How Healthy is our Restaurant Industry?

Short Description
If people are spending money and new restaurants – large and small – are opening up everywhere, one would assume that the industry is healthy. However, brush away the dust and you face stark reality.
  • Nusra Deputy Features Editor
Restaurant India

If you evaluate the industry by activity, you will see that the industry is going good – Yum! Restaurants are eyeing smaller towns for expansion in India, US icons McDonald’s, KFC and Pizza Hut are doing big business in Kochi and McDonald's will be investing Rs 500 crore to set up 250 restaurants in west and south India by 2014.

Opening new doors is a straightforward strategy and usually the main driver of revenue. However, as a chain grows in size, it becomes increasingly tricky to capture benefits. And that is the truth; the sales in restaurants are on the decline and are not happening in adequate volumes in chains and they are failing to achieve their targets. Let us know why this is happening.

Sluggish Economy and High Inflation

As soon as our finance minister announced a service tax of 12.36 per cent on all air-conditioned restaurants, leading chains had to increase their prices by 5-10 per cent. When consumers struggled amidst slowing economies, the fast food chains witnessed slow business. The reason for this clearly points to fluctuating food costs. Food retail sales slowed down by 5% in the first quarter this year and prompted the industry to dole out its most aggressive promotion and value deals.

Talking about the reasons for this dip, Samir Kuckreja, President, NRAI, says, “The predominant causes for the pressure on sales in restaurants can be attributed to sluggish economy and high inflation. Due to these factors the propensity of discretionary spending on eating out has got impacted and that has created a pressure on the overall sales.” Agreeing to this, Anjan Chatterjee, Founder and MD, Speciality Restaurants, adds, “Discretionary spending has gone down due to high cost of commodities and sustained inflationary trends. Also there is a cautious outlook towards the future as the economic growth is poor.”

So have people stopped eating out? To that Chatterjee adds, “Eating out is a social phenomenon. Therefore, even if people cook at home, visiting food outlets is a part of regular social activity where connecting with family and community is an established norm.” If people are willing to eat out, what is causing the sales dip. Possibly, people have more options to choose from.

According to Vikas Arora, Executive Director, The Precious Group, the reason for low sales in restaurant chains is firstly the economy which is slowing down and secondly localisation. Thirdly, since all businesses are becoming easy for the consumer to go to, it brings in a lot of competition as people want to experiment with new things and that definitely affects sales. He further adds, “In the past people had very fixed ideas about food; today people are not scared of experimenting because options are many today.”

To counter this slowdown, Mcdonald’s took out a massive campaign that aimed to encourage people to start their day with wholesome breakfast. As part of this initiative, McDonalds India offered one thousand free McMuffins to their customers during breakfast hours at each of its restaurants serving breakfast menu in India. McDonald's called it the National Breakfast Day.

When McDonalds started initiatives to counter the price-led trends in the QSR space – in a bid to capture the heart and the wallet of consumers – other brands too adopted smart pricing. Speaking on the smart strategy adopted by McDonald’s, Smita Jatia, Managing Director, Hardcastle Restaurants Pvt Ltd (HRPL), says, “From day 1 we emphasised on Indian taste for the Indian palate which has really worked for us. The new chains which are coming are also copying the menu and the Indianisation of food. These are things which I think other restaurants are benefiting from McDonald’s.”

Domino's soon played the 'Pehli Kamai' campaign as their affordability card for its 'Pizza Mania' product selling at 44 per unit.

Playing the affordability card even further KFC launched its ‘WOW’ menu in India that offered 10 products/combos starting at Rs 25 and all under Rs 100. Pizza Hut Delivery (PHD), on the other hand, launched a national brand campaign with the focus on its new magic pan pizza selling at Rs 44. Speaking about this value offer, Niren Chaudhary, President, Yum! Restaurants, says, “Yum! Restaurants India and its brands KFC, Pizza Hut and Taco Bell are all about providing an exciting eating out experience for our consumers. By offering products/combos starting as low as Rs 25 and KFC at Rs. 44 at Pizza Hut, we intend to widen our reach to those who are looking for affordable options while eating out.”

Oriential Cuisines also introduced certain affordable value pricing. In that aspect, Narendra Malhotra, CEO, Oriental Cuisines, says “At Oriental Cuisines, we keep bringing new additions to our menus, invent and reinvent our products, and try and bring creativity at every step. Our biggest strength is in being able to bring in new products and cater to market trends and festive demands. Through working with our vendors and economies of scale, we have been able to bring products at pocket-friendly prices for our customers always keeping in mind quality with affordability.”

Talking about the affordability factor introduced by brands and its success, Kuckreja says, “Indians are value conscious consumers, so the acquisition and retention of customers is positively impacted by pricing strategies. Consequently these strategies encourage both new consumers and existing ones to visit restaurants more regularly.”

