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The Great Hotel Scam

The key to profitability in restaurant business often lies in the details and in the mark-ups, writes Vir Sanghvi.

india Updated: Jul 08, 2008 12:37 IST
Vir Sanghvi

Anybody who works in the restaurant business knows that the key to profitability often lies in the details - and in the mark-ups. Consider your own position as a punter.

You go to a restaurant and order say, a tandoori chicken. If you are eating the chicken at a dhaba you'll expect to pay one (quite low) price. If you are eating at a mid-level establishment (say, a Kwality-type restaurant or on Delhi's Pandara Road), you'11 expect to pay a higher price. And if you are eating at Bukhara or some deluxe establishment, then you'll pay an even higher price.

But within each of these three grades, there's not much that a restaurant can do to make extra money All dhabas will charge roughly the same price for a chicken.

Within the restaurants on Pandara Road, there will not be much of a variation. And five star hotels all have roughly the same rates - though perhaps a hard-toget-into restaurant like Bukhara will charge more. In the restaurant business, pricing is usually a multiple of food cost. <b1>

The traditional formula is that you take the cost of all the in- gredients and multiply by three. That gives you a 33 per cent food-cost.

The other 66 per cent of the price of the dish goes towards salary, rent, overheads and of course, profit. These days, with salaries and rents rising, the middle level establishments try and stick to 33 per cent food-cost but hotels rarely go above 20 per cent - that is to say, of the Rs 100 you pay for a dish, the actual cost of the food is only Rs 20.

The other Rs 80 go towards the restaurant's overheads. In some cases, food-costs average 15 per cent and in nearly all eases, food-costs vary from dish to dish.

For instance, a hotel may sell you a Chilean Sea Bass dish at Rs 400 even though the fish costs Rs 200 (so, that's a 50 per cent food-cost) but it will make up by selling a bowl of rice that costs Rs 4 to make for Rs 100 (a four per cent foodcost).

Once you even out the figures, the average food-cost will be 15 to 20 per cent. In this game, vegetarians always get the worst deal. Because vegetables, rice, wheat and deal are the cheapest items in the kitchen, it costs the restaurant very little to make the dishes on the vegetarian section of the menu.

But because it wants to preserve some kind of parity with the non-vegetarian section, the vegetarian dishes are priced on a 5 to 10 per cent food-cost basis.

Effectively, every time you order a daal or a sabzi in a restaurant, you are subsidising the guy who has ordered chicken. Because restaurants make the most money from vegetarian and starch-based dishes, these are the ones they'll try and push. Do you ever wonder why, when you've finished ordering at a Chinese restaurant, the waiter wm suggest that you have rice and noodles? It's because those are the dishes they make the most profit on. <b2>

Why do they always push the soup? ("Will you have soup to start with?") Same reason - high margins. If you understand how restaurants price their menus then you'11 soon work out how not to get conned. For instance, when you go to a Sunday brunch, remember that only a n idiot pays Rs 750 or more to eat scrambled eggs and toast which cost the restaurant only a few rupees to make.

So never take the brunch part seriously and order breakfast. Try and eat a proper meal. When ordering a la carte, check the price of rice on the menu: you’ll be shocked by how muc h they can charge for a bowl of peas pulao . A common scam has to do with se t menus and coffee.

Many restaurants (especially in Europe)will offer a good value se t lunch. But because you will not look too closely at the menu, you will not realis e that coffee is not included in the price.And yet, at the end of the meal, the waiter will ask innocently, “Some coffee, sir?”

Given that you think you are eating a fixed pric e menu, you’ll nod in agreement. When the bill comes, you will be outraged to lear n that a single cup of coffee can cost asmuc h as 25 per cent of your whole three cours e meal. At many restaurants, coffee is not a beverage; it is a profit centre.

