Covid-19: Hospitality, F&B players reworking operational plans to stay afloat

Budget reallocations, diversion of marketing spends, postponing investment plans, and consolidation are among the measures which the hospitality and food & beverage (F&B) industry players are embarking on to deal with the fallout of the 21-day lockdown in the country.

According to Noesis Capital Advisors, a hotel investment advisory firm, FY20 financial performance of this industry will be 15 per cent lower from their budgeted targets. Post nationwide lockdown, “10 per cent of inventory is operational and for this limited inventory, occupancy level is 20 per cent,” said Nandivardhan Jain, CEO, Noesis Capital Advisors.

According to Hotelivate, a hospitality consultancy firm, losses for Q4 FY20 and Q1 FY21 are estimated at about ₹620 crore.

For the first half of March, Pride Group of Hotels had only 40 per cent of its hotel rooms booked. In the second half of March, Pride Hotels is left with only “long stayers as most of the customers were looking to get back to their cities,” said Satyen Jain, CEO of Pride Group of Hotels.

Sarovar Hotels and Resorts saw huge decline in March activity, resulting in its revenues slashed to half on year-on-year (y-o-y)basis. According to Ajay K Bakaya, MD of Sarovar, for April, revenue will be down almost 85-90 per cent.

Ripple effect

The reduced traffic to the hotels will have an obvious cascading effect on revenue from F&B, MICE and other commissions.

“We expect the supply chain to be impacted ― food items, housekeeping material, etc. for hotels. Given that the demand for restaurants is lower as well, the restaurant, events, and catering businesses for hotels will be impacted,” said Abhineet Kaul, a director at Frost & Sullivan.

The story is the same in the F&B industry. For Delhi-based restaurant, MahaBelly, as of February-end sales dwindled, while in March it came to a complete standstill.

Post-April 1, Mahabelly suspended operations “indefinitely,” said Thomas Fenn, Partner at MahaBelly. Fenn explained that backend supply chains were also a mess understandably, which led to crippling limitations.

“The business is currently zero,” for Anurag Katriar, who runs multiple restaurant brands at deGustibus Hospitality. Katriar, too has shut his businesses.

Katriar is also the president of the National Restaurant Association of India. He said: “Though the government has permitted delivery of food during this period, we have chosen to not do so. We reckon that this is against the spirit of lockdown and social distancing and still puts our employees at risk.”

The aviation and tourism industry is interlinked with the hospitality and F&B industry. So, the effects of the pandemic on aviation and tourism industry will obviously impact the hospitality and F&B industry too.

“Small & mid-travel agents’ cash flow got stuck with this lockdown, and they will struggle in opting for room inventory buyout in the next two to three quarters. This will further disrupt one vertical of the hotel distribution system for the next few quarters,” explained Nandivardhan of Noesis.

Impact on FY21

According to industry experts, this calamitous phase is likely to last at least for the first half of FY21. Thanks to the hesitation to travel, the first quarter will witness the worst impact, despite the lifting of the lockdown. It’s forecast that players are staring at losses of between 30 per cent and 50 per cent.

“Overall, Q1 will see a slide of 30-35 per cent on y-o-y basis,” said Bakaya of Sarovar Hotels. For Pride Hotels, average room rent (ARR) could be marginally lower due to low demand. Also, MICE will take a little time to recover.

Gauri Devidayal, Co-founder of five restaurant brands, believes that consumer sentiments will improve after the lockdown is lifted, and hence, local F&B businesses may see quicker recovery. However, her company is bracing for a minimum hit of 50 per cent on revenues.

The decline in revenues will have an impact on further investments, expansion and budgets plans. For Fenn, “cash is very dear right now,” hence, investments have taken a “backseat”. For Devidayal, expansion plans are indefinitely stalled.

While for hotel chain Pride Hotels, investment plans have been delayed by three months, standalone hotels are also taking a hit on their sales budgets.

Lucknow’s Hotel Vista Residency’s sales budget will take a hit of 15-20 per cent. According to Kunal Amarnani of Vista Residency, in a domino-effect,“it is going to affect plans for at least six months, if not less.”

With total shutdown, all variable and some semi-variable costs such as cost of goods, electricity, water, gas, and hygiene, among others, have stopped or fallen, explained Katriar. However, fixed expenses such as rentals, GST, and manpower cost, continue to accrue.

In order to cut running costs, many hotel chains like Pride are shutting down unoccupied floors, while some mid-segment hotels like Vista have temporarily shut down operations.

Several hospitality companies are redeploying their Furniture, Fixtures and Equipment (FF&E) fund to meet running costs and mitigate losses, according Anuj Puri, Chairman of ANAROCK, a real estate services firm.

Sarovar’s individual hotels have been able to bring down their daily expenses by 60-70 per cent, especially by downsizing the air conditioning operations.

Pride Hotels, which has a huge base of MICE customers, is trying to maintain its strong relationship with the corporate clients to build a pipeline of business for the future months.

Fenn said he will have to “rework the entire business model” and convert the large fixed costs to variable costs. Fenn, Devidayal and Katriar are renegotiating their terms with landlords and malls as current high-street rates are not viable in the short as well as medium terms.

For the F&B industry, an added point of sales is the food delivery, which is becoming a large part of their topline. In the near future, players will pivot to high-quality delivery, but challenges remain here too.

“Aggregators are and will be taking too much of the pie, even though the set-up costs of a delivery kitchen are way cheaper. Unless those commissions come down, we will not be able to pass on the cost benefits to our customers,” said Fenn.

Hotels will need some serious support from the government around some of these fixed costs, be it in the form of waivers or subsidiaries, in order to stay afloat, according to Megha Tuli of Hotelivate.

The Indian hospitality industry has almost two lakh employees on rolls, includingnearly 40,000 contractual and casual labour, according to Hotelivate.

“Compensation reductions (will be seen) in the range of 10-15 per cent for mid-level executives and 18-25 per cent for senior management within hotel companies,” Tuli said.

While Pride and MahaBelly have paid full salaries, Katriar is paying partial salaries. For MahaBelly, going forward, layoffs to the tune of 50 per cent may be inevitable, whereas for Devidayal’s brands, there is a hiring freeze.

According to Amarnani and Devidayal, if the lockdown continues, people stand to lose their jobs. Downsizing will be undertaken in business development, marketing and non-core departments.

Survival instinct

According to industry experts this is the survival of the fittest. Thus, while many businesses will go belly-up, some will merge with larger companies.

On the flipside, real estate prices are expected to be lower due to slow pick-up in demand (and expected property tax rebates). Thus, hotels that are renewing their leases this year will benefit, according to Kaul of Frost & Sullivan.

Devidayal’s company will become more digitally savvy and “put better IT systems in place to stay effectively connected with our teams in a situation like this”.

Lastly, since people are cooking at home, and would have had “first-hand experience of the time and effort it takes to cook a dish. I hope this translates to new-found respect for those who toil hard behind the scenes to bring a smile to our customers’ faces,” said Fenn on a lighter note.

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