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Restaurants are operating in an increasingly tough environment


Victorian mirrors, white tables, floral cups, ACs, refrigerators, microwaves, at Vintage 31, New Delhi — to be disposed of. “If you know of anyone who would like to buy these, please let me know,” says restaurateur Vimi Singh. Singh and her husband KD, a pilot with a passion for cooking, set up this to pretty restaurant two years ago.Packing it up has broken their hearts, not to mention a substantial portion of their bank balance. Yet,they are firm: “We were emotionally attached to this restaurant, but it is the right decision to shut it down”.

The cafe serving home-style “Continental” food in Mehar Chand Market no longer makes business sense for the Singhs.The couple — she is a successful interior designer, he flies charters for the high and mighty-ran this passion project as a tight ship but the economics never matched up.

“Though the restaurant was praised for its food and garnered a following, for a year-and-half we were forced to put in Rs 1 lakh or so every month from our pockets to sustain the business. Only for the last five months were we breaking even. We thought this market will pick up but have come to the conclusion that it never will. Even if we start making some profit, it is not likely to be much. What is the point of running a business 24×7 but making virtually no money?” they ask.

“We wouldn’t advise any one to enter the restaurant business in India.” It’s unfortunate that this insight should have come to them at a loss of close to Rs1 crore from their savings. Opening a restaurant may be everyone’s dream at the moment in India but, like the Singhs, it may be finally time to wake up and smell the filter coffee.

According to the NRAI India Food Services Report launched last month, the food services market in the country stands at Rs 3,09,110 crore, and is estimated to grow to close to Rs 5,00,000 crore by 2021, at a compounded annual rate of 10%. This growth, fuelled by a young and upwardly mobile middle class ostensibly hungry for new eating-out adventures, is the stuff most restaurateuring dreams are made of.

The dreams are further peddled by consultants and advisers who underline the undoubted demographic advantage and sound macroeconomic fundamentals, often promising mythic 20-25% returns to investors keen on the sector but with no real knowledge of the business. The reality is much more complex.

For much of the past decade, Riyaaz Amlani, CEO of the Mumbai-headquartered Impresario Foods, has been able to ride successive trends in the food and beverages space, beginning with his Mocha cafes to his recent Social, a chain of casual-dining-cum-shared-workingspace outlets.

Along the way, he has dabbled in other formats, like with his Salt Water brand (fine dining), as he sought to tap a growing appetite countrywide for eating out. While a smorgasbord of ventures, from quick-service chains to luxe fine diners, has been set up to utilise this opportunity, the boundless enthusiasm may be waning. “Fine dining as a concept has collapsed,” admits Amlani. “As an industry, F&B is overregulated and overtaxed.”

As he has raced to keep pace with changing trends (converting Mocha outlets to Social or shutting them entirely), he’s quick to admit that this business, especially recently, isn’t for the faint of heart. “In the 1960s, a decent restaurant could be relevant for three or four decades; then in the ’90s and early 2000s, this came down to around 15 years,” he says. “Today, keeping a restaurant alive and relevant for four or five years is extremely challenging.” If India has a big appetite for eating out, the economics of running a restaurant— or indeed any other joint — aren’t keeping up. “The amount of real estate available to restaurateurs is limited, rentals are constantly increasing and yet consumers are going for (cheaper) casual dining, making it harder for us to break even,” he adds.

Despite the glamour associated with it, restaurant business is notoriously tough the world over. Its seasonality, dependence on local markets and local tastes, intense competition and constant involvement required of entrepreneurs are just some factors that contribute to an absurdly high mortality rate. In India, these problems are compounded. The lack of well-planned and well-priced rental spaces, overregulation and licensing anomalies are factors complicating the recipe. These combined with an oversupply in at least three metros — Delhi, Mumbai and Bengaluru — and a populace that is not just price sensitive but also more reluctant to take to newer ideas and foods than previously believed are impacting bottomlines.

The brick and mortar restaurant business can be difficult to scale successfully, given upfront capital expenditure, operating expenses (especially rent) and the differences in each trade area — for example, in Delhi what works in Defence Colony may be quite different from what works in Vasant Kunj, says Bejul Somaia managing director, Lightspeed India Partners Advisors, a venture capital firm.

High Risk, Little Reward
In 1993, 20-something Ritu Dalmia decided to chuck her family’s marble business and start an Italian restaurant in the arty but then sleepy Hauz Khas Village in Delhi. Mezza Luna was one of the first standalones in India. Like the Singhs, Dalmia was an inexperienced restaurateur then. There was hardly a market for restaurants in the country and problems were aplenty — diners didn’t recognise “cold” parma ham, they sent back al dente pasta because it was kachcha, getting imported cheese was a taller order than today.

