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September 20, 2012

South African Restaurants Hurt by Climbing Electricity Prices

by Peter Cox

South Africa’s historically low electricity prices have increased dramatically over the last four years, and are expected to continue to do so over the next five.  For those in the restaurant business, it means lower profit margins, rising prices and layoffs. 

The lifeblood of a restaurant is in the kitchen.  Inside that backroom, stoves are constantly burning, ovens baking and dishwashers cleaning.

In terms of electricity, the meter is always spinning upward and costs are growing quickly.

The price of electricity in Johannesburg has risen by an average of 27 percent each of the last four years.  This year, Eskom - South Africa’s electric utility - raised prices by 16 percent. Similar increases are expected annually over the next five years.

"We have made it clear that we will be applying for the above inflation increases because our maintenance costs are going up by more than inflation.  But also we have to be in position to finance the very large new build program that we are in the middle of at the moment," said Hilary Joffe, the spokeswoman for Eskom.

Eskom is building new power stations to try to meet rising demand as more and more poor South Africans get on the grid in the post-apartheid era.

Slimming profits

In Fordsburg, a primarily Pakistani and Indian neighborhood in Johannesburg, restaurateurs are dealing with these rising costs in various ways.

The entrance of Rashid Ebrahim’s bakery - in an old church building - is lined with displays of doughy, sweet pastries.  In the back, his bakers slide trays in and out of ovens.  But with rising energy costs, he’s had to make changes.

"I haven’t raised the prices as of yet,  I’m just absorbing on my profit, taking a lesser profit," he said.  "The turnover is still the same, but the profit margins are lower."

Those slimming margins have led him to cut his staff from 15 down to 10.

"I don’t feel that’s the right thing to do, but it’s the only way to go if you want to really survive," he said.

Ebrahim is now looking at raising prices on his goods 15 to 20 percent.

Making money in the restaurant business isn’t always easy, especially for those just starting out, says Larry Hodes with The Restaurant Code, a consultancy firm in Johannesburg.

"Restaurant utility bills used to be about 2.5, 3 percent of expenses of sales as a percentage. Now suddenly you are looking at 4 to 5 percent.  It’s quite crazy right now in terms of utility costs," he explained.

Energy-saving tips

There are some steps he’s advising restaurants to take.

"Even this week I walked into a restaurant where, you know gas and electricity - the stoves are left on all the time," said Hodes. "One of the key things, it sounds simple - but you know it comes from management - is that you have to train your staff how to more effectively and efficiently use your gas and your electricity and everything.  You know that is where possibly a restaurateur can have the biggest impact immediately."

Eskom also has several programs to help ease the costs of electricity, including, Joffe says, some that subsidize pre-approved energy efficient products bought by businesses.

"If enterprises can show us that they have effective savings, we will compensate them for those," she said.

She says Eskom is working with businesses across the country to upgrade equipment which will put less strain on the country’s energy supply.

"Really, the economics of it work for us," she said.  "It is much cheaper to invest in energy-efficient technology which will reduce the amount of new generation capacity that we will need in the future than it is to invest in building new power stations. We estimate we are upgrading about 1,000 commercial customers a month to more energy efficient technologies."

Shutting down

But for some, these new costs are just another strain on business.

Restaurant owner Azhar Chaudhry worked as a cameraman for two decades before settling in Johannesburg to open an establishment serving his native Pakistani fare.

But increasing prices - along with his restaurant being robbed several times last year - means Chaudhry is thinking of selling his business and moving to Dubai.

"Rent is not coming down.  Electricity is going up.  Salaries will go up every year for the staff, so you cannot carry on," he said. "Thank you very much South Africa.  I’m going back. I’m definitely trying to sell and leave.”

He says, in the meantime, he’ll consider raising prices, but it likely won’t be good for business.