One of my all-time favorite movies is ‘Sully. If you have seen the movie a 1000 times, like I have, you would have noticed the look of relief that actor Tom Hanks displays on landing the Cactus 1549 on the Hudson River. Though he does not say it out loud, his expression definitely spells, “Phew, we did it”!
2020 has been just the same – with its scares, lockdowns and economic downturn. As we almost complete the anniversary of India’s first lockdown, we have come a long way in surviving this once-in-a-century crisis.
Having said that, the pandemic is not over yet and the talks of a another lockdown in some large states bring back frightful memories from last year. As we navigate through this pandemic, the F&B sector, which was worst-hit in the country and globally, has to display resilience to make it to the finish line. The economic situation is undoubtedly improving as more people try to get back a semblance of their earlier lives. It is also heartening that the vaccination drive is gaining momentum, leading to increased customer confidence in stepping out.
Customers always return to trusted and reputed brands when times are tough and overall confidence is low.
Nonetheless, F&B companies and operators are facing tremendous pressure following a year of muted activity, fear of a second wave of infections as well as low spending in urban/semi-urban areas etc. Some of the below-stated observations could help them wade through the ongoing pandemic and emerge stronger:
Optimising Food and Real Estate Costs: Two reasonably large, yet non-optimised cost components for any F&B player, are the product/ food cost and rentals. These costs, if not checked and worked upon, can drive a major dent into their margins. Irrespective of the business model adopted by any company – be it a fine dining establishment, QSR or cloud kitchen, these cost elements need to be kept in check to drive profitability and ensure that the company can support itself on accruals. During these challenging times, it is critical for F&B companies to ensure minimal wastage. They should also verify that their processes are optimised to reduce food costs or mitigate any increase in the same. As for optimisation on rental costs, it is essential that cloud kitchen operators look at utilising the land parcel for more than one brand, automating certain processes (like reducing manpower and required space) or creating a leaner supply chain to reduce storage requirements etc.
Reducing dependence on aggregators: It is doubtless that the pandemic has led to a tectonic shift in the business models for numerous F&B operators. One big change has been an increase in the exposure to the delivery or cloud kitchen business. Legacy fine dining players or newly launched QSR brands want to keep their business momentum going by creating cloud kitchen infrastructure. However, a big component of the P&L in the cloud kitchen format is the payout taken by aggregators. Since this is cost is attached to unit sales, optimising it is difficult. As per our research and conversations with F&B players, the revenue payout to aggregators ranges between 18% to 22% (inclusive of GST). That translates to a reasonably large hit on their gross margins. When coupled with deep discounts doled out on these platforms, the situation only gets worse. Therefore, to strike a balance, F&B brands need to start building in-house logistics support or tieup with local providers to rationalise the overall cost and service organic customers with a similar experience. Adopting this strategy can definitely lead to better and more sustainable profitability.
Higher transparency fosters customer loyalty: It is well-known that customers always come back to trusted and reputed brands when times are tough and overall confidence is low. In these times, loyalty is not an easy thing to build. However, it is extremely rewarding since it not only builds sales but also creates repeat purchases, stronger word-of-mouth publicity and supports an efficient customer lifetime value to customer acquisition ratio.
Contemporary customers have become more conscious about aspects like ingredients, processes and manpower involved in the food process. Companies need to build customer loyalty by communicating transparency and hygiene so that the brand recall is more robust and they can build an organic sales funnel.
It is undoubted that these are testing times. Thankfully, green shoots are visible when it comes to demand comeback, improvement in economic recovery, disposable income and discretionary spends However, the time is still far before we can sit back peacefully and say that the challenge is over. This is the time for F&B players to showcase their tenacity to sail through the crisis and sail past the finish line.
