FNB News - "Drivers for restaurant sector - Demand & supply side"

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INTERVIEW

"Drivers for restaurant sector - Demand & supply side"

Monday, 31 March, 2014, 08 : 00 AM [IST]

National Restaurant Association of India (NRAI), founded in 1982, is an association that represents both independent and chain restaurant owners and operators in India. Samir Kuckreja, president, NRAI; founder & CEO, Tasanaya Hospitality Pvt. Ltd, delves into various issues faced by restaurants and talks about a proposal for 24x7 restaurant in an email interaction with Harcha Bhaskar. Excerpts:

Is eating out a trend in India that is growing significantly, and how has it evolved over the years?
The eating out trend is definitely growing in India and has evolved from just an occasion-driven activity, alternative /change from home-made food, sheer indulgence to a more regularly frequented activity.

The reasons for the evolution could be summarised as

Introduction of the global chains
Urbanisation
Changing lifestyle
Greater exposure
Rise in discretionary income and therefore a higher propensity to spend
Restaurants becoming convening points for social gatherings, meetings and hangouts.

What are the key growth drivers for restaurants in India?
Growth drivers for the restaurant sector can be summed up as demand side and supply side.

Demand Side
Changing Indian Demographics: India has the youngest working population. This group is prone to indulgence and since they find jobs very early in their lives, are empowered by their spending. The group is well connected, well informed and is eager to explore and experiment.

Growing Consumer Base: The Indian consumer base has a diverse profile with varied consumption patterns. The increase in the number of consumers in the upper segments of society is the catalyst for discretionary spending on food and food services.

Increasing Share of Consumer’s Wallet: Changes in the lifestyle has led to the growth of consumerism underpinned by a well-paid salaried class.

Increasing Experimentation: Greater exposure to global trends and travelling to broader destinations while being connected through Internet and other communications channel has given rise to experimentation. Consumers want to experiment today.

Increasing time poverty: With the rise in the number of double income household, and work schedules, consumers are left with little time for various household activities. This phenomenon is leading to increasing ordering in or going out and is instrumental to the growth of the industry.
Indulgence in smaller cities: Forming a considerable size of the consumer base, the segment in the smaller cities cannot be overlooked which is also moving up the social ladder and aspiring for parity with the big cities counterparts.
Emergence of new customers segments: India is a heterogeneous market and new consumer segments keep evolving as aspirations, and needs undergo changes. Consumers are even willing to pay a premium for healthier products thus presenting a lucrative opportunity for food services players who can cater to different consumer choices.

Supply Side drivers

Consistent growth of Indian and International Brands- The existing potential in the Indian food services market has resulted in the setting up of several international players besides promoting enthused domestic players to expand and cater to a larger customer segment.
Growth in Real Estate Space: The boom in the real estate sector has led to the growth of mall space across various cities in India. These act as a catalyst for the growth of the Indian food services sector as they position themselves as preferred locations for consumers to spend on shopping and consumption.
Strengthening the back-end: To secure their presence in the markets the players have started investing in the commissaries, besides expanding their cold chain and logistics network. Also, new raw material suppliers are being added enhancing the sectors growth across segments.

Which segment of restaurants (quick service restaurants or fine dining) is preferred by consumers and the most profitable?
QSR segment is a much larger segment as compared to fine dining by consumers. The market size of QSR is estimated at Rs 5,500 crore while fine dining is also at a significant 500 crore mark for 2013. The QSR segment has grown over the years with the focus on affordable and competitive pricing clubbed with growing need of consumers for convenience, increased appetite and craving for international food. A number of international QSR chains have flocked into India over the past few years with specific cuisines and product offerings fuelling the market’s growth.

Having said this, it is important to mention that fine dining is also an important format that caters to the need of the affluent consumer who has the willingness to indulge in and experience exotic foods.

What are the current and future trends in restaurants as far as the menus, technology, consumer behaviour, profitability and innovations are concerned?
Changing consumer demographics, globalisation, exposure, cost of operations, brand building, evolving consumer preferences are driving the need to innovate to sustain the changes.

Some of the emerging themes in the food service market:
Hybrid and theme-based concepts: Hybrid concepts include beverage-based formats. Theme based formats like microbreweries, entertainment cafes.

