Sunday, 27 October 2013

Impact of increasing food costs on the restaurant business !!!

Over the last 3-4 years, food costs have consistently been spiralling upwards. Most food items are now atleast 15-20% more expensive than they were 3-4 years ago, with a number of products almost at double the prices (e.g. Paneer - I remember having bought Milky Mist Paneer at Rs.95/kg at Metro in early 2009. Today the price of the same is Rs.185). Same story with good quality branded ghee and several other products.

The impact of such high increases is severe on the restaurant business, especially the value for money affordable food joints. Let's assume a local north indian joint. If the cost of the raw materials for a curry was 38 bucks earlier, the joint could price the item at around 100 bucks. The net sale price would be 96 bucks (after taking out 4% VAT). So the food cost would be 40%. Now if the cost of the raw materials go up by about 20% = 45 bucks. To maintain the food cost @ 40%, the new selling price would need to be 117 bucks. Now it would not be easy for the affordable food joint owner to suddenly increase prices by 17-20 bucks. This is just for a 20% increase in the cost of the raw materials. Given the prices have gone up by over 40% on an average, the local affordable & VFM food joints are no doubt in trouble.

What do I foresee for the industry in the next year? 
I can see a lot of the VFM affordable businesses struggling to stay alive. The market will slowly start accepting increased prices, but a lot of the businesses may not be able to hold on till that happens. This is because of the high increase in the food costs, plus an equally high increase in labour costs. Rentals, utilities etc. have also been very high, but even there the increases over the last 3-4 years have been significant (e.g. LPG cylinders now sell at 1700 bucks. 4 years ago the prices were at the 800 bucks level). Most businesses can absorb high cost increases in one or two of the key factors. Today, all the cost factors are coming into play, and the prices can only be increased by so much and may offset one or two of the factors.

The ones who manage to stay afloat?
The businesses which manage to survive and sustain longer should be able to grab a larger share of the customer's wallet. While the increased sales will not lead to increased profits, it should help offset the increased cost of all the input factors.

So all the affordable VFM food joints need to get their seat belts on and survive the turbulence. As the famous dialogue in "The Dark Knight", the night is darkest just before the dawn. I sure hope that this is true for the restaurant business in India.

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