Will Invoking Force Majeure or Offering Rental Waivers Solve the Real Estate Problem for the Food & Beverage Industry?

Will Invoking Force Majeure or Offering Rental Waivers Solve the Real Estate Problem for the Food & Beverage Industry?

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Undoubtedly, the food and beverage industry is facing a massive setback due to the coronavirus pandemic. The lockdown has brought businesses of restaurants to a grinding halt, and with it, commercial real estate that depended on food businesses is staring at an uncertain future.

The National Restaurants Association of India (NRAI) has forecasted an estimated loss of 80,000 crores for the F&B industry by the end of May 2020. The Association has also revealed that over 7 million people who were dependent on the F&B industry have already lost their jobs.

The current crisis begs the question — will invoking force majeure or offering rental waivers solve the real estate problem for both F&B players and landlords? Force majeure is defined as an act of God or an unforeseeable circumstance that prevents an individual or organisation from fulfilling a contract, in this case, prevents restaurant owners from honouring their rental agreements. Indeed, tenants across the board have invoked the force majeure clause in their agreements to obtain a buffer as they work to get back on their feet in a post-COVID world.

An estimated 90 percent of restaurants in India operate on lease. On average, they shell out between 10 to 30 percent of their annual income towards rent. According to NRAI estimates, 1 in 2 restaurants in India are likely to shut down if the lockdown extends beyond the month of May. The industry continues to stare at a bleak future.

Restaurants — that work on an averaged of 15 percent EBITDA (earnings before interest, taxes, depreciation, and amortisation) margins — will need to innovate in order to revive their businesses moving forward. Equally, landlords will need to approach the current crisis with an open mind to work out a win-win scenario for both parties concerned. This is where the cloud kitchen model offers a ray of hope. For instance, Smart Kitchen Company — a Delhi-based start-up — is revolutionising the delivery only and online F&B industry, which is poised to play a key role in reinvigorating the F&B industry as a whole.

Smart Kitchen Company works on a revenue-share model with its food partners, who only begin to pay the Company once their revenues gain volume and strength. With more than 30 kitchens across Delhi NCR, Smart Kitchen Company is aggressively expanding its footprint across the region to help both landlords and food companies get their businesses back on track. A revenue share model allows food companies the flexibility and freedom to restart their operations at low costs, while also providing landlords and commercial real estate owners the opportunity to monetise on their assets once again.

The way forward for F&B brands to stay afloat and navigate through the COVID-19 crisis is by adapting to a more agile business model and shifting focus to delivery and takeaways, a more relevant approach in a post COVID world. Smart Kitchen Company, with its revenue share model, offers competitive leverage to sustain businesses with reduced capital expenditure and increased sales at lower costs, while providing comprehensive operational support, from tech-enabled growth strategies to marketing insights.

In light of the current crisis, landlords and tenants will need to collaborate and act in good faith to find innovative and practical alternatives in order to ensure that businesses are revived and jobs are protected. Although force majeure or rental waivers help food companies or restaurants cope with the loss in business in the immediate run, moving forward, a revenue share agreement as observed with the cloud kitchen model offers light at the end of the tunnel.