All restaurants love selling wine (excep t perhaps in Bombay these days because the Maharashtra government has slapped absurdly high excise duties on wines that are not from Maharashtra) because of themark-up factor. When a restaurant buys a chicken costing say, Rs 100 and charges Rs 400 for the finished dish, it is charging the guest for the expertis e of chefs and cooks aswell as the time the kitchen spends in cooking the dish. But when it buys a bottle of wine for Rs 1,000 and sells i t for Rs 4,000, almost all of the Rs 3,000 mark-up is pure profit.

Few Indian restaurants bother to hire a special wine waiter or a sommelier so they don’t even have to factor in his salary. The only cost that selling a bottle of wine entails is a little storage space and a corkscrew. So, nearly all restaurants and hotels will screw you on the wine. During the last BJP government, hotels were allowed to import wine free of import duty on the grounds that this would promote tourism.

In fact, all this has done is to promote hotel profits because the savings have not been passed on the customers and tourists are still getting cheated. Worse still, the same wine, bought from the same importer, will sell at completel y different prices at neighbouring hotels. A n even bigger rip-off is wine by the glass. I’v e written before about how the Oberoi chain charges as much for a single glass of Moe t et Chandon champagne as it buys a whole bottle for. But this rip-off pales in comparison tom y old bugbear, the bottled water scam.

First of all, there’s no real reason for a fiv e star hotel to serve Indian bottled water. None of our packagedwaters constitutes mineralwater.All that the companies do is dig very deep wells and bottle the stuff that the y find deep down. There is no distinctive taste and no great sense of terroir. If you are on a car journey or eating at a dodgy place and want to make sure that the water is safe then it may make sense to buy a bottle of water. But thewater at five star hotels—all of whic h spend lakhs of rupees onwater purification plants—is meant to b e so safe that in most establishments you can drink the tapwater and still not fall ill.

So why do hotels not give you their own water in nice pitchers ? Why do they persist in placing nasty little plastic bottles of commercial water on the table and serving it to you with such fanfare? Simple: Money!Money!Money! Most hotels mark their water up by something like 500 per cent.

Mark-ups of 1000 per cent are not unknown.Many of us do not bother to look at water prices so we don’t notice that a bottle of water that a hotel bought at Rs 8 will be on sale at Rs 80 or Rs 100. That’s how hotels get rich. Worst of all is the offensive practice of opening a bottle of water unasked for, of pouring it into your glass without permission and then ripping you off by inflating the bill.

I have a policy on this. If I haven’t ordered thewater (which I never have), I refuse to pay for it. I urge you to do the same.Most hotels will sheepishly drop the charge if youmake a fuss. Beware also of the great Evian scam. Many hotels will ask you if you want Evian or Himalayan in a manner that suggests that the y both cost the same. Actually, the Evian will be several times mor e expensive.And youwill have no alternative but to pay for it becaus e you’ll have said yes when they asked you (and they cunningly did this before you sawthemenu so you had no ideawhat the pricewas). Another phrase that should make you sit up is “still or sparkling.”

There are complex (and largely nonsensical) regulatory issues whichmake it difficult for anyone to bottle sparkling mineralwater in India, sowhat the phrase translates as is: “So sucker,will you havemy over-priced imported water or will you have Bisleri?”

My advice to you when you are confronted by a snobby waiter who asks, “Will you have mineralwater?” is the sameas always. Respond as follows: “Is your hotel’s normal water unsafe?” Obviousl y thewaiterwill have to say something like “oh, of course not.” “Well, then,” you respond, “I don’t see why, I need to order what you call ‘mineral’ water.” Are these scams all part of the game? Sadly they are.Winemarkups, coffee cons, and water rip-offs are part of the restaurant trade all over the world. But that’s no reason why we should fall for them.

Indian hotel chains are making record profits by aggregating the small ripoffs. And I don’t see why we should help them make even more money.

Read more of Vir Sanghvi's columns:

Tracking the bhutta story
Much ado about foie gras
Kathmandu diary
Cultural Revolution
Rude Food photo gallery