The State of Restaurant Business in India

This blog post aims to give you a complete picture of the restaurant business in India. For this purpose, it’s updated every few months with the latest insights and trends. This is the August 2019 edition. Happy reading! 

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.

So what is this market like and what you should know to touch profitability here? We’re covering this and a lot more like:

  • Market Size
  • Challenges
  • Delivery Disruption
  • Commission Fatigue
  • Dark Kitchens
  • Customer Experience
  • Investment
  • Current Trends
  • Restaurant of the Future
  • More Resources

Let’s dig in!

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.

Disposable income is on the rise; according to data from the Economist Intelligence Unit, personal disposable income in India should grow about 10.5% annually through 2020.

Further Rahul Singh, India President, National Restaurant Association mentions:

“Restaursnt 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 stands at Rs 3,09,110 crore, and is estimated to grow to close to Rs 5,00,000 crore by 2021, 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 fuelled 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

Quick Service Restaurant POS

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. We’ve got you covered here with the right inventory management tips.

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.

Hiring and retaining employees

Restaurant business in India employed 7.3 million people in 2018-19. But the staff turnover is high in the market, also increasing the hiring costs. Restaurants have to plan their hiring needs well in advance for peak seasons. They also have to dedicate time & money towards employee retention activities. Hearing what their employees have to say and how their experience has been.

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 2,3 Cities

delivery and restaurant business in India

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. According to LiveMint,  in 2019 alone, Swiggy and Zomato have launched operations in 185 and 300 towns and cities, respectively. For Swiggy, the new cities form 15% of their business, while for Zomato non-metros contribute 40% of the order volume.

Food Tech has seen a lot of momentum in the past year with third-parties picking up funding from investors and parent companies. This has led to further expansion plans in other tier 1 and 2 cities.

According to ReedSeed Management, with increasing competition, these third-parties are using discounting strategies based on events, meal types and cuisines leading to decrease in industry AOV (average order value) by almost 18% but still strongly driving growth.

But the Commission Fatigue will Grow

With third-party aggregators, the issue is that they have control over the customer’s experience. They’re the ones being a touchpoint for consumers. Not to forget the high commissions they charge on every order.

Restaurant businesss in India are now realizing this problem.

In fact, Members of the Kerala Hotel and Restaurant Association (KHRA), which has decided to boycott the aggregators, are worried that aggregators will do to them what Ola and Uber did to drivers: initially help widen their reach but eventually kill their earnings, especially through heavy discounting.

In an interview to Quartz , Suhaib V, owner of Kochi-based Ceylon Bake House said –  “Uber Eats and Swiggy take a 33% commission and Zomato charges around 22%. Only if the delivery apps reduce their commissions to around 10% will we potentially stop losing so much money.”

While in an analysis, Forbes found out –

Restaurant business in India will continue to grow commission fatigued in supporting third-party aggregator fees (which range anywhere from 15 to 30%), and a few will start to wean off of these services by implementing their own platform and delivery fleets.

More players are now setting up their own online ordering platforms. Want to see some examples? Go here.

Dark Kitchens and Meal Delivery Services

Food packing boxes

A dark kitchen is a restaurant that exists only online, without an actual storefront for guests to visit. They run on online ordering and delivery.

“Dark kitchens are red hot because they add a fast-delivery layer on top of restaurant brands, allowing them to scale quickly,” says G.V. Ravishankar, the Bangalore-based managing director of Sequoia Capital India

Faasos, Box8, FreshMenu, and Biryani By Kilo are brands having more than 10-20 outlets each and are expanding rapidly.

Not just startup restaurants but full-fledged brands like KFC are also exploring the dark kitchen model.

Samir Menon, managing director, KFC India said:

“The company’s pilot of its dark kitchen has done much better than what we expected. We believe it is another way to increase access to the consumer and we’re already in discussions to expand it.”

Read all our dark kitchen, cloud kitchen, and ghost kitchen guides here.

Meal delivery and home-based chefs are two more concepts taking up the Indian market by storm. Brands like FreshMenu and Lunchly are giving affordable meal options and home chefs are tying up with delivery partners to take their business a step higher.

