How the recent import duties and tax increases are impacting restaurants and cafés
ADEEL MAHFOOZ: When and why did you start Esquires Coffee in Pakistan?
JEHANZEB PARACHA: Esquires is an international franchise based in New Zealand. We opened the first store in Zamzama, Karachi, in March 2018. I was looking to move back to Pakistan from the UK and exploring opportunities. I noticed that people wanted an organic and fair trade café in Pakistan. People were especially keen about the organic concept. Fair trade is still relatively new, but when you explain the concept to people they love the idea. Our coffee is selling with a purpose – it is not just organic, which is good for the customer, but it is also fair trade, which is good for the grower.
AM: What has it been like to do business in Pakistan?
JP: Having lived abroad for a long time I had a quite a few shocks when I moved back. Doing business in Pakistan is difficult; there is a lot of red tape and unnecessary hassles. Registering for sales tax, obtaining approvals from DHA and coping with harassment from agencies are all issues. Then there is no gas available in my Zamzama branch, so I operate on LPG, which means that my bill, instead of being Rs 60,000 per month, is Rs 150,000. Similarly, I have to buy water (tankers) which is expensive. We also have electricity problems, and during the recent rains we had no electricity for three days; we had no choice but to close the café at some point.
AM: How has the imposition of duties on imported items and higher GST for restaurants affected your business?
JP: The cost of food has gone up massively and we initially tried to absorb it ourselves, and we are still trying to. To put things in perspective, our coffee beans cost 35% more now than when we started the business. This has happened because of the devaluation of the rupee, the increase in import duties and in taxes. Then there are certain products which are not available in Pakistan – certain types of cheese, blueberries, blackberries, avocadoes, and even flour for bread making – and all have to be imported, which is extremely expensive.
How the recent import duties and tax increases are impacting restaurants and cafés and what measures the government could take to reduce the pressure.
AM: Yet the government is asking people to buy locally; is this realistic?
JP: There is stuff we can buy locally and we have switched to quite a few. We used to import roasted peppers and sundried tomatoes but we are now making our own and we have found good local suppliers for homemade pasta. For a few cheeses we have switched to local suppliers. However, there are some items you cannot buy locally – for example coffee beans; they cannot be grown in Pakistan because of the climate required – and there are certain types of chocolate and cheese which have to be imported.
AM: Have customers become more price conscious?
JP: Everyone is tightening their belts because food prices have increased. People are complaining that their food budget has gone up by 15% and I read in the newspaper recently that food prices increased by 13% in the month of September alone as compared to September 2018. People are going out less and buying fewer imported products.
AM: How sustainable is your business in this environment?
JP: We cannot run our business at the same old prices, so we have had to increase them. It is difficult and our margins have decreased significantly. We are breaking even because we cannot pass on everything to the customer. There will be players who will close down because they just do not have enough footfall. We are not looking to downsize; instead we are trying to bring in efficiencies through other methods. As mentioned earlier, one way is by switching to local ingredients. Furthermore, because our bills have gone up massively due to increases in electricity tariffs during 6:30 p.m. to 10:30 p.m. and the GST, we are trying to be efficient by turning off air conditioners in areas where there are no customers. We are also trying to reduce wastage. Laying off staff is probably the last thing we would consider.
“It is ironic that we import avocadoes, blueberries and blackberries, while these items can be grown in Pakistan but no one is selling them locally. The government has to make it possible for people to go into these businesses”
AM: Have you seen a decrease in footfall at Esquires?
JP: Yes, and it’s not just us. I have spoken to quite a few people and they have noticed the drop in diners. People are going out less and restaurants and cafés have no choice but to increase prices. However, I think that what the government is doing is a long-term policy, and it is needed; I am not against it. My only suggestion would be to give the example of a child. When a child misbehaves you first scold them and maybe later take away their privileges. What the government has done is they have literally banged a hammer on our heads and that is the problem. They should have brought in these changes gradually. It still isn’t too late and they can withdraw some of the tax measures and reintroduce them gradually so that we don’t feel the pressure like this. We have been off track for many decades and you cannot sort it all out in a matter of months.
AM: Do you think that there are still opportunities in the food business?
JP: At the moment when I speak to someone looking to invest in Pakistan, they don’t want to invest in food; there are too many factors beyond their control. There were a couple of people living abroad who wanted to invest in Esquires in Pakistan but they backed out. They want to let the market settle and then decide. The food industry is not a very attractive business at the moment for new investors.
AM: You have recently expanded into Dolmen Mall. Do you have any future expansion plans?
JP: We started working on our Dolmen Mall outlet almost a year ago and it opened seven months ago. We do have plans to expand but not on the same model as our Zamzama outlet. We are working on a smarter and smaller model, because in this way we have less upfront investment and lower operational costs. If the footfall is decreasing then there is no point in a seating capacity of 60 to 80; the strategy is to have a capacity of 25 to 30 people and keep it full all the time.
AM: How can the government facilitate food businesses at this time?
JP: In Islamabad, GST is 7.5% for restaurants and cafés whereas in Sindh it is 13% and this is, in my opinion, discrimination because it should be equal across the board. Reducing GST will help customers and that is something the government should consider. They should also encourage the fair trade concept by cutting out the middle man, so that growers can benefit and ultimately customers will pay less. It is ironic that we import avocadoes, blueberries and blackberries when these items can be grown in Pakistan but no one is selling them locally. The government has to make it possible for people to go into these businesses and benefit from them. Similarly, for items that are not grown in Pakistan and cannot be grown, why not reduce the duties and taxes because those items are not competing with local growers. Maybe the government needs to sit down with people from the industry, listen to their concerns and suggestions and then formulate the policy.
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