In short, Mezza Luna was destined to fail. Dalmia shut it in two years and decided to relocate to London. It was only in 2000 that she gathered courage to come back and set up Diva, which together with AD Singh’s Olive and Rahul Akerkar’s Indigo, kickstarted the standalone revolution in the country. Dalmia’s Mezza Luna experiment does not seem very different from the Singhs’ at Vintage 31.

But while one proved to be the stepping stone for an entire industry, the other is likely to go down as yet another accident in a long list of failed restaurants. “The difference is in the risk,” says Dalmia. “At that time, I was paying Rs 10,000 as rent, my total capital investment was Rs 5 lakh, if it didn’t work out, I could just go. Today, the rent for a 1,500 sq ft Khan Market restaurant could be as high as Rs20 lakh. People invest anywhere between Rs70 lakh and Rs 10 crore in ‘mid-level’ casual restaurants. Risk factors have totally changed,” she points out.

This changed economics is making restaurants unviable. The biggest problem, restaurateurs acknowledge, is high rentals.

“Throughout the world rent and electricity make up 5% of restaurant earnings, but in India this is 20-25%,” says Dalmia. While Delhi’s Khan Market is arguably the most expensive real estate in the country (rentals reportedly have been around Rs1,500 per sq ft), even upcoming sites like those in Mumbai’s BKC can charge around Rs 650 per sq ft. “Yet you have fools rushing in,” says restaurateur AD Singh of Olive Bar and Kitchen. People can lose their savings without the right maths. “To pay a rent of `20 lakh a month, a restaurant would have to do sales of `1 crore a month. How many pizzas will you sell?” asks Dalmia.

Food costs are very high and not just due to inflation. The cost of importing ingredients, compounded by a lack of clarity on labelling laws, has made sourcing a challenge for even seasoned chefs. For restaurants that use topquality or imported products, food costs could spiral. Even for tightly run operations with Indian food, they are in the 20-25% bracket. Indian Accent, the top Indian restaurant that could also be a case study in efficiency, runs at a 20% food cost.

Then there are policy bottlenecks like high licensing fees in different states — an annual excise license in Hyderabad, for instance, costs Rs 34 lakh, points out a restaurateur. There is also over-governance especially when it comes to alcohol, which impacts business.

R”The lack of planned infrastructure development for restaurant retail in every locality, along the highways and such, is a serious challenge, along with issues of high taxation, multiplicity of licensing and different excise policies in different states,” says Arvind Singhal, chairman of the retail consulting firm Technopak.

All these issues mean that restaurants today are operating at slim profit margins. Most restaurant companies aim for an operating margin of 15-20% and even efficient ones could just about manage a net profit margin of 5-6%; anything in double digits is regarded as an exception.

“It’s a business where it is very easy to slip from black to red. You have to be constantly on the ball,” admits Dalmia, who shut down two of her restaurants, Diva Piccola and Kitsch, at different locations in the Capital within sixeight months of operations.

Industry watchers estimate (and ET has reported) that almost 80 or more outlets may have shut in the past six to 12 months. Given that much of the business is in the unorganised sector, this number is likely to be higher. More tangible proof of the lack of profitability and unviable business comes from the biggest companies.

Anjan Chatterjee’s Speciality Restaurants (with the popular brand Mainland China and newer ones like the bar concept Hoppipola) has remained the only publicly listed Indian restaurant company till date. However, it has seen its business — and its share price — dip sharply (its 52-week high was Rs 165, it closed on Friday at Rs 85.15).

The Problem of Plenty
“I am only interested in the highest and lowest ends of the market in India. The mid segment does not make any sense,” says Rohit Khattar of Old World Hospitality. Khattar, arguably India’s most successful restaurateur, is now focusing on the international and national rollout of his two brands: Indian Accent (average per customer check or APC: Rs 3,000 plus tax just for food) and Tikka Town (APC of Rs 225) at two ends of the spectrum. A higher APC or the economies of scale at the lowest level drives restaurant profitability in India, believes Khattar.

It is the mid, casual-dining segment that is a problem, where APCs range from `600 to Rs 1,500. This, ironically, is also the segment where most of the growth has occurred in the last few years with more and more brands sprouting. The result? “Supply has far outstripped demand,” says chef and restaurateur Manu Chandra, co-owner of casual dining brands like Monkey Bar and The Fatty Bao in Bangalore, Delhi and Mumbai. “In this market, you are basically competing with everyone.” Saurabh Khanijo, who started the homegrown pan-Asian brand Kylin, agrees: “The customer in the mid segment has no loyalty. He will go to a new place, but switch to a newer or cheaper place that comes up the next month.”

Mid-market bar formats, deemed the most profitable and which have been sprouting in the Indian restaurantscape for the last threefour years, are particularly sensitive to fickle loyalties. Restaurateurs now dread the oneand-a-half anniversary of their outlets. That is when most start losing money and need to reinvent products. Chandra, in fact, says that attention spans have become even shorter: “The honeymoon period for these new launches has shortened from over a year to just six to eight months.”

