Going bananas over premium pricing?

Why are we going bananas over price of Rs 221 for a banana?

There has been a lot of outrage against, mockery of as well as serious discussion on the topic of Rahul Bose being charged Rs 442 for two bananas at J W Marriott. The marketing folks managing other brands also used it as an opportunity to push their brands by taking pot shots at the situation. A few of the comments on this topic on LinkedIn are highlighted in the LinkedIn news feed here https://www.linkedin.com/feed/news/is-442-for-two-bananas-justified-5034850/

Should GST be charged on bananas?

On a serious note, whether the GST should be charged on bananas is a topic for serious debate. I am sure the GST experts - Chartered Accountants, Lawyers, and GST / Sales Tax/ Excise Department, the Appellate Tribunals and the Judges will spend time on this over next few years. As someone who is not a GST expert, but understands how the tax authorities function in India, I believe J W Marriott was right in charging the GST, because the consequences of not charging the GST (and in turn not paying it to the Government) can be costly for any business. The advance ruling facility doesn't work the way it is supposed to work.

The "outrageous" pricing of bananas

Coming back to the price of Rs 221 for each banana itself, many people have expressed surprise that J W Marriott could charge such an outrageous price when there is no "value addition" involved. After all, a banana is a banana unless you peel off the skin, and put it in a fruit salad, a milk shake or an ice cream, right? Why should a hotel bump up the cost so much without adding any "value"?

Why should a five-star hotel charge high price? Image Courtesy: pexels.com)

Free market

First and foremost, J W Marriott is free to charge whatever price it wants to charge. If you feel it is outrageous, you can always choose not to eat bananas at Marriott and instead eat something else, or walk across the street to the fruit vendor, and have a banana at Rs 6 a piece. Even a banana milk shake should not cost more than RS 30 to Rs 40 on the street!

Five-star hotel cost structure

Marriott is a five-star hotel. Running a five-star hotel is not an easy business. It is almost as difficult as running an airline. Most five-star hotels make losses. They make heavy losses when the business confidence is down. A consolidated statement of industry sales and margins for 51 listed companies shows that the industry made a net loss of Rs 27 crores on sales of Rs 4,527 crores in FY'19. They made a loss in FY'17 and FY'18 as well. (Source: CARE Ratings' report of January 2019 on Indian Hotel Industry).

There are tons of mandatory facilities that a five-star hotel must provide in order to qualify for those five-stars. These mandatory facilities include something as basic as 24 hour lifts for buildings higher than ground plus two floors, keeping all floor surfaces clean and in good condition, to air conditioning in 100% rooms, minibar/ fridge in every room, hot and cold running water available 24 hours, 24 hours room service, telephone facility within arm’s reach of the toilet seat, a swimming pool and so on.

The costs of running a hotel include employee costs 25% - 30%, sales and distribution 15% - 20%, F&B 10% - 15%, power & fuel 8% - 10% and other costs 35% - 40%. A large component of these costs are "fixed costs". That is, they remain the same regardless of the level at which the business operates. So, even if the room occupancy goes down, these costs remain at the same level.

Five-star hotel charges you for the "experience", not food (Image: pexels.com)

Revenue sources for a five-star hotel

The hotels recover these costs from mainly three sources (1) room tariff, (2) food & beverages (F&B), and (3) otter services like spa, telecom, laundry etc. The room tariff contributes to approx 50% - 55% of total revenues, whereas F&B sales contribute approx 35% - 40% of total revenues. Room tariffs are under pressure because the industry is operating at approx 75% occupancy in the best scenario, and the GST rate on five star hotel room tariffs is a good 28%. As per Government of India You are committing a "sin" while staying in a five-star hotel, hence you have to pay a "sin tax" equivalent to the tax on liquor or cigarette.

Thus, the hotels must recover a substantial costs of running business from F&B sales. So, when you buy that banana at a five- star hotel, you are paying for that glass chandelier, carpet, furniture, valet parking service, 24- hour security, air conditioning from entrance lobby to every corner of the property, minibar/ fridge, 24-hour hot and cold water, even if you don't use some of them. You are in effect cross - subsidizing someone else who is availing those services.

If you don't want to pay that "atrocious" price of Rs 221 per banana, I suggest you walk out of the hotel, and get a banana at Rs 6 from the street vendor. The upside is, the vendor won't charge you GST! The downside is, you won't get free publicity on social media.

#GST #Costs #Business #Pricing #Hospitality