Real Economy Check: It’s Easier To Open An Arms Factory Than A Restaurant In India, Says Riyaaz Amlani
India’s restaurant industry is plagued by the requirement of no-objection certificates and licenses—seven times the number needed in Singapore or Turkey—at a time the government’s working to improved India’s ease of doing business.
That’s according to Riyaaz Amlani, chief executive officer and managing director of Impresario Entertainment & Hospitality Pvt. Ltd., which owns multiple restaurants and pubs across India, including Social, Smoke House Deli, Ishaara, Slink & Bardot and Salt Water Café. Amlani spoke to BloombergQuint on Real Economy Check—a special series on India’s small and medium enterprises.
“I think we’re the most over-regulated industry in the country today,” Amlani said, adding the industry is classified under many ministries. “We need a health license, we need an excise license, we need a police license, we need a shops and establishment license, we need a factory license,” he said. Even if all the restaurant does is sell sandwiches, it needs 35 no-objection certificates to open up, compared with only five in Singapore and Turkey, he said.
That comes as the Narendra Modi-led government has been working to improve business regulations in the country to boost local entrepreneurship. India’s ranking in the World Bank’s ‘Ease of Doing Business’ index rise 14 spots in the latest survey to 63 for 2018-19.
More recently the industry has been representing to government to allow it to claim input tax credit when availing the lowered 5 percent GST rate. Amlani said the inability to claim input tax credit (offset tax paid on inputs) has increased costs by 20 percent.
We could’ve opened five restaurants but now, we can open only four because of the input tax credit (problem).Riyaaz Amlani, CEO and MD, Impresario Entertainment & Hospitality Pvt. Ltd.
Despite the regulatory and tax challenges, Amlani is upbeat about the growth potential for the industry - whether dining out or ordering in.
“We have seen a phenomenal growth in the eating-in category. A large part of the growth is not because they are replacing dining out, but they are actually replacing the kitchen.”
Watch the interview with Impresario Entertainment & Hospitality’s Riyaaz Amlani
Here are the edited excerpts:
Tell our readers about your company. You run Smoke House Deli, you run Social and a bunch of other popular brand names?
As a company, we run Social and Smoke House Deli. In addition, we also started our business with Mocha- a coffee shop chain - and we also run Salt Water Café, Slink & Bardot, Ishaara- which is a differently-enabled restaurant and Prithvi Café. So, we have fun.
As I was wondering Riyaaz, if indeed this time around, things have looked slightly different? Have the last three to six to nine months been starkly different than what you’ve seen in the past?
It would be incorrect to say it was starkly different. We had a reasonably good quarter one. The last two months which is October and September have been a little muted than before. We have seen about 3 percent de-growth, but we are expecting the next few months to be better. So, the same store sales growth has been flattish, but it hasn’t been a substantial dip; as it is for the last two months. Typically, the restaurant business does see a slowdown in the September and October months because there are lots of festivals and people go to each other’s homes and they don’t spend so much time going to restaurants during September and October. It’s not been so bad.
I was under the impression that most people during the festive season of Navaratri, Diwali etc would be going out to eat and drink but you are saying that this is a seasonal phenomenon- every time during this year, you do not necessarily have the best of occupancy?
No, we do not because during the Ganesh Chathurthi time, things are bad. There’s always the Shradhs (mourning period) and the Navaratras (fasting period). Typically, these are times when people are fasting and observing their festivals and they tend to go to a religious gathering, or they go to the Navarati festivals or they go to each other’s homes. So, these two months are typically a lull period for restaurants.
One of the other things that I wanted to get through this conversation was, has there been a change in the business environment? One is how the consumer approaches your places or your outlets which is based on the consumer sentiment. The other is, liquidity, cash flows, rates etc because rates have come off but the mid-size companies say that they haven’t really experienced that cut in rates as well. What’s been your experience as an entrepreneur on all of these accounts?
So, we’ve not had a bad experience. Like I said, we’ve not seen growth, but we’ve seen flat sales. So, we haven’t seen a de-growth so to speak. We are private equity funded so we have the cash flow right now and we have a visible runway for the next one year or so. We are continuing our expansion plans the way they are.
Our biggest issue has been the non-input tax credit allowed on our GST, which has effectively - we don’t get any rebates, or we don’t get any input tax credits on our GST that we pay. What that has effectively done, it has made opening restaurants 20 percent more expensive and it has increased our cost by 20 percent. So, that has been the biggest hit to our industry; non-allowance of input tax credit.
Has the industry body made any representations?
So, we have been making representations, we’ve been talking to various specially constituted group of ministers; we have been talking to them, we have been telling them that the hospitality industry is the most intense employer per square foot in the services sector. By letting the hospitality industry have the input tax credit, you can actually unleash the true potential of the restaurant industry.
