Scenario Analysis-2

Restaurant Business in India

Restaurant business in India is always evolving. More Indians are warming up to the idea of
eating restaurant food whether by dining outside or getting food delivered. While the industry
is fragmented and coming up with newer business models.

Market Size of Restaurant Business in India

India is one of the largest consumer markets globally, and one of the youngest with more than
45% of the population under the age of 25.

Further Rahul Singh, India President, National Restaurant Association mentions: “Restaurant
business in India is the largest service sector in India after retail and insurance and is 20 times
of the film industry, 4.7 times of hotels and 1.5 times of the pharmaceutical sector.”

According to the NRAI India Food Services Report, the food services market in the country
is estimated to grow at a compounded annual rate of 10%. The fine and casual dining
segments are expected to register market growth of more than 18%–20% and 15%–17%,
respectively. This growth is fueled by a young and upwardly mobile middle class, hungry for
new eating-out adventures.

ReedSeed Management’s research found out that consumers on average spend INR 2100 per
month on restaurants. The spend is higher in metros with Mumbai and Kolkata leading the
table.

Dine-in is the most preferred medium followed by delivery with the spend on takeaway being
the least. With the growing online penetration consumers are getting comfortable with online
services. And hence we expect the online food delivery apps to take up more and more share
of the delivery spend of consumers.

Challenges of Running a Restaurant Business in India

“Today, keeping a restaurant alive and relevant for four or five years is extremely
challenging. If India has a big appetite for eating out, the economics of running a restaurant
— or indeed any other joint — aren’t keeping up”, said one restaurant owner in an interview
to Restaurant India.

While the market is booming with opportunity, these are the challenges that most restaurants
are facing:

Unaffordable rent cost

The amount of real estate available to restaurateurs is limited, rentals are constantly
increasing and yet consumers are going for (cheaper) casual dining. “Throughout the world
rent and electricity makes up 5% of restaurant earnings, but in India, this is 20-25%”  – said
one of the restaurateurs in an interview to The Economic Times.

Constantly increasing food costs

Food costs are very high and not just due to inflation. The cost of importing ingredients, or
finding and getting them from local vendors has made sourcing a challenge for even seasoned
chefs. Controlling these rising costs will be much more simple if your restaurant takes control
of its inventory management. 

Increasing competition for restaurant business in India

New restaurants are popping up every few days in the Indian restaurant industry. While
global players are increasingly entering India, localized brands with unique menus and
cuisines are also taking over the market. Finding out where your restaurant stands in this
arrangement and making it stand out is of utmost importance.

Slim profit margins

An analysis report by NRAI suggested that – most restaurant companies aim for an operating
margin of 15-20% and even efficient ones could just about manage a net profit margin of 5-
6%; anything in double digits is regarded as an exception.

Tangible proof of the lack of profitability is that Industry watchers estimate that almost 80 or
more outlets may have shut in the past 6 to 12 months.

Delivery Disruption takes on Tier II and Tier III Cities

Consumers show a growing preference for eating at home and consuming healthier dining
options, so restaurant brands are faced with delivery challenges.

Restaurant companies have started to rethink their real estate approach and their delivery
integration approach. In fact, to avoid bottlenecking traditional dine-in/drive-thru operations
– chains have started adding fulfilment locations (kitchens) devoted entirely to delivery.

Further on, the food delivery flight is ready to grip small towns in India, especially Tier 3
cities. For Swiggy, the new cities form 15% of their business, while for Zomato non-metros
contribute 40% of the order volume.

Question:
A. Comment on the type of market structure that is represented by the Restaurant
business in India. What are the salient features of such a market?
B. What should be the ideal way to compete in the Restaurant Business – Price,
advertising, quality of food/services?

Instructions for submission of write-up:

1. Write-up must be hand-written.
2. Word limit: 250 – 400 words for part A and 250 – 400 words for part B.
3. Your write-up should reflect your understanding of underlying concepts of Managerial
Economics.
4. Entire write-up should be in your own words