Restaurant businesses hit by Covid-19, face a long road to recovery

Our Bureau Mumbai | Updated on May 14, 2020 Published on May 14, 2020

An empty restaurant in the wake of coronavirus pandemic in New Delhi   -  PTI

Multiple challenges ahead for the restaurant industry as they await guidelines to resume business.

India’s organised dine-in restaurants are on course for a 40-50 per cent cut in revenue this fiscal due to the disruptions caused by the coronavirus pandemic, which have led to the closure of outlets, job cuts and a trickle-down effect on the food supply chain. The ₹1.5 lakh crore organised restaurant business will take at least a year after the lockdown is lifted to recover from the Covid-19 pandemic, a CRISIL Research estimate showed.

Organised restaurants account for ~35 per cent of India’s restaurant industry, estimated at ₹4.2 lakh crore in fiscal 2019. Dine-ins are 75 per cent of the organised restaurants, with online delivery/takeaways making up for the rest.

Dine-ins and public entertainment venues in Mumbai, National Capital Region (NCR) and Bengaluru have been shut since March 13-14, 2020, before the government announced the first nationwide lockdown on March 25.

Online delivery is available in several cities such as Mumbai, Delhi-NCR, Bengaluru, Kolkata, Pune and Bhubaneshwar, and that, too, at low service levels.

Slow recovery

Rahul Prithiani, Director, CRISIL Research, said, “The organised sector has seen a 90 per cent reduction in sales since the lockdown. Dine-in is not operational and online orders have declined 50-70 per cent. And when the lockdown is lifted, the rebound is expected to be only gradual. This holds especially for Mumbai and Delhi-NCR, which make up nearly half of the organised restaurant industry in India, but are Red zones accounting for over 30 per cent of the Covid-19 cases in India.”

The slow recovery should begin from June. Given the low demand and social distancing norms, restaurants will operate at 25-30 per cent of their monthly service levels in the first 45 days after lifting of the lockdown. Besides, with restrictions on gatherings and public movement likely to be extended again in Mumbai and Delhi NCR, curbs on dine-ins there will continue – or, they may be allowed to operate only at low service levels.

This will jeopardise the financial health of many restaurant operators. Additionally, because of high operating leverage, a 40-50 per cent decline in revenue could lead to negative operating margins this fiscal.

Increased costs and declining revenue

To manage liquidity constraints and cash flows, many restaurants are already seeking concessions or deferment of rentals. Players with high debt levels will face pressure to shut unprofitable outlets to save costs and raise money. While large players with low debt will be able to raise money, business revival remains a big question for them, too.

Anjali Nathwani, Associate Director, CRISIL Research, said,“Once the restrictions are lifted, restaurants will have to rework their business models and overcome operational challenges. With consumers turning more health-conscious, hygiene protocols at restaurants and supply chain will need to improve materially, which will increase cost.”

The decline in restaurant revenues will, in turn, impact horticulture farmers, dairy producers, food processors, suppliers and logistics and delivery partners.

Unorganised food producers, many of which have high exposure to the restaurants sector, will be hit the hardest due to a sharp decline in bulk demand this fiscal.

The estimates are based on assumption that lockdown restrictions will be continued till end of May. Any further extension will aggravate the industry’s woes, extending the recovery period further.

More than 50 per cent of the players in the industry have stressed balance sheets with negative networth or debt equity ratio of more than 2 times. Around 30 per cent of the set analysed also have low interest coverage ratio (ICR), at less than 2 times. With declining revenue and increase in working capital requirements, these players will find it difficult to raise debt from banks.

Operational challenges

That’s not all. The operational challenges post the lockdown will also lead to changes in the business model. For instance, volumes are likely to dip since customers will turn cautious on discretionary spends. Also, social distancing norms will lead to lower operational levels with fewer tables, reduced working hours and improved ventilation systems.

With consumers emphasising on greater hygiene in both restaurants and the supply chain, cost will increase. Contactless dining will also need to be facilitated, such as enabling ordering from a customer’s phone instead of a menu card. With the dine-ins facing stiff competition from the delivery segment, restaurateurs will have to retune their strategies since consumers are less likely to queue up for a table.

The industry is undertaking several measures to tide over the crisis and adapt to the new normal. For instance, the dine-in segment is looking at new offerings such as do-it-yourself meal boxes with ingredients and recipes, and focusing on healthy products and safe deliveries. They are also changing menus to suit demand – comfort food, quick and combo meals are fresh additions.

For now, dine-in remains closed, with the restaurant industry awaiting further guidelines from the government on resuming business. Any extension of the restrictions on dine-in in key regions to June will aggravate the restaurant industry’s woes, and stretch the time to recovery.

Published on May 14, 2020

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