Casual dining sector faces 'cloud landlord', inflation and other mounting cost challenges

Kabir Suri, NRAI president and co-founder of Azure Hospitality, which runs popular chains like Mamagoto and Dhaba Estd. 1986, in an exclusive conversation with Mint said there is a need for a dedicated ministry to address the sector's unique needs, which contributes a substantial ₹5.69 trillion to India's gross domestic product. 

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The sector, which gave patrons or consumers of restaurants a GST rate reduced from 18% to 5% in 2017, now struggles with rising costs and shrinking profit margins. Suri said calling for the restoration of input tax credit and support for operational expenditures such as rentals and delivery commissions for restaurants, especially an input on rentals which contribute 20% of operational costs would be a game changer.

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The GST reduction move was originally hailed as customer friendly, but may have now backfired as the industry is unable to cope with mounting taxes and inflation. As a result, over the years, menu prices in the organised restaurant industry have shot up dramatically. The largest impact of the GST regime is on the profit margins and how they have shrunk. Costs like heating, air conditioning, commissions from delivery platforms, all have an input GST cost which can range anywhere between 18-28% which they have passed on to diners by way of price increase.

Cost of goods

A restaurant's cost of goods can range anywhere between 25-40%. The sector contributed ₹33,908 crore by way of taxes in FY24 and is expected to contribute ₹55,594 crore by FY28. "We have to procure goods and services in our restaurants in order to provide food. But we have all had to increase our pricing in order for us to cover the gap of the lack of input tax credit not coming to us because our operating costs have shot up. Today, a restaurant patron has to pay a 5% GST on their consumption. But at the source, a restaurant owner is paying multiple taxes for procurement of everything other than in salaries, vegetables and poultry. Since the owner is unable to offset this tax, they have had to take steep price hikes," he said. Input tax credit is a type of GST that a business entity can claim for the tax it has paid on the purchase of goods and services used for business operations and can be deducted from the GST payable on the business's sales.

Added to this, overall food inflation has also impacted the restaurant business steadily since after the pandemic. Suri said the government should consider giving an input on rentals if they don't want to rework the entire GST policy framework, which makes up for about 20% of a restaurant's operational expenditures. "We are also hopeful the government can intervene in terms of the tax and commissions paid to restaurant aggregators like Swiggy and Zomato. In a way, a lot of these expenses are getting loaded onto the customer's bill without them realising," he added. Several restaurants saw huge growth in deliveries to 20% from under 5%, since after the pandemic but that has also resulted in increased commissions being paid to delivery aggregators. At the moment, the industry grapples with the duopoly of the two food delivery providers. "Today all restaurants have two landlords, one on the ground and one in the cloud," he said.

There has also been talk of the Open Network for Digital Commerce (ONDC) channels being opened up where restaurants could work with any delivery partner of their choosing based on the commissions they were offered on this platform. However, so far it has not taken off. ONDC is a private non-profit section 8 company established by the Department for Promotion of Industry and Internal Trade of the government to develop a wider, more open e-commerce system. But the good news for the sector, he said, is that it has seen growth over 2019-20 despite the rising inflation.

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The sector touched ₹45 trillion in 2019 but has gone beyond it to reach ₹53 trillion this last fiscal. "Even if inflation is considered and its compounding effect of 5% each year, there is still 2% growth in the sector from then to now, with some segments of the food services market growing better than others," he added. Suri is referring to cloud kitchens which, for instance, saw a massive jump during the pandemic when restaurants were shut but may not be seeing the same level of success now. The increase in disposable income has also helped grow several independent casual restaurants and chains which are showing strong growth in the industry now owing to better margins (10-15%) as compared to any other part of the sector including quick service restaurants (8-10%).