Indianisation and R localisation: Players are modifying their core offerings to suit to the consumer’s plate and are engineering menus to suit to the specific regional markets needs.

Value Meals: Players are adding combos and value to convert their prospects into consumers.

Health Consciousness: Today’s experiment-friendly consumer is increasingly exploring new ingredients. Consumers are getting more aware about organic and gluten-free foods and players are catering to the needs of this niche market too.

Tech-savvy consumers: The trend of greater technology usage by consumers has led food services players to adopt new and diverse technologies as a means of enhancing their consumer’s experience and thereby establishing a unique brand identity. Interactive menu screens, social media, mobile applications and food review websites are the emerging tools.

New Revenue: Sharing/ Turnover Rental Models- The growing impact of high rentals on the overall cost structure of players has fuelled the evolution and widespread adoption of revenue-sharing models.

Indian brands expanding internationally: Many food service players after having established a strong base in India are looking for an expansion in the international territories. Good responses have been received driven by the growing number of Indians abroad and expatriates travelling to India and experimenting with Indian cuisines and also acceptance of the newer cuisines by international consumers.

What are the challenges faced by restaurants as far as a fragmented market, operational challenges, real estate, manpower and supply chain are concerned? What are the possible solutions to overcome it?
Issues and challenges faced by the industry;

Economic/ Market Factors
Rising Food Cost- Inflation in food prices which have gone as high as 20% as compared to the last fiscal, narrows the bottom lines and compel the players to keep revising the menu and prices.

Fragmented Market and Increasing Competition- The unorganised nature of the industry create challenges of unclear format segmentation, varied consumer options for eating out and the lack of best practices for food services outlets. This makes it difficult for the players to engage and retain consumers.

Operational Factors
Manpower Issues- The Indian hospitality industry is highly labour-intensive, but the availability of trained chefs, managerial staff and other support staff is low. According to a study by the ministry of tourism, the current supply of skilled/ professionally trained manpower is estimated to be ~9% of the total manpower requirement. Given this shortfall of quality manpower and the industry’s high attrition rate of 20-25%, the cost of labour is high. Players therefore have to invest in the in-house training programmes.

Real Estate Issues-
High real estate and labour costs impacting store profitability - for a food services outlet, real estate (rentals) is the second major cost component after raw materials and accounts for ~12-15% and sometimes even 20% of total revenues. Further, labour costs are also high in India. People get low salaries, productivity is low, and thus there is a requirement for more employees. The high labour and real estate costs, coupled with the high service tax on property, are exerting pressure on store profitability and consequently deterring the growth of food services outlets.

Land reforms impacting business operations -
The food services market is constantly banged by reforms relating to land availability, land ceilings, and floor space index (FSI), and also suffers delays in approvals. The permissible FSI in India varies across cities and, on average, is in the range of 1 to 4.

Fragmented Supply Chain -
The industry’s supply chain is fragmented in nature and marked by the presence of multiple intermediaries. The lack of appropriate infrastructure, inadequate technologies and non-integration of the food value chain are the key factors leading to the nearly 30-40% food wastage across the supply chain. It is most essential for food services players to pin down existing supply chain issues related to warehousing, logistics, cold chains and so on and implement suitable counter measures.

What are the regulatory issues and issues pertaining to taxation, licensing and registration and food safety faced by restaurants, and what steps are being taken to overcome them?
Government and Regulatory Factors;

Over licensing
In India, obtaining the requisite licences, e.g. health licence, food safety licence, police licence, No Objection Certificate (NOC), from the fire department and the state pollution control board, and so on is a major obstacle hindering the smooth operations of a restaurant. The process is not centralised as yet and requires filing applications with individual stakeholders, which involves a lot of paperwork and is a time-consuming activity. The licences required to start a restaurant are the same throughout India, except in some states like Maharashtra. A player needs approximately 12-15 licences just to open a restaurant each from a government department. In comparison, the licensing requirements internationally are not as intricate as in India.

The process of obtaining these licences is cumbersome, expensive, and imposes a high and avoidable ‘cost of compliance’ that benefits neither the industry nor the public. The restaurant industry needs to ensure the implementation of a solution to the licensing conundrum to achieve its full potential; which can perhaps be achieved by encouraging a single-window licence clearance.

