Inflation steals restaurateurs’ cheer
9 min read . Updated: 20 May 2022, 12:58 AM IST
Premium- With prices of everything from seafood to gas going through the roof, restaurants are struggling to turn a profit
- Restaurants across the country are trying to tackle inflation as best they can, by raising prices moderately, renegotiating supply contracts or sourcing cheaper ingredients.
NEW DELHI : Early this year, Chaayos, a tea-café chain, started doing something unusual—it began stocking paper and cardboard as prices of packaging materials surged 25-30% in the last quarter of 2021. The company uses paper for food wrapping and carry bags, while cardboard is used as the outer packaging for its takeaway chai kettles. Anticipating that prices will rise further, the company is building an inventory of products with a longer shelf life, says founder Nitin Saluja.
Earlier, the chain, which has about 185 outlets, used to buy raw materials every two-three weeks; this has changed to three-four months for packaging and non-perishable items. Chaayos has also procured capital expenditure (capex)-heavy items such as store equipment in advance to tackle price escalations, says Saluja.
The chain’s costs have risen 10% over the last four-to-five months and it has increased prices by 3-3.5%, which is nowhere near the cost escalation. “We are absorbing the rest of the costs because it is difficult to pass those on to the customer," he says.
Things are no different for fine-dining restaurants either, with the Russia-Ukraine conflict as well as a recent surge in covid cases in China once again limiting supplies of imported products. For instance, the Saga restaurant in Gurugram, where a kathal (pulled jackfruit) cutlet is priced at ₹495, has to hunt for supplies of a variety of Asian cooking sauces. As an alternative, the chain is trying to source local ingredients that are cheaper.
In all, costs are up 20-25% from pre-covid levels, says Vishal Anand, partner at Moonshine Food Ventures LLP, which operates Saga, as well as the Farzi Cafe in Delhi’s Aerocity, among other restaurants. “At the same time, we are not able to pass on the entire cost directly to the consumer because we cannot keep revising menu pricing," he explains. Things have become especially difficult in the last three months, he adds. Saga had revised its prices in January.
Priyank Sukhija, co-founder and MD at First Fiddle F&B, which runs restaurants across India, including Bougie, Misosexy as well as Dragonfly and Plum by Bent Chair, says the company is going for a price hike of around 10-12% across its restaurants. “We will also have to increase alcohol pricing but are worried customers may get spooked if we do that," says Sukhija. “Our margins are shrinking—most restaurants will find it difficult to survive if things don’t improve in the next few months," he says.
With prices going through the roof in every part of their business, restaurants across the board are reeling. Everything—be it seafood and meat, or vegetables and cheese, or refrigerators and steel fittings for kitchens or gas—has become expensive. And there appears to be no relief in sight.
Gutted by inflation
The timing couldn’t be worse for the restaurant industry. Customers have been coming back, and revenge eating and drinking is happening like never before. After being battered for two years by covid, the industry was finally beginning to see signs of a recovery.
According to the National Restaurant Association of India, the industry saw a contraction of 53% in 2020-21, the first full year of the pandemic. Both revenue and profitability took a pounding, with average revenues after the first lockdown contracting 46% and average profitability shrinking 88%.
But now, just when things are looking up, galloping inflation is affecting many businesses almost as badly as any of the covid waves. Food inflation in April jumped to 8.38% from 7.68% in March.
The Consumer Price Index (CPI)-based inflation was led by edible oils, vegetables, meat and fish, footwear and clothing, and the fuel and light segments.
Restaurant owners Mint spoke to say employee costs, too, are running high as businesses adjust salaries to inflation. Meanwhile, rentals, which had seen a dip following the onset of the pandemic, are rising once again. The cost of opening new restaurants has gone up 10-15% from the pre-covid days, they say, with equipment becoming more expensive in the wake of stainless-steel prices going up. And this has forced many to cut costs wherever possible. “We are trying to control every expense out there—hiring, marketing, everything," says Saluja.
He expects the volatility in prices to continue till the end of the year—especially because of higher milk prices. Prices of wholesale milk increased 4.8% year-on-year in April, according to a recent report by ICICI Securities. “We believe the rise in wholesale prices is attributable to the end of the flush season and higher consumption in the economy. After a period of lower milk prices for two years, milk prices have started the upcycle," states the report.
All of this has impacted the profit margins of the industry. First Fiddle F&B’s Sukhija says typically, margins for restaurants and pubs at an outlet level are 15-18%. On an average, this profitability without corporate costs has come down to under 10%.
Restaurants are trying to tackle inflation as best they can, by raising prices, renegotiating supply contracts or sourcing cheaper ingredients. Samir Kuckreja, founder and CEO of Tasanaya Hospitality, which consults with many restaurants on fundraising transactions and provides food and beverage advisory services, says he is currently working with several clients to help them navigate the challenge of rising prices.
“Price hikes are a simple way of combating food inflation. A lot of restaurants also rationalized their menus while others focused on buying local ingredients—trends that started during the pandemic. It helps that today much better artisanal ice creams, cheeses and jams are available in the market," says Kuckreja.
Vendors face the heat
At the back end, a number of vendors supplying the food services industry say they are compelled to pass on higher prices to restaurant chains.
