Rajat Singh, disheartened by the current state of his business, made the difficult decision to sell his cafe in Kisan Bazaar, Lucknow, at a compromised price. Eager to make a swift exit, he actively searched for potential buyers. However, his plans took an unexpected turn when local newspapers began flashing news about restrictions on running F&B businesses in specific zones of Kisan Bazar.

To Rajat's dismay, he discovered that his cafe was situated in one of these restricted zones. Surprisingly, businesses in this area had been operating for ages without any clear guidelines or restrictions. The issue of permissible activities in the zone only came to light when certain influential players raised concerns, seemingly for their own convenience in running their businesses.

The sudden revelation of this restriction added further challenges to Rajat's already troubled situation. Now, he faced not only the struggle of selling his cafe but also the uncertainty of its future operations. The lack of clarity and the sudden enforcement of these restrictions left him and other business owners in a state of confusion and frustration.

Financial Trap

In recent years, the Indian food and beverage industry has experienced a roller-coaster ride, especially for mid-scale restaurants with investments ranging from 5 lac to 25 lac. While this sector has attracted many young entrepreneurs with dreams of success and glamour, it has also witnessed a significant downturn. A substantial number of these ventures face extreme failure, leaving 90 percent of small-scale businesses shutting their doors within just one year of operation. The key reasons behind this downturn include high rentals, manpower shortages, lack of skilled labor, slim profit margins, and complexities in the licensing process.

Struggling in the Shadow of Pandemic Recovery

The F&B industry, like many others, was severely impacted by the nationwide lockdown during the Covid-19 pandemic, setting off a downward spiral. However, after the lockdown lifted, the industry has been attempting to recover by adapting and innovating. New service offerings and Covid hygiene protocols have emerged to gain customer confidence and boost revenues. Food delivery apps have also begun explicitly mentioning the hygiene standards of restaurants, making them more appealing to customers who prioritize safety and cleanliness.

Challenges in Tier 2 and Tier 3 Cities

Tier 2 and tier 3 cities present unique challenges for F&B businesses. While they offer vast market opportunities, they come with their own set of hurdles. Firstly, the cost of investment in these cities is substantial. Only those with significant capital and a robust operating budget of at least two years can sustain themselves in this competitive market. Secondly, the availability of skilled labor is limited, making it difficult for F&B establishments to find the right talent for their operations. Additionally, the high rentals in commercial spaces add financial strain to businesses, affecting their profit margins. For instance, although Lucknow is considered to be a tier 2 city, the rentals and labour cost is no less than in Delhi. 

The owner of Samosa Day, that has multiple outlets in Lucknow mentioned that high rentals are making the industry bleed specially for small scale f&b business. “Maybe many business are running in no profit no loss but to earn is a big question. Small scale f&b business are finding it extremely difficult to make profits,” he mentioned while adding that only one out of his all outlet is making a decent money. 

Government Policies and Regulations

Government policies and regulations are also taking a toll on F&B businesses, particularly in smaller cities. The minimum wage requirements under the progressive wage model (PWM) have added to the cost pressures faced by food service businesses. Moreover, tight labor markets and restrictions on foreign worker quotas have made it challenging for F&B establishments to meet their workforce needs. These factors contribute to the increased operational costs and make it difficult for many businesses to survive in the long run. And for small bsinessess, getting the several liscensing has always been a hurdle. 

Dinesh Sharma, founder and director, APCA (Academy of Pastry and Culinary Arts) mentioned that starting a food company has its own advantages and disadvantages. The Indian government has developed several new regulations and programs to assist business owners in establishing their food company. While attaining license is one of the prerequisites, there are numerous other factors that one must consider to set up a food business.

The Grim Reality

Despite the challenges, the allure of the F&B industry remains strong for many young entrepreneurs, lured by the prospects of success and creativity. However, the statistics paint a grim picture, with the vast majority of small-scale businesses shutting down within a year. While the market potential is vast, sustaining a successful F&B business in tier 2 and tier 3 cities demands careful planning, significant capital investment, and a thorough understanding of the market dynamics. Those who can navigate the hurdles and overcome the barriers stand a chance to thrive in this fiercely competitive industry.

“The general idea is to be ‘conservative’ with your predicted revenues and a “generous” with your projected expenses because that's how things turn out in practice. Use only 75 percent of the money you have or can arrange it at first. And the remaining 25 percent will come in handy,” Sharma added.

Other Factors that proceeds to failure

While the market potential is promising, the harsh realities of high investment costs, manpower shortages, slim profit margins, and stringent regulations make it a risky venture for many. The restaurant industry in India is highly competitive, especially in urban areas. With numerous dining options available, small restaurants often struggle to stand out and attract enough customers to sustain their operations.

Many consumers in India are price-sensitive and prefer to dine at establishments that offer lower-priced meals. Small restaurants, particularly those focusing on quality ingredients or unique cuisines, might struggle to compete on price alone.

“Small restaurants often rely on regular customers, word-of-mouth referrals, or nearby office-goers. Fluctuations in footfall due to seasonal variations or changing consumer preferences can affect their revenue streams. We have been facing issue in making new customer,” Dhananjay Jha owner of Kadalu restaurant in Delhi stated. Additionally, securing a prime location in high-footfall areas can be expensive for small restaurants. A less-than-ideal location might not attract enough customers, impacting their revenue.

Only those with substantial capital, a long-term outlook, and innovative strategies can weather the storm and thrive in this challenging landscape. As the industry continues to evolve, aspiring entrepreneurs must carefully analyze the market dynamics, consider the hurdles, and be prepared to adapt to changing circumstances to achieve sustainable success.