In Focus

Curtailing inflation woes

The recent hike in essential commodity prices following steadily rising inflation has fuelled concern in the hospitality industry, especially among the smaller F&B establishments. With increased competition, the main question most hoteliers are asking is whether they should raise menu prices to survive the trying times. By Gayatri Vijaykumar

With India's inflation rate touching 3.5 percent, the prices of most essential commodities have increased over the past few months. And adding to the inflation rate (based on the Wholesale Price Index (WPI), is the possible hike in domestic oil prices. According to Dinesh Khanna, president, Federation of Hotel and Restaurant Association of India (FHRAI), this hike in prices may not have an impact on most three to five star hotels and restaurants because they run on an annual contract with their suppliers. Veerendra Shadakshari, director - Operations, Ramanashree Group of Hotels explains, "As a practice, most hotels enter into yearly contracts to fight such inflationary trends. By virtue of this, the effect of short term increases are not immediately passed on. But should the price hike be a long term one, then we will have to pass it on. Nonetheless, the strategy remains focussed on entering into long term contract with the suppliers having fixed prices throughout the year while ensuring good quality of products." According to Shadakshari, Ramanashree's cost of operations has, however, gone up by approximately five-seven per cent because of the price hike.

The smaller hotels and restaurants have been heavily affected as a result of the recent price hikes. According to K N Vasudeva Adiga, president, Bruhat Bangalore Hotel Association (BHA), prices of vegetables like onions and potatoes which earlier used to increase only for a maximum period of one month, have remained high for the past six to eight months at a stretch. "And to make matters worse, petroleum prices will be hiked from this week, due to which the overall transportation rates will also go up directly affecting the operating costs of smaller food and beverage establishments," Adiga notes. He further adds that though most food outlets have been reluctant to increase prices due to stiff competition, an upward price revision has to be considered in order to ensure that quality is not compromised on. Also, according to H A Mishra, managing director of Foodesign Hotels and Resort Systems and a food consultant, unlike star hotels, smaller food and beverage outlets do not work on an annual contract basis with the suppliers, due to which any fluctuations in market prices would have a heavy impact on their operational costs. "Unlike the larger hotels, smaller food establishments have no other alternative than to increase menu prices. The customer complaints arising out of increased prices can however be offset by providing a good spread and adding value to the menu."

In order to create awareness among customers about the need to hike menu prices, Adiga explains that the BHA has published a comparative list of prices of all essential commodities showing corresponding prices from December 2006, June 2007 and December 2007. "Vegetable prices on an average have increased by 30 percent. Apart from that, taxes and license fees have also been hiked. The LPG prices too, are constantly increasing. Last year the price for a commercial cylinder was Rs 700; this year it is Rs 1130," Adiga bemoans. According to him, adding to the burden of spiraling bills are the sales taxes, increased license fees, high labour costs and increase in commercial water and electricity charges which have been implemented by the government. A S Kamat, managing director, Kamat Yatri Nivas adds that the operating costs have gone up by at least five per cent. "We have 20 units spread across the country and have increased prices in a couple of units. However, if prices of essential commodities like milk, LPG and edible oil increase, we would also be forced to hike our prices correspondingly."

Another factor which concerns both Adiga and Kamat is the rising rate of attrition in the industry. According to them, with the increased prices affecting daily lives, in order to curtail attrition, employee wages have to be hiked. Kamat says that though the annual employee bonus takes place in the month of April, this year the Kamat group had to increase employee wages in December as well. "Every year there is an upward revision in the Dearness Allowance and other components of the employee wages and we have to increase employee wages accordingly. With the existing high attrition rate, employees are not willing to work on minimum wages," says Adiga.

Though the recent price hike may not have affected the five star hotels, the smaller hotels and F&B establishments have realised that if the prices continue to climb, upward revisions on menu prices would have to be made. This would then lead to a situation wherein the constant increase in prices would mean that the restaurant or hotel loses its potential customers. "We would obviously bear in mind our customers before effecting a price increase but with costs spiralling beyond our control, we will have to consider increasing prices in order to maintain quality," Adiga surmises.