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Modern food chains ride on low prices to eat into market pie

Modern food chains ride on low prices to eat into market pie
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First Published: Thu, Mar 24 2011. 01 15 AM IST

Securing supplies: A McDonald’s outlet in Mumbai.Hemant Mishra/Mint
Securing supplies: A McDonald’s outlet in Mumbai.Hemant Mishra/Mint
Updated: Thu, Mar 24 2011. 10 35 AM IST
Mumbai: Eating out is not what it used to be. It now often costs less to eat at a McDonald’s than buy a dosa at a high-street restaurant. The result: eating houses that traditionally catered to the Indian middle class are losing customers to modern food chains that source cheaper inputs and pavement stalls that have lower overheads.
A snapshot of this transition was evident on a recent afternoon outside the busy Andheri suburban railway station in Mumbai. The air-conditioned Aditi Fast Food and Restaurant was empty, with only two of its 12 tables taken.
Yet, some 10 metres away, eight people were standing at the takeaway window of the local McDonald’s while another 100 or so were inside.
Securing supplies: A McDonald’s outlet in Mumbai.Hemant Mishra/Mint
And right outside Aditi Fast Food is a Jumbo King vada pav stall, doing brisk business selling the popular Mumbai potato burger.
The prices tell the story: a plate of two potato vadas cost Rs28 at Aditi while a McAloo tikki burger retails at Rs25 and a Jumbo King vada pav sells for Rs8. Persistent food inflation and rising overheads such as rents and wages have put traditional eateries at a disadvantage.
McDonald’s has increased prices by 2-3% on average over the past year, said Amit Jatia, managing director of Hardcastle Restaurants Pvt. Ltd, the master franchisee for the burger chain in the western and southern parts of India.
In comparison, standalone or smaller restaurants and hotels have raised prices by 20% on average, said Arvind Shetty, vice-president, western zone, of the Association of Hotels and Restaurants (Ahar), an industry group.
McDonald’s has been able to hold the price line in these inflationary times because it has backward linkages all the way to the farm, eliminating middle men who bloat prices in urban markets.
The restaurant chain has made Rs1,000 crore of investments till date in its supply chain in India to improve yields and secure supplies.
It also benefits from economies of scale and has year-round contracts for most of its ingredients such as potatoes and iceberg lettuce, says Abhijit Upadhye, senior director, national supply chain, menu management, quality assurance and new business channels at McDonald’s India.
Twenty-one-year-old Mustaq Shaikh and his 17-year-old girlfriend along with a bunch of friends are enjoying their french fries and burgers at McDonald’s on a Wednesday afternoon. A second-grade dropout, Shaikh earns Rs12,000-15,000 a month selling newspapers and knick-knacks at the Haji Ali junction in central Mumbai. He enjoys frequenting Pizza Hut, McDonald’s and coffee shops such as Barista. “My girlfriend lives in Malad and is here to see me. I feel it is important to take her to a nice air-conditioned restaurant,” said Shaikh, who said he visits such restaurants three to four times a month.
Shetty said that standalone restaurateurs are facing a double whammy—declining consumer interest and rising costs, as they compete with quick service restaurants and street side vendors offering lower-priced fare. Meanwhile, staff wages have increased by a quarter in the past year, he added.
Overheads include the 45 licences that restaurants require for varied purposes, from preparation of food to its storage, neon signboards, ice-cream machines and even for installation of shutters.
Moreover, licences have to be renewed every three years.
“Price increase is our last resort. We do it when left with no other options,” says Vinayak Kotian, owner of DP’s, a fast food joint opposite Ruia College in Mumbai. DP’s has taken two price increases of 10% each in the past year.
Experiments and innovations at cost cutting at the restaurant include substituting onions with radish in pav bhaji, one of its most popular dishes, at the time when onions prices had climbed.
To be sure, prices at roadside street vendors are also increasing. A vada pav now costs Rs10 compared with Rs5 in 2001, says Dheeraj Gupta, founder and managing director, Jumbo King Foods Pvt. Ltd, a vada pav chain with 45 stores across the city.
“We have to be prepared for a 10-15% increase every year in prices. It’s unavoidable,” says Gupta, while explaining that electricity bills, wages, rent and vegetable prices have shot up. However, higher prices have not translated into a loss for the business as the economy is growing and growing affluence is encouraging people to consume more, says Gupta.
But not everyone is as optimistic as him. Close to 30% of Ahar’s 6,500 members are finding it difficult to survive. “Margins are squeezed and the restaurants on the periphery are opting out as they live hand to mouth,” says Shetty, who along with the apex body for hotels and restaurants—Federation of Hotel and Restaurant Associations of India—has been lobbying the government for industry status to help make it sustainable. For instance, an industry status could also help in reducing the operational overheads such as number of licences required, says Shetty.
Earlier this year Rasraj, a juice and speciality snacks restaurant opposite the Mumbai high court, that started in 1970, was shut down due to increasing costs. According to Ahar, the restaurant association, at least 50 restaurants have downed their shutters in south Mumbai in the past couple of years. Owners now find it more lucrative to rent out their space to a bank or office rather than struggle in the restaurant business.
Meanwhile, regular customers are also eating lesser thanks to stress in their family budgets because of high inflation. For instance, the 60-year-old Café Madras restaurant in Matunga, a Mumbai locality dotted with Udipi restaurants, primarily sells idlis and vadas. In the past three years it raised prices by a bare 1-2%. However, it has a large loyal clientele that frequents it often, at least two to three times a week.
“People who used to have two plates of idlis now eat one, they have started eating a lot less,” says Gopal Krishna Kamath of GP Kamath and Co., which owns Café Madras.
sapna.a @livemint.com
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First Published: Thu, Mar 24 2011. 01 15 AM IST