Demonetisation could clean up the restaurant business

One of the big, underreported issues dogging legit Indian restaurants is competition from rivals in a parallel economy. A collapse of this shadow economy and a level playing field are long-term benefits that restaurateurs are hoping for in the wake of the demonetisation.

While restaurateurs are guarded talking about this, most “all white” chains complain about tax-dodging rivals. These restaurants and bars, much of whose sales are in cash, drive up rentals and salary bills and sometimes force price wars, making it harder for those playing by the book to survive.

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“Competition is fine but when you are competing against players whose profit margins are higher because they are dodging tax and can therefore pay more in rentals and wages, it fouls the market. There are also restaurants set up solely to launder money. The current bold move will definitely help,” says Sumit Gulati of Gulati Restaurants in Delhi.

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Restaurateur AD Singh of Olive Bar and Kitchens is similarly hopefully: “The parallel economy will collapse and bring prices to a more affordable level. Real estate, for example, has been propped up by the black economy and has been the biggest problem for our industry.”

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With the extra cash drying up, “we hope the part of our industry that operates outside the system will be brought into the system, thus improving our competitiveness”, says Singh.

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Restaurateurs hope that demonetisation and increased scrutiny will encourage more credible companies. For most structured companies, cashless systems are already in place to ensure transparency.

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“It is only small vendors like the bhajiwallah who need to be paid in cash. They will be temporarily affected by demonetisation,” says Sameer Seth, partner, The Bombay Canteen.

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The drop in revenues in the mid-market segment is also expected to be temporary. Most mid-market restaurants in the metros report 70-80% business through credit cards and don’t expect a huge dent in the long run.

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