Customer Experience is Key for Restaurant Business in India

customer experience in restaurant business in india

For restaurants in this competitive, fast-moving space, being able to engage and delight guests won’t be nice to have, it will be a must-have. Here are some facts:

  • As a group, Millennials are willing to spend the most (21% additional!) for great customer service.
  • People tell an average of nine people about good experiences and tell 16 (nearly two times more)people about poor experiences.

Providing good customer experience actually costs less than providing a bad customer experience in the long run. Moreover, great customer experience also makes customers willing to spend more money with you.

As Scott Cook has mentioned before – “Instead of focusing on the competition, focus on the customer.”

This way you’ll never have to worry about the competition.

How to work on your customer experience?

Gather data about your customers, turn that data into insights, and place those insights into action. Always be honest with them and connect on a human level.

Investors want scalability and sustainability from restaurant business in India

India’s food and beverages (F&B) market saw around US$100 million of investment in 2018, with the amount of space dedicated to the sector rising to a record 18 percent, as per a JLL report.

While shows like Shark Tank, Dragon’s Den, or Restaurant Startup give you a look at the experience of pitching your restaurant idea to investors. It’s a whole new game when you are doing it yourself.

For restaurant business in India that are looking out for money from investors, here’s what investors say:

“The issue which has come in the past in the restaurant space is about the scalability of the concept and the model, pricing it in the right way to make the investors earn money. I think investors have gone through a cycle in which they understand which formats can scale.” –  said Sumer Juneja, Partner, Norwest Venture Partners in an interview to Restaurant India.

While Biju Thomas, CFO, Adiga’s pointed out that – “A key factor in investing in a restaurant is the sustainability. It all depends on the life span of a brand. For eg: earlier the lifespan of a casual dine was 4-5 years which is now coming down to 2-3 years. So, you should always look at the flexibility and how food is adapted to the change and constant menu innovation because most of the time restaurants that don’t adapt themselves to the change fail to sustain in the long run.”

So the mix to get your investment pitch right is a combination of innovation, scalability, and sustainability that you’re bringing to the table.

Current Trends for Restaurant Business in India

Healthy food – still for the win

Healthy food combined with tech

Overall, the demand for healthy food will continue to grow as consumers become more conscious about their diet by trying to eat healthy, going for farm-to-table lunches, growing their own garden herbs, buying organic produce, trying new grains and consciously avoiding junk as much as possible. Dairy alternatives like almond and soy milk will also continue to grow popular with millennials.

Home chefs, another growing trend, are likely to drive this trend as they run small kitchens where the recipe for success is a mix of experimentation and quality control. Though health food is still largely an urban, metro phenomenon. Awareness has not yet trickled down to other cities. But with growing consumer preference, it is only a matter of time before the health and wellness foodservice industry expands its base into the non-metro cities as well.

Restaurant tech will come together with more automation

These are the early days of AI and machine learning-based automation in the restaurant industry.

“Consumer demand for greater convenience and speed will continue to accelerate, and restaurants are responding by adopting and incorporating more sophisticated layers of technology into day-to-day operations,” said Hudson Riehle, senior vice president, research and knowledge group, National Restaurant Association.

Restaurants business in India will redesign for off-premise business

In a Restaurant Delivery survey, it was found that:

  • Nearly 4 in 10 operators plan to invest more capital in expanding their off-premises business in 2019
  • A solid majority of casual-dining (72 per cent), family-dining (63 per cent) and fast-casual operators (64 per cent) say their delivery sales are higher than they were two years ago.

Delivery optimization is key for the majority of restaurants.

Kiosks to take the front place

Kiosk ordering restaurant business in India

Major chains have started accelerating their kiosk rollouts, normalizing the habit of ordering from a touchscreen versus front-of-the-house employees. Kiosks and self-ordering will be seen adapted by more QSRs and fast-casual restaurants.

