The Year Gone-By And Outlook 2021 For the Indian Food Services Industry

As we look back at 2020, the crisis has resulted in many small and medium food service establishments having to shut down

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The year 2020 will be remembered for all the wrong reasons as far as the food industry is concerned. No one in their living memory would have experienced such a downturn in business as far as this sector was concerned. This was driven primarily by three key reasons. First, there was the impact of the pandemic; second, it has a consequential impact on the supply chain and third, there was a much higher impact in urban consumption compared with rural consumption which largely drives the food services market in India.

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So, as we look back at 2020, the crisis has resulted in many small and medium food service establishments having to shut down; it has highlighted the need for more organized players to come into the industry and for institutional credit to be made available to this sector. Hopefully, this crisis will result in some of these challenges being overcome in the near future. Having said that, those out of business from the food service industry aren’t likely to get back to earning their wages, in the near future. Even entrepreneurs in this sector have been severely impacted and will have to now work harder to rebuild their business model as also to look at alternate means for income generation.

If we look back at the supply chain, the initial disruption was humungous because of the lockdown and many essential goods could not move freely which further impacted consumption. At the same time, demand for protective equipment and gear spiked and there were significant shortages witnessed in these items which resulted in both hoarding and profiteering. All of this was at the cost of the viability of the food services industry. Today as it tries to limp back to normal it continues to battle with the core problem of not having access to formal credit and being forced therefore to either scale back or exit the business given the fact that no customer in India is willing to support small and medium entrepreneurs in overcoming this crisis.

It is definitely a cause of concern given that it is probable the second largest employer in the country after the real estate sector in so far as the minimum wage and marginally above the minimum wage category labor is concerned. So hopefully the pandemic will come under control in 2021 and result in creation of jobs again in the food service industry but even 2021 will not see consumption anywhere close to pre-COVID level as far as the sector is concerned.

The four key drivers of the sector will remain needed which is corporates, banquets, which is the large weddings and corporate events, education, which is the schools, colleges and universities, and last but not the least is the manufacturing sector which will probably see the highest recovery. The first three sectors will definitely continue to push the industry down and impact the viability even in 2021 of the small and medium players. What will also happen in 2021 is the increased focus on safety and best practices in managing of the central kitchens and onsite kitchens will result in investments being made to enable these production establishments to meet the required safety standards. That once again will require capital and will be a stretch for small and medium enterprises already recovering from previously carried forward debt. So overall the outlook in 2021 for the food service industry whilst being better than it was in 2020, is definitely not yet one where the business is going to be viable.

Given the cost of borrowings still languish at between 8 per cent and 11 per cent, and margins in the industry between 4 per cent and 6 per cent it becomes very difficult for the business to be able to afford credit even from the organized sector in spite of the fact that it is still not available. Hence one will have to tread with caution in making investments in this space and rethink one’s business model to understand whether it is worth being a standalone establishment or partnering with larger players so that both credit and receivables are secured.

The one thing that can help the food service industry from the upcoming budget is the input tax credit on food sale in B2B being restored which can significantly help improve both the streamlining of the supply chain as well as the removal of the cash business which became rampant post the withdrawal of the input tax credit.