Location costs for restaurants is not a variable cost like food and labour costs and hence, often gets side-lined until a hike in the rents cause the management to stop in their tracks. The lease costs in food business should ideally vary between 5% to 8% of the revenues that the business is earning; and while the food and labour costs take away most parts of your revenues, location costs or rents are the third-highest costs eating into your earnings. This is the cost that is associated with the locational advantage in an area with a pre-set clientele that straightway leads to opportunities for higher sales volume.
The scenario in India – location costs of restaurants:
- Restaurant rents depend largely on the location, size and type of food business.
- Data suggests that the location costs take up as much as 25% to 33% of the revenues in India for a typical family restaurant; especially in prime locations. Globally, the ratio is about 15 to 20% of the revenues.
- Restaurant rents at all prime locations in the country have witnessed a significant increase in the last few years
- The average rent today usually lies between Rs. 30,000 to Rs. 1 lakh per month.
How to run restaurants with increasing location costs?
Go in for the fine-casual concept rather than fine-dining restaurants.
Many restaurants in the West have done this, especially in the Bay Area where rising rentals became a big challenge for business owners a few years back. They scaled down their menus which directly impacted their labour costs because it required a lesser number of chefs and cooks. The concept of self-service also got introduced where the need to hire order-takers and waiters was minimized. These tactics helped the owners sustain their business even in high-rent areas.
Work out the best rent structure with your landlord
Again, this is a time-tested concept. Involving the property owner as a partner is a cost-effective model. While negotiating the best rent structure is one way out; you need to look out for a property owner who is also keen to invest in the business making it a win-win strategy for both. If the partnership does not work, try convincing the property owner by committing to a tenancy on a long-term basis by working on a reasonably-priced rental.
Go for the cheapest location – enhance the customer experience for better sales
If budgets do not permit, it is best to go for the cheapest location available. It is a wise business decision but you also need to earn revenues at the end of the day. So, you need to find an alternative to attract customers to your place. Trying doing so by investing in building up an impressive ambience, quality food, and superior service to deliver an optimized aesthetic experience to customers to get them to your restaurant. With lower rents, convert your space into an uber fine-dining restaurant that caters to a niche crowd.
Go in for the Cloud kitchen concept for your restaurant
Many small-time restaurant owners are now opening up to this modern-day concept of cloud kitchen to reduce location costs. A cloud kitchen is based out of a rather cheap and affordably priced area. The concept does not include a fine-dining or a dine-in eatery or even a takeaway joint. It works on the delivery model where the food is cooked in the kitchen and delivered against customer orders. Since there are no walk-in customers to the place, you can keep the location costs to the bare minimum and focus on providing superior food quality and delivery services.
There is no guarantee that the rents for restaurants or the location costs will decrease or stabilize anywhere in the near future, at least for prime locations. As a business owner, you need to be aware of the external factors and understand how well you want to maximize your revenues by taking concrete steps to avoid the high costs of commercial real estate. You could bring in your own innovative approach to handle the situation and become a trend-setter in the industry. You need to remember that in modern times the concept of successful restaurant businesses has changed and it will evolve further too.
Indifi is a modern-day tech business that believes in helping small and medium scale business owners with working capital and funds that they are unable to get from conventional institutions like banks due to various reasons. With a highly reliable network of investors and lenders, it is able to connect interested business owners with this network for working out an effective funding way.