We still believe there is a lot of room of grow but the capital doesn’t get that far anymore. So, what could have we done? We could’ve opened five restaurants but now, we can open only four because of the input tax credit (problem). So, that’s a 20 percent shave on our ability to open more restaurants.
So, until those changes happen, large scale expansion of chains might be hindered and might be slower than it otherwise would’ve been?
I think all the chains have muted down their expansion plans because of this income tax credit disallowed. Like I said, our dollar doesn’t get us that far anymore because all expenses have gone up by 20 percent. So,the same amount of capital would yield in 20 percent less restaurants and therefore, 20 percent less employment, that means 20 percent less revenue collection, that means 20 percent less business to the ancillary industries. So, we definitely feel that the GST is currently our biggest issue but other than that, things are alright.
What about the cash flow and the lending by banks? You might be private equity funded but you still need your daily working capital and maybe your peer set might not be in the same space that you are. Have there been issues?
After demonetisation, things did slow down for a bit but we also saw business climb back up very quickly after the first three months - but that was one quarter we never got back. The business loss in that quarter was phenomenal. After that,things were pretty much back to normal after the first quarter of demonetisation.
When it comes to liquidity, restaurants have not had access to too much debt because we tend not to own the immovable asset in which we carryout our business. We tend to rent our premises, so we don’t have much collateral to present to the bank. So typically, a bank would fund about 20 to 25 percent of the capital requirement of the restaurant after mortgaging the movable assets that you would have. So, banks are not the preferred choice for restaurants to grow because they would fund you 20 to 25 percent of your capex requirements and we are a working capital negative business so that is an advantage for restaurants. We get goods on credit, but we sell on cash. So that is a big help. But banks are not our go-to source for the restaurant industry.
When I speak to fund managers, when I look at the employment numbers- the Zomatos and the Swiggys in a way are a subset of yours or a client of yours or a whichever extension of yours- are hiring by the dozens. Their employment is really picking up, they’re amongst the largest employers and that would only be possible if people are ordering a lot more than they used to four to five years ago. Now, how is this puzzle? Is this why the business has overall picked up or is this why eating out has gone down and ordering in has picked up materially?Does that impact your business as well?
This is a very nuanced question. We have seen a phenomenal growth in the eating-in category. A large part of the growth is not because they are replacing dining out, but they are actually replacing the kitchen. Earlier, with the rise of nuclear families and the labour costs also going up for household help, it is becoming more effective to start ordering in. So, a lot of the meals that are consumed outside are actually kitchen replacements. What you would have cooked at home you have found it cheaper and easier to order food from outside - rather than go grocery shopping or employ a cook or cut and chop the vegetables, do the preparation or spending a couple of hours getting a meal ready is cumbersome. So, I think, the ordering in is a kind of a labour arbitrage.
Dining out, the frequency is only increasing. Currently, in metros the dining out frequency is eight to nine times a month. To put things into perspective, Singapore dines out about 66 times a month. So, in terms of that, we have a lot of headroom for growth. So, we are very excited about the possibilities. Yes, there are a few things that we have over-regulated. We don’t have the income tax credit on our GST and we are battling with our aggregators on the issue of deep discounting. So, these three are issues that we are facing but overall, we are very optimistic about the future.
Is there a statistic about Indians dining out? Singapore is 66 times, what is the India-average if there is something like that?
In metros like I said, in major cities and metros, it’s about eight to nine times a month and in tier two and tier three cities, its about three to four times a month.
You mentioned that the Input Tax Credit has been the biggest bugbear. Anything else that has been a sore point which from a regulatory standpoint?
So, there are a couple of things that we’ve been asking the government to do besides the Input Tax Credit on GST.
One is, we are very over highly regulated. For a restaurant to sell a sandwich they need 35 different no-objection certificates and licenses and I think we are the most over-regulated industry in the country today and that comes because we fall under so many different ministries so we need a health license, we need an excise license, we need a police license, we need a shop and establishment license, we need a factory license and there’s a whole host of licenses that we need to get. I think easing up from those licenses; from 35 NOCs which is what is required in India but in a place like Turkey or Singapore, you need only 5 licenses to create a food services business. So definitely, we need government will to kind of ease up on the regulations of controlling the restaurant industry.
It’s easier to open up an arms factory in terms of licenses than a restaurant. So, we definitely want the government’s intervention in terms of reducing the amount of NOCs and licenses that we need.
The second request that we have from the government at this stage is to control the predatory practices of the aggregators. So, that is what we feel that if left unchecked, it will really hurt the industry.
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