Issues and Challenges by Restaurant Industry
Issues and Challenges by Restaurant Industry

Economic / Market Factor

Rising Food Costs

Food price inflation is a key factor affecting the food services market in India, and is impacted by delayed monsoons, the economic slowdown, and unfavorable demand- supply conditions. It keeps fluctuating and reached a peak of 18% in 2010 (Exhibit 100). While It affects consumer indulgence across all formats, it also hits the margins realized by players.

Across all food services formats, food costs (raw materials) account for ~30-35% of the revenue. The perpetual rise in food costs narrows the players’ margins, compelling them to increase menu prices. This in turn accentuates the challenge of retaining customers who are already value-conscious and tend to evaluate all available eating out options carefully.

Fragmented Market, Increasing Competition

The Indian food services market has many small and mid-size unorganized players competing with large chain players. This fragmented market reflects a number of challenges, including the unclear format segmentation, varied consumer options for eating out, and the lack of best practices for food services outlets.

There are a number of players who offer products that are more or less similar, at competitive prices. No single player leads the market; and also low consumer loyalty exists. This makes it challenging for players to engage and retain consumers, and heightens their performance-related uncertainty. Since a one-size-fits-all approach will not pander to the variegated consumer palate, it is imperative that food services players tailor their offerings from time to time be it the menu, the format, or the concept, in order to establish a unique business proposition and attract diverse consumer segments.

Operational Factors

Manpower Issues: Shortage of Quality Staff and High Attrition

The Indian hospitality industry is highly labor-intensive, but the availability of trained chefs, managerial staff and other support staff is low. According to a study by the Ministry of Tourism, the current supply of skilled/ professionally trained manpower is estimated to be ~9% of the total manpower requirement. Given this shortfall of quality manpower and the industry’s high attrition rate of 20-25%, the cost of labor is high. To bridge the demand and supply gap, currently players are hiring in huge numbers and increasingly investing in in-house training programs.

Real Estate Issues

High real estate and labor costs impacting store profitability

For over a decade, India has been experiencing an escalation in real estate prices amplified by increasing demand and the availability of easy credit. For food services outlets, real estate (rentals) is the second major cost component after raw materials and accounts for ~12-15% and sometimes even 20% of total revenues. Further, labor costs are also high in India. People get low salaries, productivity is low, and thus there is a requirement for more employees. The high labor and real estate costs, couples with the high services tax on property, are exerting pressure on store profitability and consequently deterring the growth of food services outlets.


Land reforms impacting business operations

To add to the woes of exorbitant costs, the food services market is constantly buffeted by reforms relating to land availability, land ceilings, and floor space index (FSI), and also suffers delays in approvals. The permissible FSI in India varies across cities and, on average, is in the range of 1 to 4. In comparison, the global FSI average is 10. This is because of the constant discouragement of a high population density in urban areas, which results in a higher density in slum area and also unauthorized constructions. For example, in Mumbai, where space shortage is an issue, the FSI (including transfer of development rights) is 2.


Fragmented Supply Chain


The industry’s supply chain is fragmented in nature and marked by the presence of multiple intermediaries. The lack of appropriate infrastructure, inadequate technologies and non-integration of the food value chain are the key factors leading to the nearly 30-40% food wastage across to supply chain.


It is most essential for food services players to pin down existing supply chain issues and implement suitable counter measures.




There exists a shortage of quality warehousing space in India. Warehouse lack the optimal size, design, and storage system. Further, the presently available warehousing space is inadequate with respect to the growing demand. According to industry sources, the total warehousing space in India is estimated at 80-100 million metric tons (MT), whereas the demand is for a much larger space.


The logistics market in India is highly unorganized- ~95%, with few national level players. The infrastructure is grossly inadequate, with lack of proper roads, rail network and ports. Insufficient distribution channels, over-burdened ports, and poor quality of services are just a few of the bottlenecks that impact players. This leads to high logistics costs, which amount to over 13% of Indian’s GDP as against ~5% in developed countries.

Cold Chain

Currently, cold chain facilities in India are inadequate to meet the prevailing demand. The cold chain infrastructure is highly fragmented in India. An estimated 85% of the market by value is dedicated for storage and the other 15% for transportation.

According to industry sources, there are ~5,300-5,400 cold storage in India with a total installed capacity of ~23 million MT. Around 25% of these cold storage are multi-purpose, with the rest for storage of potatoes (~55%), other fruits and vegetables, dairy products and meat and fish. In terms of capacity, ~80% are utilized for potatoes alone and the rest 20%for other commodities. Across the entire supply chain, the need for cold infrastructure and advanced solutions is critical to minimize wastage of fresh produce, extend life of perishables, and enhance quality of food.

The need of the hour is to establish an end-to-end supply chain, making use of modern structures such as logistics parks, integrated cold chain solutions, and last mile connectivity, and also adopting such technology as barcoding and RFID’s and assuring government support through the incentivizing of private enterprises.

Liquor Sourcing

India is caught in a maze of archaic and complex regulations at both the central and state level when it comes to sourcing liquor. Every player offering alcoholic beverages has to obtain a series of licenses to sell alcohol, and also adhere to the prescribed permitted hours, eligible age limit, etc. This situation is further intensified by the following challenges.