Fast-casual everything for restaurant business in India 

“There are many things happening, but my prediction is that fast casual will make significant inroads. We’ll continue to see luxury ingredients served in a very simple fashion with self-service.” – Geoffrey Zakarian, chef, restaurateur and TV personality.

Reusable packaging

73% of millennials say they try to buy food in packaging that is recyclable, while 59% say they look for beverages in packaging that is made with renewable materials.
69% have changed what they buy in order to avoid artificial foods and beverages. (Source: EcoFocus Trend Study)

With the plastic ban hitting more and more cities in India, cloth bags, non-plastic packaging of foods, carrying your own cups/bottles to cafes is all set to take over in a big way. Consumers will also expect restaurants to provide and promote these reusable/recyclable options.

Cocktail culture

Have you heard of Espresso Whisky? There’s much more happening in the cocktail side of things. Resto-bars in India are happily creating larger drinks menus than food menus. Hiring bar consultants to set it up is also becoming a common practice. All this is leading to a thoughtful range of cocktails that have a story to tell or have an interesting origin. And consumers are excited about this trend.

Eating where you shop
Plum by Bent Chair
Plum by Bent Chair

Restaurants business in India are coming up with new ways to innovate and provide a complete experience to their customers. One of which is combining retail and food. Going beyond food, restaurants are turning retail destinations with millennials being the prime takers for this concept. The retail industry, which is expected to grow to $1.1 trillion by 2020, has a lot in common with the restaurant industry.

Places like Cafe Dori, Plum by Bent Chair in Delhi are a few examples of this shift.

At Plum Café, visitors can buy anything they see and anything that they like, quite literally. “It could be the spoon they are eating from or a piece of art hanging on the wall; if a customer sees it, he can buy it. Everything in the restaurant has a price tag attached to it,” says Sukhija, who will be retailing Bent Chair décor products at his restaurant.

Targeting younger consumers for restaurant business in India

Restaurant operators across all segments are focusing on building business among younger consumers (Millennials and Gen Z). To attract these tech-savvy consumers, a majority of operators expect to devote more resources to social-media marketing and personalized communication.

Here is a list of 16 marketing ideas to help you.

Need for usable restaurant data

data management for restaurants

In our Restaurant Technology Report, 81.2% restaurant operators said that analytics is an important part of their business.

While restaurants are collecting and looking at data, there’s still a barrier in understanding it and using it to derive insights. Time now is calling for a data ecosystem that is usable and connected to your restaurant management system. An ecosystem that gives them insights into sales, marketing, operations, front-of-house, back-of-house, customers, and retention.

More appetite for technology

Technology influences nearly all core functions of a restaurant business in India – acquiring customers, booking tables, processing orders, Kitchen displays, billing, payments, inventory, marketing and retaining customers.

In NRAI’s survey, the majority of consumers say they would like to see restaurants incorporate more technology with a focus on improving customer service, making ordering and payment easier, and offering more convenient takeout and delivery options. This means more opportunities for personalised interactions, cashless economy and delivery innovations.

The restaurant of the future

Today’s restaurant customer is technologically savvy, connected, and has high expectations.

Restaurant business in India who understand their customers, capitalize on digital/technology investments and analytics, take the opportunity to engage customers in a highly personalized way. They can drive increased dining frequency, better average basket size, customer conversion, and loyalty.​ Are you ready for the future?

Here are some more links to help you prepare for the restaurant business in India:

Food Franchise in India: A Complete Guide

All the Licenses Required to Open a Restaurant in India

Indian Restaurant Name Ideas: What we learned from 3500+ Restaurants

Ghost Kitchens: How restaurants are Leaving the StoreFront Behind

Stunning Restaurant Interior Design Ideas

How to Hire the Best Team to Run Your Restaurant

16 Restaurant Marketing Ideas for your Strategy

If you have any questions, we’d be happy to chat in the comment box below.

The State of Restaurant Business in India
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Niharika Maggo

Niharika Maggo

Niharika is a Content Marketer at LimeTray. When she’s not busy wearing down the keys on her keyboard, she's found listening to podcasts, reading or drinking tea. She can be reached at marketing@limetray.com.