At the recently held Kalaghoda Festival in Mumbai, one interesting piece of art epitomised the recent sky-rocketing prices – an elusive basket of onions and potatoes placed at a table of stakeholders. Everyone who buys raw food from the market or cooked food from a restaurant has been hit by the price rise. Since restaurateurs are buyers too, they’ve been hit as well.
A Restaurant Customer: “Sure, but don’t we as customers pay for all their expenses and huge profits? When I pay Rs.200/- plus taxes for a plate of pasta at a mid-level restaurant, the restaurateur’s profit is at least 50%. I buy pasta and cook it, so I know exactly what it costs. Even if you add rent, labour, electricity, it doesn’t come to that much. He is making a clear profit of at least Rs.100/- on that plate. I know this business, it never goes down. Even in a recession, food is always in demand. In fact, one of these days I’m going to start a restaurant of my own.”
A Restaurateur: “To arrive at the right selling price, I first calculate my variable costs, based on the number of plates I serve. This means my per-plate cost of food, packaging and delivery. I then consider costs that remain fixed, regardless of the number of plates I serve. These include labour, rent, electricity, licence fees, marketing expenses etc. As if the rent wasn’t high enough, I now have to deal with vegetable prices sky-rocketing. Plus I haven’t even been able to deliver a 25% profit to my investors. I have little choice but to increase my menu prices once again, which I know isn’t going to go down well with my customers.”
25% profit? Am I joking? Not at all. Worse still, no profit at all. Scenarios where restaurants lose money and are forced to shut down are commonplace in this business.
The industry norm was once that Net Sales (i.e. Sales minus the Value Added Tax which goes to the government) should comprise of three equal parts: Variable cost, Fixed cost and Profit before Income Tax. Nowadays however, a restaurant’s cost and profit realities are quite different. Costs don’t stay where they should, and their increase means a spill over into a restaurateur’s profit. It may surprise you to know that to survive and compete in the business today, your favourite restaurant brands (high-end and low-end), work for far less profit than you’d imagine.
A restaurateur who insists on marking-up his selling price to retain the once targeted profit, finds it tough to stand up to his competition and demonstrate value to his customer. He knows that fleecing his customers because they are captive to a particular cuisine, one-day event or remote location is the choice of only myopic food brands.
Now let’s take an example from the coffee shop space, to see how pricing decisions can sometimes go wrong despite good intentions.
Barista, the forerunner of the coffee shop sector in India, was once highly respected for being a game changer in the food and beverage industry and its patrons. When CCD entered the market with a somewhat similar value proposition and a lower price point, it posed a challenge.
Barista responded by lowering its prices to match CCD. Many Barista patrons then felt that they had been overcharged all along, and migrated to CCD. Subsequently, Barista realised the implications of its pricing decision and repositioned its cafés as regular and premium with respective price points to match. They invested serious time and sincere efforts in redeveloping each element of their proposition to demonstrably offer better customer value. Slowly they began regaining a part of the coffee shop market that they once owned exclusively.
So while Barista was the only player, customers saw value in the price of its offer. When a new game changer came in, the dynamics changed and so did the perception of value.
To survive and make money in the restaurant business, a restaurateur must overcome these reality-based and perception-based price challenges.
I believe that your understanding of this as a restaurant patron or potential restaurateur, will help you be better equipped to discern between what’s a fair price for restaurant food and what isn’t.