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It is 8 PM on a Friday. At south Delhi’s Sidecar, a bar, this writer sips from the cocktail inspired by Ernest Hemingway’s love for the Daiquiri—a concoction of fig-infused rum, orange juice and kaffir lime liqueur. Sidecar is spread over two levels, has a library, lounge chairs, bar stools, small and large tables. Today, there are only 10 customers, spread across four tables. That’s unusual for a bar which was recently voted amongst the world’s top 100.

All bars and clubs have fallen silent, not just in Delhi but also in Gurugram, Noida, Mumbai, Pune, Bengaluru, and Chandigarh among other cities as state governments imposed night curfews to contain the second wave of the pandemic. It has meant a knock-out punch to brick-and-mortar businesses that were just beginning to show signs of life after being comatose for most of 2020.

Sidecar, for instance, restarted operations in September 2020 when alcohol was finally allowed to be served in Delhi after months of restrictions. The bar gained back business between December 2020 and March 2021. “We recovered well; we were clocking 80% of the business compared to pre-covid till about a month back," Yangdup Lama, director at Barkeepers LLP, which runs Sidecar, said. “Evening sales contribute 90% of our earnings because we are a bar. This is at complete risk now," he added.

Delhi’s night restrictions begin at 10 PM and Lama has to close the bar by 9 PM to make sure his staff reach home before the curfew kicks in. But then, it is not just about bars. Indians prefer late dinners and so restaurants have little business, too.

Down south, in Chennai and Bengaluru, a restaurant chain called Kappa Chakka Kandhari, which translates to tapioca, jackfruit and bird’s eye chilli, serves traditional Kerala food. The restaurant did brisk business till March. Regi Mathew, co-owner of the restaurant, said he has now suspended dining in Bengaluru after Karnataka imposed a night curfew on 10 April. “We will do takeaways instead. We are looking at a 50% drop in business versus what it was last month," Mathew said.

Kappa Chakka Kandhari, where people usually come to dine in large groups, is more about the experience—in other words, the social contact provided at the restaurant makes dining enjoyable. Mathew doesn’t like home deliveries or takeaways of his food, but then India’s crucial food services industry is trying to adjust to the next normal.

The food services market is crucial for multiple reasons. Over the decades, it has been a vehicle for entrepreneurship and job creation for large swathes of the population, particularly the semi-skilled in the unorganized sector (roadside joints, dhabas) and the skilled in the organised sector (small to large restaurants and cafes).

The backward linkages with agriculture and animal husbandry as well as associations with allied industries, such as tourism, business conferences and marriages, make food services an important pillar in India’s economy. Investors probably get the big picture. Burger King India’s initial public offer (IPO) was subscribed more than 150 times in December 2020. On 26 March this year, the IPO of Barbeque-Nation Hospitality, another restaurant chain, was subscribed nearly six times on the final day of bidding.

Just how distressed is food services right now? Here’s an indication: the overall market, which includes both the organised and the unorganized sector, totalled about 4.23 trillion in 2019-20, according to Technopak Advisors, a consulting firm. In 2020-21, the market has more than halved to 2 trillion.

The organised sector is about 40% of the market and employs 2.3 million people directly. While it is difficult to estimate how many people lost their jobs in 2020, anecdotal evidence suggests that anywhere between 25%-30% have, with restaurants resorting to aggressive cost cuts to survive.

A number of small eateries, meanwhile, shut down. “30% of the 10,000 restaurants on the Eazydiner platform never opened post-covid," Rohit Dasgupta, CEO of table reservations company Eazydiner said. “About 15% of the restaurants in the industry changed hands," he added.

Apart from slashing people costs, restaurants, large and small, pivoted to digital as dining-in halted during last year’s lockdown. Nearly everyone pivoted to new business models such as cloud kitchens, pushing the accelerator on home deliveries. At the same time, they renegotiated rentals and other supply-chain contracts. Nevertheless, questions remain with the second wave now sweeping the country. Will the pivot to cloud work for every brand in 2021 and beyond? What are companies stuck with huge capex in brick-and-mortar stores planning to do? Could there be further cost rationalisation?

This will be a Darwinian battle for restaurants—the next two quarters are expected to be tough. However, some are better prepared too, having navigated 2020. Large companies that already turned lean may thrive, going ahead.

Digital sauce

Customer is king. King never bargains"—this sign is prominently displayed on a pillar at Dhaba Estd. 1986 Delhi. An outpost of an Indian restaurant chain in an upmarket retail development in Delhi’s Aerocity, it is modeled around a highway eatery. Bollywood music belts non-stop, tables have Indian motifs, and the bar has ‘child’ beer. For all its rustic decor, the ordering and billing is rather smart and touch-less. Scanning a barcode on the table takes you to the digital menu. You can place the order online, look for deals offered by fintech companies, and pay digitally.

Azure Hospitality Pvt Ltd, the food company that runs Dhaba as well as brands such as Mamagoto, Sly Granny and Foxtrot pivoted to digital in 2020. The company said it is better prepared now to handle a slump because of its learnings from 2020. A major fulcrum of the pivot was launching cloud kitchens. Food ordered on the app, through aggregators such as Zomato, is prepared and delivered from kitchens you never get to see. Often called ‘ghost kitchens’, they are located in neighbourhoods where the real estate prices are far lower compared to malls and the high streets.