Too Much, Too Soon
Celebrity chefs, partying restaurateurs, eager customers, reservation lists that go down weeks — that may be the glamorous face of this business. Internationally, however, more often than not, it is not the celebrated chefs whose faces launch a thousand brands who really own their businesses. Rather, it is a bunch of savvy investors who have bought into brands and scaled them up. In India, the last five years have seen the same model at work. The best-known “lifestyle” brands across cities are all part of just four-five big restaurant companies that dominate the market. Examples include Farzi Cafe, Social and SodaBottleOpenerWala. Their proliferation may give the impression of a restaurant boom but the companies that own the brands — all with private equity funding — are trying hard to balance growth with profitability.

“Growth versus profitability is a tightrope,” admits AD Singh, “there are many companies that have been going after size but slipping on profitability.” Like most other top restaurant companies at the moment, the Olive group is a Rs 200 crore turnover company. It aims to reach Rs 500 crore in the next four years. “We grew three times in the last four years but now it will be slower,” says Singh. This year has been one of consolidation. The company closed its luxe lounge bar LAP in a Delhi hotel and exited a small French bistro format where it had got into a partnership. It is set to add eight restaurants across brands such as Monkey Bar (slated for a Kolkata launch next month), SodaBottleOpenerWala and Olive Bistro (looking to go to tier-2 and tier-3 cities). “But we have to be cautious with expansion. If even one product does not work, it will undo the work and profit of others,” explains Singh.

Not all restaurateurs are cautious though. The last few years have seen many chase investors to expand. Many of them succeeded only to find themselves chasing numbers and diluting their brands. “Having an investor can be like a monkey on your back if they don’t understand the business. Many investors are only interested in doubling their money in four years and exiting, not in building long-term value.

Getting funding is now about the art of storytelling. When these investors realise that it is not as easy as it seems and the restaurant industry is not like making motor spare parts, that is when problems arise,” says Khanijo. Khanijo, whose Kylin brand was bought into by Rollatainers, a listed packaging company that was keen to enter the food business, is still in creative control of his brand. By 2018, he plans a rollout of 14-15 dine-ins across India and 27-28 QSR format restaurants. Clarity about deliverables is essential, he adds

The present restaurant ecosystem is full of uneasy alliances. Entrepreneur-investor relationships are fraught with tensions though companies are tight-lipped. Some of these are in the open. Jayaram Banan, who created Sagar Ratna and sold off a majority stake, has had an acrimonious relationship with the investors. Rahul Akerkar, one of the most talented chefs in India and founder of Indigo, famously lost his business after he brought in investment.

“Indian entrepreneurs are very emotional about their businesses. It is across industries. If they want to build big companies, they need to let go of egos and adapt,” feels Technopak’s Arvind Singhal.
The investors themselves are getting wary. “After the success of chains such as Domino’s and Speciality Restaurants between 2007 and 2011, there was a rush of interest,” says Vishal Sood, a partner with SAIF Partners, an earlystage investment firm. “However, more recently, at an individual enterprise level, profitability has been elusive,” he says. “There has been a glaring lack of exits in this sector and this has kept the pace of deal-making muted.” Most restaurants and bars also operate on a cash-heavy model, avoiding VAT as this could be the difference between profit and loss.

“None of our three investments are profitable yet and we are cautious seeking new deals in this space,” says Sood. Other investors such as Deepak Shahadpuri, managing director of DSG Consumer Partners, a private equity fund in Singapore, point out that lopsided costs make India’s F&B sector a difficult investment option. “There was a rush of money into this space between 2005 and 2009 (when DSG backed Amlani’s Impresario),” he says. “But few funds have managed to make money of a sector with so much potential.”

Much of the challenge for investors is to dissuade entrepreneurs from going after them for funding, since some business models may not work for PE investors. “Not every brand can have 100 outlets and be funded,” says Shahadpuri.

Level-Playing Field
Many, however, continue to believe in the potential for restaurants. Sanjay Chhabra, managing director of Boutonniere Hospitality, who owns the listed packaging company Rollatainers but got into restaurants after acquiring Barista, along with franchise rights to international brands like Wendy’s and Jamie’s, says,”We see some formats in the sector being under stress but that’s cyclical and temporary.

We are seeing good growth in the fast and casual dining segment today. Compared with the matured economies of the world where this sector is almost stagnant, in India, we are seeing good growth.”

Indian and reinvented Indian food-led formats are, apparently, what consumers want. Bars serving this kind of food seem to be doing the briskest business.

The most successful restaurateuring model for now seems to be vanity investments — a group of four-five investors raising capital. These restaurants typically shut after a year or two, at which point the investors start something else. That is not by any stretch the recipe for a full meal.

Source :Economic Times

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