Are high rentals draining out restaurant business

It has always been a twofold blow for restaurateurs. Not only are they bogged down by rising food prices, but high rentals are also eating out their thin margins. Studies indicate that rentals for restaurants in India have gone up 40 to 45 percent and for a number of standalone restaurants, it is getting unsustainable. 

For a restaurant, business is good if rentals are below or equal to 15 percent of their revenues. However, Covid has changed the number game altogether. Not just the industry has struggled for its survival throughout the lockdown, the high rental issues have led numerous owners to down their shutters permanently. 

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“While premium and luxury restaurants budget about 10 percent to 13 percent of their revenue for rentals, the average restaurant takes up to 18 percent. Selecting the right location and suitable rentals is key to any perfect feasibility study,” said Aji Nair, COO, Mirah Hospitality that owns and operates Bayroute, Hitchki and Rajdhani chain of restaurants. 

Rentals crucial in determining ROI

F&B being one of the growing industries, the demand for the units in premium locations over the last few years took the rentals to a very high level. Being a fixed cost, which doesn’t vary as per the sales, rentals play a vital role in the returns on investments. While paying a premium rental for a vital location, the investor should always generate the revenue to the highest limits so that he doesn’t need to compromise on any other costs. 

“Especially for restaurants, the major factors contributing to the expenses, other than the rent are F&B costs and manpower cost.  Both are non-compromised,  considering the quality of food and services to be provided. Hence, it is imperative to study, analyze, negotiate, and finalize the rental initially; otherwise, it will severely affect the returns,” added Nair. 

In most of the leasing happening now, the security deposit is directly connected to the rent. Lower the rent lowest will be the investment as in few cities the security deposit goes up to six to ten months rental, making it a huge chunk of the total investment.

However, due to massive losses because of Covid scare, restaurants across India had issues in covering the rental costs. Mohit Ahuja Owner of Shakespeare Cafe in Delhi expressed that all the salaries, rentals and overhead expenses are born out of the revenue generated and with a stark 50 percent reduction in footfall, the stats looks disturbing.

Covid induced losses pinching more

Understanding the current situation of the beleaguered food and beverage industry, February 2021 saw the footfall reach 50-60 percent of its pre-Covid numbers. The restaurants were operating at 50 percent capacity and now with the second wave in place, it is definitely going to affect business in a huge way. 

Taking cues from some of the premium f&b destinations in India, the Bandra-Kurla Complex (BKC) in Mumbai has one of the highest lease rentals. Over 50 upscale, fine dining restaurants, bars and cafes proliferated and thrived as corporate houses, moved their offices to this commercial business district.

The lockdown, though, has affected business plans and upset the applecart of several restaurateurs, now unable to sustain the rentals of INR 450 to INR 550 a square foot (carpet) a month.

Delhi’s toniest shopping district Khan Market has seen big names shutter shop as the lockdown ate into the restaurant business. The main issue was clearly high rentals.

One of the biggest hurdles while resuming operations

When most restaurant businesses resumed their operations, they faced working capital challenges and found real estate costs as a big burden. According to Yogesh Sharma, Managing Director of Futomic group which owns restaurant chains like Jungle Jamboree and Flying Dutchman, increased rate of real estate is one of the prominent factors that prevent smooth operation of the restaurant business in India.

However, larger restaurant chains have kept their real estate costs low by going in for a revenue share model with landlords. In a typical revenue share model, the landlord gets 80 percent of market rental or 15 to 18 percent of the top line, which according to many restaurateurs are higher.

Suggesting few ways to keep the rentals under control, Sharma said, “Check out similar commercial properties within the area and find out their rates, and then ask your landlord to match their offer. Also, point out how your business has never or hardly ever been late with the rent because you are a profitable business, and it is more profitable for them to keep you as a loyal tenant in the long run instead of finding a new tenant with uncertainty.”

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The sky-high rents have become one of the biggest nightmares for the restaurant owners, especially the standalone ones who are pinning hopes on regenerating their business.