High Taxation
The Indian restaurant industry is burdened with multiple taxes like VAT, excise, and service tax, besides different state taxes, which add up to 17.5- 25% of the bill value. This tax is much higher in comparison toother sectors like apparel and footwear, where it ranges from 10-15%. Such taxes are usually passed on by restaurant operators to consumers, who then curb frequency of their visits to restaurants. Overall high taxation is a serious impediment to market growth.

There is news of proposal of keep eateries in Mumbai open 24X7, how would it impact the restaurants industry in Mumbai?
As the voice of the Indian restaurant industry we are in strong support of this proposal and hope it gets passed and also implemented in other cities. Late work hours and longer travelling time is gradually becoming a regular feature of metropolitan lifestyle. Extension in the opening hours is welcome as this will give people the opportunity and options to dine out at their favourite outlets while having a relaxed time after work.

Further the move will not only promote tourism but will also add to the government’s revenue.

How much is the market size (both value and volume) of individual food service segments like quick service restaurants, casual dine-in, cafés, fine dining and pubs, bars, clubs and lounges (PBCL)?
The size of the total market (organized and unorganized) is INR 247,680 crore (USD 48 billion) in 2013 and is projected to grow to INR 408,040 crore (USD 78 billion) by 2018 at a CAGR of 11%.

Within this, the unorganised market holds a 70% share with an estimated market size of Rs 172,685 crore (US$33.7 billion). The organised market (chain and licensed standalone outlets) is estimated at Rs 67,995 crore (US$ 13 billion) in 2013 and is projected to grow, at a CAGR of 16%, to reach Rs 145,770 crore (US$28 billion) by 2018.

The share of the chain market in the organised market (chain and licensed standalone outlets) is ~19% - INR 12,785 crore (US$2.5 billion); this is expected to grow at a CAGR of 21% to reach Rs 33,250 crore (US$6.5 billion) by 2018. The chain market comprises six formats.

The Cafe has 12 per cent of the market share valuing Rs 1,520 crore, QSR 43 per cent of the market share valuing Rs 5,500 crore, Frozen Dessert & Ice Cream 6 per cent of the market share valuing Rs 775 crore, Casual Dine 31 per cent of the market share valuing Rs 3,950 crore, Fine Dine 4 per cent of the market share with Rs 500 crore, PBCL 4 per cent of the market share with Rs 540 crore.

What opportunities does the Indian food service market hold for international entrepreneurs who wish to venture into the Indian market, as well as Indian businesspeople who wish to make overseas forays in future?
Although the economy is slow but various factors like youngest working population in the world, growing consumer base with diversified consumer preferences, increasing propensity to spend, greater exposure, and inclination towards experimentation make India one of the important regions for the various international players chartering their expansion goals.

Factors like popularity of Indian cuisines across the globe, more number of Indians travelling and even settling down at various parts of the world create opportunities for the Indian players as well to set their foot off the national territory.

How has the recent inflation in food prices and depreciation in rupee affected the restaurant business in India?
Expenditure on ‘Eating out’ is a discretionary activity and is severely marred in the wake of sluggish economy, high inflation, and depreciation of the local currency. These factors lower the propensity of spending out of home on dining and entertainment and create pressure on the profitability of the industry.

As the economy slows down consumers tend to restrict their spending on activities like eating out. With consumer sentiments already low and negative, the industry is witnessing a decline in the overall footfalls.

However, depreciation in the rupee has not impacted all the segments of the industry. It is the fine dining segment that has been impacted by this decline as most of the restaurants depend heavily on importing ingredients and other equipments.

What are the various roles NRAI plays to shape the industry?
NRAI representing various national and international brands from the F&B sector aspires to lead the Indian Restaurant Industry to greater profitable growth. The association represents the interests of members through advocacy, training, research and industry events. Various issues affecting the growth of the industry are taken up by the association at various levels with the Central, and state governments and municipal/local departments. We promote change in the laws governing the Restaurant Sector. The association keeps the members regularly informed about the specific legislations and important information required for running their businesses.

Also we organise regular training seminars/workshops with experts in various cities. The leading professionals cover relevant subjects like menu engineering, integrated marketing, supply chain, training and development, restaurant operations etc. These are well attended and are a platform to share best practices that helps in running a restaurant business better.