Samer Choucair, who recently launched the cafe network Kava & Chai says start-up costs are lower for quick service restaurants and less operating expenses can mean higher margins. Image Credit: Clint Egbert/Gulf News

Dubai: The heat is getting intense for the restaurant trade in Dubai … and it’s not from what is getting cooked in the kitchen. For a second straight year, the local food and beverages (F&B) sector and its many players have seen their growth being cut and sliced. For some F&B businesses, it has meant stepping out of the kitchens for good.

Across the city, some properties have seen their F&B ground floor tenants move out as they lower the shutters because of a lack of sustained cash flow. But, it must be said, these same properties do manage to get in new tenants … and most likely new F&B ventures hoping to try their potluck.

“It’s turning into a hit-and-miss industry for most entrepreneurs,” said Samer Choucair, Vice-President of CE-Creates, the business incubation arm of Sharjah-based Crescent Enterprises and which recently launched an upscale cafe network, Kava & Chai. “It seems to be attracting anyone who thinks they can make a good product and the make a business out of selling it.

25%

Of a Dubai F&B outlet’s running costs could represent rent

“If the location chosen is brand new or still emerging as an attraction, a new player has to hit its targets within the first 12 months. If the restaurant is at an already up and running location, you need to do so within the first three to six months itself.”

This is where things get difficult in the Dubai F&B space. Industry sources say that, typically, rents represent 8-10 per cent of an outlet’s running costs. But in Dubai, for some F&B businesses, it could shoot all the way to the 20-25 per cent range. That is as true for established names as for new entrants.

For a stand-alone F&B venture, these are the operational costs that could soon turn the business sour. In an ideal world, an operator should be able to start recording profits from an operational perspective from the sixth month or so. Because with most such start-ups, it is unlikely that the promoters can call in unlimited funds as working capital beyond the initial four to six months.

The issue of rents — and landlords unwilling to see reason — is a concern for global F&B brands to pick on as it is for domestic players. “Occupancy costs are commercially unreasonable in some cases,” said George Kunnappally, Managing Director at the UAE operations of Nando’s, the home of peri-peri chicken and which owns and operates 22 locations in the UAE.

“Landlords who charge increasing base rentals year-on-year and have turnover rent and net effective rent to benefit them when the tenant does exceptionally well are not very supportive to reduce these when the same business starts to generate lower revenues. And for reasons beyond the tenant’s control.

George Kunnappally, Managing Director, Nando's. Image Credit: Virendra Saklani/Gulf News

“Any rent-to-sales ratio above 15 per cent is unsustainable for our sector. In many cases, even above 12 per cent becomes very dicey. Shopping centre managements by and large refuse to accept the ground reality and tend to blame tenants for reducing footfalls and the reducing quality of the footfall in most malls.

“The irony is that our best-performing Nando’s restaurants are not located in any of the major malls. We strongly hope that landlords will take a cue from the government and regulatory bodies who have overwhelmingly reduced and/or waived off fees and tariffs to support local businesses to grow and prosper in such challenging times.”

He’s got a point there — Dubai authorities are reviewing retail sector dynamics and expected to come out with their suggestions on how the industry can tackle the many challenges it faces, both from online and within the brick-and-mortar universe itself. Major retailers are offering their insights to entities such as Dubai Chamber and Dubai Land Department.

And with the saturation coverage that food delivery platforms provide these days — at seemingly on a 24x7 basis — casual dining/quick service restaurants are having to cope with volatile traffic numbers to their outlets. But when it comes to rents, these changes in how UAE consumers order and eat are not fully reflected.

But from a mall owner’s perspective, it is easy to see why raising rents on their F&B tenants seem like fair game … at least to them. Food courts are no longer sideshows at malls, and stand-alone restaurants have been allotted prime spots at the top of the corridors rather than down the aisle. Because, these days, the malls’ F&B options are as much a crowd puller as the retail stores … if not more.

“Considering global brand standards and in some cases dictated by mall lease agreements, most casual dining outlets carry out a shell-and-core renovation every five years,” said Kunnappally. “This would require the unit to break even in 30- to 36 months to be able to recoup the initial investment and make some profits before it reinvests some of that to renovate and start all over again.”

Many in the industry believe that some form of government direction and changes brought in voluntarily by malls/landlords could yet bring about change. Then again, there is also the state of the market that can accelerate the move towards a much-needed rebalancing.

12

months time to hit revenue targets for new players in sector

Choucair says as much, “We do have some leverage with mall owners and we are taking advantage of that. Plus, a lot depends on the nature of F&B business itself.

“The start-up costs are lower for QSR [quick service restaurants] operators, and less op-ex (operating expenditure) can translate into slightly higher margins. Most of the staff are behind the counters and we only require smaller store spaces. It all shows up eventually in the bottom-line.”

That’s very much the ingredient F&B operators need to work on — manage costs and make it show on the bottom-line. In the mean time, hope for a lot more understanding from their landlords.

Having deep pockets helps

For CE-Creates, its venture into the F&B business comes as part of a wider strategy. Its parent company, Crescent Enterprises, is an established player in logistics and energy. “We wanted to set up something in consumer-facing, sustainable businesses,” said Samer Choucair. “And why F&B specifically? We have a disproportionately low number of home-grown brands. CE-Creates is a platform to build regional brands that can go internationally.”

Even F&B suppliers are dropping out

During the best phase for the local F&B sector, between 2013-16, there were as many new speciality food suppliers getting launched as there were new restaurants. “It was a particularly fertile period for anything to do with organic food supply,” said Sailesh Israni of Sunn and Sand Group and which operates the Qiso cafe at Silicon Oasis. “But their numbers are coming down — it’s showing up in our supplier lists. It could be that many of their clients may have exited the F&B game, and which is forcing suppliers to follow that path as well.”