“We took an aggressive stand and signed up for 10 cloud kitchens; seven are operational," Kabir Suri, co-founder of Azure Hospitality, said. The firm’s restaurants always delivered but delivery was never more than 10% of total sales pre-lockdown. “The new cloud kitchens came up in third and the fourth quarters of 2020-21. Today, delivery contributes to about 40% of revenues," Suri added.

Azure, a private equity funded company with Goldman Sachs as the largest shareholder, has an advantage. It already has scale with about 38 restaurants and a turnover of 150 crore in 2019-20. The company invested in building equity for brands such as Mamagoto and Dhaba through unique concepts of course, but also because of a physical presence in major cities. On an aggregator’s rather crowded app with thousands of options, customers are likely to recognise brands they have seen or dined in earlier. Not every cloud kitchen can survive.

“The cloud-only narrative is getting commoditized and competitive. It is difficult to stand out," Ankur Bisen, senior vice president at Technopak Advisors, said. “Beyond a certain scale, we see a high mortality. You can list (on an aggregator platform) and grow to 5-10 crore of turnover. However, scaling up is difficult because every neighbourhood has many cloud kitchen providers with similar food," he added.

A search for ‘biryani’ on Zomato shows 522 restaurants that deliver. Scale within the cloud model, therefore, is gravitating towards brands with name recall value.

Yet another survival mantra—again one that hinges on brand equity—is the fast-moving consumer goods (FMCG) pivot. Companies such as Azure Hospitality have started bottling sauces and curries while exploring franchisee options that would bring in annuity revenues.

The food services industry has many segments. Broadly, there are the quick service restaurants (QSR) like Domino’s Pizza and Burger King; casual dining restaurants such as Dhaba; fine dining restaurants found mostly in five-star hotels; cafes, bars and lounges.

Bars, unlike food-first restaurants, can’t pivot to home deliveries. Sidecar, therefore, sells pre-packed cocktail making kits. And Yangdup Lama conducts cocktail making sessions online for corporates on the weekends. In the end, all this could add up and keep the ship cruising.

The biggest learning from 2020, restaurateurs said, is to de-risk from a single vertical play.

Losing the fat

Yogeshwar Sharma, CEO of Select Infrastructure Pvt Ltd which runs Select Citywalk, a mall in Delhi’s Saket, meets this writer in a conference room in the mall’s fourth floor. Deliveries from the mall’s food court have shot up four times post the pandemic. But the rise of cloud kitchens pose a long-term threat to malls.

Why is that? “One food company did close to 2.5 lakh worth of deliveries from our mall store earlier. Now, they have opened a cloud kitchen nearby and are diverting deliveries," Sharma said. Malls work on revenue-share and food services brands, under pressure to burn the fat, are finding alternatives.

Malls, going ahead, may therefore need to re-think the revenue models. “Revenue share may not be the right model at times. Maybe fixed rentals are the way ahead. We can’t do policing," Sharma said.

Retail developments, in the meantime, will come under pressure because restaurants are likely to shrink the real estate they lease. The chief business officer of an international dining chain, who didn’t want to be identified, said that the company usually leased about 3,000 sq ft in malls. “Now, we will half the asset size for new stores. For old stores, we are re-negotiating rentals and proposing just a revenue share without minimum guarantees given the second wave," he said.

Meanwhile, food services companies are also cutting down on menus to streamline food costs. Manu Chandra, chef partner of the Olive Group of restaurants, which runs Monkey Bar, The Fatty Bao, Toast & Tonic, among other restaurants, said that he has reduced the menus by nearly 30%. “In some restaurants, I have not created a separate lunch and dinner menu, thereby reducing stocks. This has optimised costs and reduced wastage," he explained.

So, what happens to companies that can’t optimise costs? They are sure to sink as the market consolidates amongst the stronger players. “The consolidation had already started post the first lockdown," Pushpa Bector, executive director at DLF Retail, said. “The smaller players who were over leveraged in terms of funding and who did not have a strong product exited the market. Such players will continue to have issues," she added. About 10% of the brands that leased real estate in DLF Retail’s malls and commercial developments gave up their leases in 2020-21. Bector said the company has now leased this space to stronger brands.

Over the next two quarters, companies with the right product can benefit, too. In the QSR segment, Jubilant FoodWorks Limited, which holds the master franchise rights for Domino’s Pizza in India, can consolidate the market, analysts said. “Domino’s would have gained marketshare at the expense of other pizza players and other formats. Because whenever there is a spike in covid cases, customers go back to trusted brands," Abneesh Roy, executive vice president at Edelweiss Financial Services, said.

Products such as pizzas do well in the home delivery market because it is served hot and can be reheated—hot food products were preferred over the cold during the covid peak last year.

Yes, in-store dining is back to the comatose state at the moment. But investors remain optimistic, seeing the current downturn as a short-term blip. “Vaccinations have started; 2021-22 will not be a washout. Normalcy might be delayed by a few months," Edelweiss’ Roy hoped.

The promoters of HT Media Ltd, which publishes Mint, and Jubilant FoodWorks are closely related. There are, however, no promoter cross-holdings.

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