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Demonetization & the Hospitality Industry: Let’s change the Way We do Business!


On the 9th of November 2016, the Indian government, delivered a masterstroke, by announcing, as illegal tender, the INR 500/- and INR1000/-denominations in the currency system. This was truly a bold move and dealt a blow to the very heart of corruption. Ironically, in the short term this led to severe shortfall of cash as widely documented across the country. According to the RBI, the two values of tender, accounted for more than 86% of the notes in circulation. It would be easy to say that the ripple effect of this was felt across many key industries, especially those dependent on cash transactions and disposable incomes, with the hospitality industry being one of them.

In the initial weeks, the National Restaurant Association of India had reported losses for the sector averaging up to 40% revenue. This was truer for the small businesses, QSR, and home delivery segments. For many organized players, whose primary customers were predominantly users of plastic, there was little change, with a rise in the ratio of plastic to cash transactions across the first two weekends. In many cases, there were many small businesses in the hospitality industry which faced an ‘opportunity lost’, as unlike the consumer durables or FMCG industry, there would be no deferment of purchase but a complete ‘missed opportunity’. Once the initial shock wore off, it has been business as usual with sales spikes over the weekend that just passed. Market sentiment has been slowly easing back in the organized sector.

The Indian hospitality industry is projected to grow at a CAGR of 10 % by 2021, and is currently valued at INR 3, 09, 110 crores/-. This fast growing industry needs to use this opportunity to re-evaluate and re-assess. s/-. This fast growing industry needs to use this opportunity to re-evaluate and re-assess. This is a disruptive moment for all of us, in not just how we do business, but also in the way consumer spending habits are going to change. While, there has been a temporary lull in the hospitality and entertainment sector, but as most of the current demographic of consumers are heavy plastic and mobile wallet users, this will soon pass and we need to be ready to move into the future.

Operation Clean-Up:
Keeping up with the trend sweeping across the country, the main contribution of demonetization is going to be the setup of ethical business practices. The organized sector currently is only about 33% of the entire hospitality industry. This year alone, it will contribute a whopping INR 22, 400/- crores in taxes, but this is just the tip of the iceberg. Restaurateurs and entrepreneurs need to use this time to ensure a clean front-end and back-end operation with all vendor transactions, supply chain, employee payrolls and billing shifting to a transparent format. This is especially important for procurement as well as billing where small cash transactions are actually more of a hassle than help.

Cashless Platforms:
The hospitality industry in India is vibrant and innovative. Some of the smartest ideas have come from a brilliant pool of entrepreneurs looking to bring a global mindset to the sector. Incentivizing consumer spends on cashless platforms like mobile wallets, as well as redeemable points and rewards schemes in addition to card friendly transactions will only make life simpler for all. This is a necessary shift. The country currently has only 1.3 million Point of Sale Terminals, whereas the entire merchant base is about 30 million. In fact, it’s predicted that the small businesses within the hospitality segment will soon switch to electronic and digital cash transactions and become the flag bearers of change in the sector. In the past few days most mobile wallets as well as electronic cash platforms have witnessed a 150%-200% jump, post demonetization.

Appetite for risk:
While the short term effects of this move are only being seen from the consumer perspective in the long term there will be benefits for the entire nation’s financial health. As bank surplus rises, lending interest rates are bound to fall. Financial pundits predict lower real estate costs, with a correction across purchase and rentals. This is an excellent time for new investors to take the plunge, as well as existing entrepreneurs and investors to consolidate resources and expand. It’s time to be bullish on the market as India will recover within the next two quarters and move ahead with GDP growth facilitating more business.

GST is the biggest pay post demonetization:
The passing of the GST bill a few months back has been the biggest win for the trade and business community in India. GST is a step in the right direction as restaurant and hotel owners end up paying multiple taxes as well as cascading taxes. The VAT varies from state to state and the value lies between 12%-14.5%. When all taxes are combined the impact can be between 20%-27% on the basic bill. With the implementation of GST, there will be one single tax, which will benefit this industry where consumers bear the burden of tax. Point of purchase of materials will also lower thus helping most hospitality outlets work on better revenue systems with lower impact on the consumer. The compliances across all states will also be similar easing things for chain outlets that operate across several states.

Source: BW Disrupt