not match for most entrants. According to industry insiders, capital costs on interiors alone can be as high as Rs 7,000 a square foot. Operating expenditures, such as kitchen costs, rentals, utility payments, and staff salaries are also substantial for an entrepreneur who cannot realistically expect to break even before two years. Including a year of rent, a good restaurant could cost anywhere upward of Rs 1 crore, while high-end restaurants need about Rs 2-2.5 crore per outlet.

“When they factor in the investments, they never factor in the gestation period. So that’s one of the primary reasons restaurants run out of steam. You have to withstand other issues like salary etc. for a period of six months so if you do not have that kind of backing, there is a 90 per cent chance that you will go bust,” said food consultant and restaurateur Marut Sikka. According to him, a restaurant doing reasonably well should make about 20 per cent margins, but those entering the business overestimate it at 45 per cent .

Concurred Zorawar Kalra, founder of Everstone Capital-backed Massive Restaurants, which runs Farzi Cafe and the critically acclaimed Masala Library. “This is a high-risk profession. Restaurants that do well will always be the ones that aren’t under capitalised. The profession is also prone to cyclical demand and most restaurateurs don’t realise that. A good restaurant only makes a 20 per cent profit and most people get into it thinking it’s a glamorous profession to be in.”

To be sure, globally, the failure rate of a restaurant is estimated at 90 per cent within the first year: And only 50 per cent survive until the second year. India, however, has an additional set of challenges contributing to a tough environment for restaurants: Taxation, oversupply, the Supreme Court ban on the sale of liquor along highways, consumer discretion on service charges, and the currency swap have added to the stress the business already faces.

In its annual food services report for 2016, NRAI had estimated that the restaurant sector would contribute Rs 22,400 crore in taxes and create 5.8 million direct jobs in 2016, but the organized sector accounts for only 33 per cent of the market.

The industry also bears the brunt of challenges like poor infrastructure and high costs. The collapse of a portion of a Connaught Place building recently led to New Delhi Municipal Corporation banning rooftop meals at 21 restaurants that include Warehouse Café, Kitchen Bar, Lord of the Drinks, Open House Café, Café OMG, and Unplugged Courtyard.

According to Samir Kuckreja, trustee at NRAI and the former MD of Nirula’s, Connaught Place itself has 177 restaurants, and the situation is somewhat similar at Mumbai’s BKC and Linking Road. “There can only be those many bars in the same area without any differentiators. Bengaluru too, is quite crowded in certain areas but in cities like Mumbai and Delhi, the problem is quite acute as they have overestimated the demand,” he added.

With competition intensifying, restaurant owners are finding it hard to distinguish themselves from the rest. Rakshay Dhariwal, director at Pass Code Hospitality that runs Pass Code Only (PCO) bar and A Ta Maison, said he can name several “funded” restauratuers who believe in gimmicks rather than tasty food and a good ambience.

“What has caused the surge in outlets shutting down is the surge in outlets that have been cropping up. People will go to experience a gimmick once, but after that, the experience gets old and that outlet would become a ‘struggling’ outlet,” he said.

The government’s move to swap the currency on November 8 and overnight withdraw bills of 500 and 1000 denominations has also hit the industry. Food outlets across categories and formats reported up to 40 per cent drop in sales immediately after the announcement. Sources say about 50 restaurants across the BKC Vile Parle stretch alone in Mumbai have shut down since November. Industry experts expect many more closures in the next 6-12 months.

Fund flow to the industry has also dried up after the government’s move. “People thought that it was a simple business to get into and were directing surplus funds pre-demonetisation. Perhaps there would not be as many restaurants mushrooming for the next few years unless a similar flow of money makes its way into the system,” said Sikka.

Saurabh Khanijo, managing director of the Kylin chain of restaurants, said the business can never work if people only choose to be investors. Kylin had witnessed a 40 per cent drop in sales in their QSR format in the weekend following the government’s currency-swap move. “From the outside it looks easy, but once you get in, you realise how tough it is. There are many issues plaguing the industry and if you treat it as a side business, it will never work.”
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