Long gestation period: It takes anywhere between 1 month to 1 year to get a liquor license, with additional paperwork, and approvals from multiple departments, adding to the latency.

Anti-liquor mindset: Liquor procurement is discouraged in some states by applying simulated restrictions such as high tax rates, monopolizing procurement and levying charges on distribution.

Huge and recurring Licensing fees: An estimated INR 0.5-0.6 crore (USD 0.10-0.12 million) is required to fulfill all licensing requirements, which is a huge impediment for growth when considering a restaurant’s finances. In addition, the annual license fee to sell imported alcoholic beverage is as high as INR 10 lacs (USD 19,230) per year in New Delhi. Processing charges are additional expenses.

High tax burden: Many indirect taxes like customs duties, excise permits, and additional fees like government education tax are levied on imports and especially on the import of alcohol. In addition, interest is also payable. For example, a 150% tariff a levied on imported wine upon which the federal government imposes an Extra Additional Duty (EAD) of 4%. In addition, each of India’s 28 states levy their own taxes on alcohol that range from 30% to over 100%.

Government/ Regulatory Factors

Over- Licensing

In India, obtaining the requisite licenses, e.g. health license, food safety license, police license, No Objection Certificate (NOC), from the fire department and the state pollution control board, etc. is a major obstacle hindering the smooth operations of a restaurant. The process is not centralized as yet and requires filing applications with individual stakeholders, which involves a lot of paperwork and is a time-consuming activity. The licenses required to start a restaurant are the same throughout India, expect in some states like Maharashtra. A player needs approximately 12-15 licenses just to open a restaurant each from a government department. In comparison, the licensing requirements internationally are not as intricate as shown in Exhibit 101.

List of Restaurant Licenses- International


No. of Licenses

Nature of License



Sanitation (food) license
fire License
Sales (tax) license
Work permit License
Local Municipal license



Sanitation license
Environment License
fire License
Sales (tax) license



Food/Health License
Fire Licens
Sales license
Waste License



Municipality License Fire department License


 In India brands usually prefer to form a separate department or hire an external liaison consultant to handle restaurant licensing and other legal compliances because of the complex nature of the job and the time and effort demanded. The laws are also not uniform, differing as they do from state to state, and further, are open to interpretation. Exhibit 102 lists the licenses required for opening a restaurant in India.

List of Restaurant Licenses- India

Nature of the License

Issuing Authority

Mandatory / Optional

Food Safety License



health / Trade License

Municipal Corporation / Health Department of the concerned State


Eating House License

Police Commissioner- Licensing


Liquor License L-4 (L-17 as per new excise Rule)

Excise Commissioner

Mandatory for service of Liquor in the Restaurant. Otherwise not

Approval / Re-Approval of Restaurants

Department of Tourism of Government of India in the State concerned / Delhi Government


Playing of Music in restaurants- License

Phonographic Performance Limited / Indian Performing Right Society

Mandatory when recorded / live music of the two copyright Holders are played in the restaurant.

Environment Clearance for Grease Trap/ETP (Water Pollution Act)

State Pollution Control Board


Environment Clearance for Generator Sets (Air Pollution Act

State Pollution Control Board

Mandatory for Gen Sets

NOC from Fire Department

Fire Department of the concerned state


Weights and Measures

Legal Metrology Department


Lift License

Concerned authority- Electrical Inspector, Office of the Labor Commissioner

If lift is to be installed

Insurance required to be taken. Public Liability product Liability Fire Policy Building & asset There are other insurance policies also which are not mandatory but useful.

Any Insurance company Consult your insurance company.


Shop and Establishment Act

As Prescribed in the Act and as applicable to the state


Signage License

Municipal Committee / Corporation of the City

Mandatory In Some States


The Process of obtaining these licenses is cumbersome, expensive; ad imposes a high and avoidable ‘cost of compliance’ that benefits neither the industry nor the public.

The restaurant industry needs to ensure the implementation of a solution to the licensing conundrum to achieve its full potential; which can perhaps be achieved by encouraging a single window license clearance.

High Tax Rates

The Indian restaurant industry is burdened with multiple taxes like Vat, excise, and services tax, besides different state taxes, which add up to 17.5-25% of the bill value (Exhibit 103). This tax is much higher in comparison to other sectors like apparel and footwear, where it ranges from 10-15%.

Taxation in Food Services Outlets

Type of Tax

Tax (%)

VAT- Food and Non-alcoholic Beverages


VAT- Alcoholic Beverages


Service Tax

4.94% (40% of 12.36%)


Such Taxes are usually passed on by restaurant operators to consumers, who then curb frequency of their visits to restaurants. Overall high taxation is a serious impediment to market growth.

Consumer Factors – Diverse & Unpredictable demand

India, with its diverse ethnic backgrounds, comprises a host of target consumers with varied needs. The extant diversity and the ever-changing needs of the consumer make it difficult for players to classify customers into segments and create offerings accordingly. It is thus mandatory for players to constantly adopt newer tools like consumer analytics, and/or hire market research agencies, to understand consumer behavior and innovate constantly for effective business operations.

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