Ankur Soni, a livestock and frozen foods trader in New Delhi’s Bhogal area, says prices of chickenfeed, especially soya, maize and a variety of imported amino acids used in the feed mix, have spiralled upward since he got into the poultry business a year ago. In particular, domestic prices of soymeal, a key ingredient in poultry feed, have been rising since mid-2021, says Soni.
So, this April, Soni decided to initiate price increases across the board, charging top hotels and restaurant chains he supplies more per kilo of frozen meat and raw chicken. Soni, who runs Noohi Farm (a fresh chicken business) as well as Tushar & Company, a frozen foods business, supplies frozen fish, prawns and squid apart from frozen non-vegetarian snacks. He says business has been volatile; chicken prices, for instance, have shot up 35-40% between January and May.
“I have not seen such inflation. This is not the kind of profit margin I was thinking of working with—the raw material cost is too high now," he says. Unwilling to work at a loss, many vendors have walked out of contracts with restaurants and other clients.
The cascading effects of a volatile global supply chain and sky-high prices of everything from edible oils to frozen fish are not being felt by Soni alone. In January, mayonnaise and sauce maker Dr Oetker instituted a 9% hike in its mayonnaise range, which it supplies to the country’s top fast food chains, including McDonald’s, Burger King and KFC.
Oliver Mirza, Dr Oetker’s managing director & CEO, Indian subcontinent, says a third of the company’s business comes from business-to-business contracts. Mirza says that while he did face some pushback from chains for raising prices, most were accommodative given how expensive raw materials are across the board. However, his clients are now swapping annual buying contracts for shorter ones, given the uncertainty over future prices.
Contracts are definitely getting negotiated, says Saga’s Anand. He is shortening orders with vendors given the volatility of prices of everything from exotic meats to vegetables and condiments. “We used to have bi-annual contracts with vendors. Not anymore. Now, all contracts are monthly," says Anand.
Heartburn for consumers
Consumers, already battered by rising household expenses, are unwilling to pay more for food. For instance, a 45-year-old marketing manager at a hospitality company, who did not want to be named, said that if she and her teenage daughter were to eat out a few times every month, there would be a significant dent in the household budget. Prices are up 15-20% at some of their favourite places, even in old Delhi’s Daryaganj area.
“It’s not just the cost, it is also the taxes. Most times it is difficult to keep track of how service charge and taxes add up in the eventual bill," she says.
A couple in their 60s who like to eat out every weekend at south Delhi’s DLF Avenue say they have noticed an increase of over 10-15% at a few restaurants they frequent. Sometimes, they use apps such as Dineout and EazyDiner to pay the bill and earn payment-related discounts.
Keenly aware how sensitive consumers are to pricing and quantity, restaurateur Vikrant Batra has decided against making any changes for now. His restaurant chain Cafe Delhi Heights’ most famous dish is a succulent ‘Juicy Lucy’ burger, a fat meat patty weighing close to 350g. Any change in the size or price, he says, will be instantly felt by loyal customers. So, Batra is absorbing the steep increase in input prices.
“We are a place where middle-class India comes to eat out. We need to keep them in mind every time there is a price decision and we won’t just reduce dish sizes," he says.
However, such decisions might become inevitable, going ahead. “To survive in the industry, especially after three lockdowns in the last couple of years, it is necessary," he explains. The majority of Cafe Delhi Heights’ 21 restaurants are in the national capital region (NCR), where eating out has bounced back robustly.
In Mumbai, Arvin Tucker, founder of Chufang Asian Kitchen & Bar in the Bandra-Kurla Complex, is in a similar predicament. The restaurant has not passed on the increase in prices to customers as the business has just been launched. “We have just opened, and it would take at least two to three months to assess the situation before passing on the cost increase. Although the cost of raw materials and commercial gas has risen, we are still in the evaluation stage," he says.
Off the table
While some restaurants are raising prices, others are reducing sizes and a few are looking to source cheaper ingredients locally to be cost efficient. But not everyone can do that. For instance Saga’s Anand says some imported products on his menu, such as New Zealand lamb chops, a popular dish, are in short supply. “We have asked our staff to not recommend the dish actively anymore. The cost of the item for the restaurant has also moved up from ₹800-900 earlier to ₹1,200-1,400 now. We can only take so much of a price hike," he explains.
The owner of Mensho Tokyo, a San Francisco franchised restaurant in Delhi’s plush Greater Kailash market, also says they cannot look at cost-efficiency since the restaurant has international recognition. “We need to maintain standards and authenticity. When there are situations where certain exotic ingredients are in shortage, we have no option but to make some dishes unavailable," says Vidushi Sharma, Mensho Tokyo’s chef and owner.
Gauri Devidayal, co-founder and director of Food Matters Group, which runs restaurants such as The Table and Mag St Cafe in Mumbai, says prices do tend to increase year on year, but they are now rising at a much higher percentage. In the long term, this will affect menu pricing for many.
And it isn’t going to be limited only to those who use imported ingredients. Higher costs are impacting local products, too, affecting everything from packaging costs to logistics. “Sometimes, if a dish is no longer sustainable or feasible at a particular cost, you have to take it off the menu," she says.
It’s just a matter of time, she feels, before every restaurant increases rates. It’s not a question of when but by how much.