Talking about the challenges, he further adds, “Our menu philosophy was designed keeping simplicity and variety in mind along with easy-on-the-pocket prices. The overall consumer environment is also proving to be challenging and therefore we continuously focus on delivering value, building sales layers and new-unit development.” Striking a similar note, Chatterjee says, “The most successful strategy is to create surprises by way of new menu, and food festivals. The idea is to keep on top of the mind. Such activities always have positive impact though the base in recessionary trends is already shrunk.”

Speaking on the ways McDonald’s adopts to keep price pocket-friendly, Jatia says, “Inflation has been in India from many years and I don’t think this is something we have to take in reality for running any business in our country. At McDonald’s, we take the price that is half the rate than what the inflation goes, take about 2-3 per cent price rise year-on-year and try and see any inefficiencies in our business, in our supply chain, in our CNL, so that we don’t pass the increase on customers.”

 “Value pricing is the most time-tested practice used by the players to combat these challenges. Marketing efforts especially price-led promotions like promotional offers, discounts on specific days, meal combos and special buffets at happy hours, etc. help in driving footfalls,” says Kuckreja. Even though each brand emphasised on ‘value menus’ and increased their low-priced offerings like never before, the business did witness a low.

Seasonal Factors

Seasons play a very important role especially in India. In the first quarter this year, consumers felt shock, anger and betrayal over payroll taxes in addition to bad weather conditions. Speaking on the effect of seasons on the food service market, Kuckreja says, “Seasonal factors do affect restaurant sales. While holidays, summer vacations, festive seasons like Christmas, Diwali see spurt in sales, there is a decline in business during the examination periods. Further regional variations in climate also have an impact on the sales. Extreme climatic conditions play a deterrent to the eating out activities.”

On the same lines, Chatterjee says, “Hot summer days, incessant rains, very cold weather, all could affect adversely; whereas festive seasons mean better footfall.” However, Chaudhary has different take on it, “Eating out is not a seasonal business and is largely unaffected by climatic conditions. However, we do see an increase in sales during holidays, summer vacations and festive seasons like Christmas, Diwali, etc.”

How Fast is Casual?

Another aspect of restaurant sales is seen by analysing its two broad categories – fast food and casual sit-downs. Since sit-down restaurants tend to be more expensive, it makes them even more sensitive to consumer budgets and the health of the economy. On the other hand, QSR restaurants’ convenience and value make them attractive. Stating the reason for people’s inclination towards QSR/fast-casual, Harry Balzer, Market Researcher, NPD Group (which provides market information and advisory services to drive better business decisions), says, “We are using fast food more but sit down restaurants less because there (in QSRs) the focus is on the food – tasty food, fresh food, prepared the way ‘I like it’. It is half the price of casual dining because with less money person are getting what they want. Fast casual is benefitting from the ‘fast’ part than the ‘casual’ part.”

How Floating are Cafés?

According to the NRAI report, the size of the cafe market is estimated at INR 1,520 crore (USD 290 million) in 2013 and is expected to grow at a CGAR of ~20% to reach INR 3,775 crore (USD 725 million) by 2018. Speaking on how café’s are trying to tap consumers in the volatile market in order to stay afloat, Kuckreja adds, “The cafe segment is evolving and as the market is getting competitive, the players are differentiating by tailoring their offerings in terms of ambience, service and developing new products such as regional flavours, international coffee blends. Players are expanding their presence at various new terrains like hospitals, colleges, corporate houses, travel locations. Foraying into different formats helps players tap a wider customer base usually by means of enhancing the overall cafe experience through an appealing ambience, encouraging greater time-spends at outlets, using assorted menus to fulfil the need for either a small bite or a regular meal and providing interactive experience.”


Cafe Coffee Day (CCD) has been going to town with its magic priced F&B combos between Rs 49 to Rs 119. Explaining the reasons for CCD to latch on to the price-led strategy K Ramakrishnan, President - Marketing, Cafe Coffee Day had this to share with Economic Times, "An attractive price point offers to bring in newer customers who were otherwise not trying the category at all.” Agrees Chatterjee, “Café, as in QSR band, could perform better in recessionary trends as per person spend is less.”

Arora has a different take on the success of café chains. Speaking on why café’s are introducing food in their outlet, he says, “Indian consumers want something to eat. People normally go out to have food and not just beverage. That is why cafe joints are introducing foods.”

The Hard Facts

According to a research by NPD Group, the Restaurant visits among millennial have fallen 16 percent over the last four years and failed to pick up as the economy improved. Thus the effort put in by the restaurant industry seems to suggest that they are luring large numbers of consumers, caging them, and hoping that the buzz created by this large mass translates into profits. 

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