Wish you a Happy New Year

My wish for 2012: May this year bring good fortune to all Restaurant Entrepreneurs. We need to turn the statistics upside down - From over 90% of new restaurant businesses failing within the first year to over 90% of new restaurant businesses succeeding within the first year. 

Kitchen Area in a Restaurant

While designing a restaurant space, the normal tendency would be to maximize the number of "Covers" (industry term for seats) and minimize the space required for the kitchen area. What exactly is included when we use the term "Kitchen area" in a typical restaurant.

1) Cooking area - This means the area used for preparing the food - large commercial gas burners, tandoor, grill etc. depending on your cuisine.
2) Work tables adjoining the cooking area for preparing and keeping the final cooking ingredients ready. This could include veggies & meat cut appropriately, sauces, spices etc.
3) A Wash area that can be used for washing the cooking utensils & accessories and another wash area for serving dishes (plates, spoons, forks etc. - cutlery, crockery). In small restaurants, the wash areas for both tend to be combined.
4) A Small Store area - This is a dry area used to store the most commonly used provisions in the kitchen. Even if the restaurant has a separate larger store, the kitchen will need a small store or atleast a few storage shelves.
5) Pantry Area - This is the area where the juices, desserts, maybe even salads and other items which do not need cooking, are prepared.
6) Food Pick-up tables - Generally, you have a small table which is used to assemble the dishes to make it easy for the server/steward to come and pick-up the items and take them for serving to the customers.
7) Preparation Area - This could be an area used to cut meats, maybe have a grinder for grinding flour etc. In small restaurants, the same work table area is used for this. This would depend on your cuisine.
8) Staff Toilet Area: This, in my opinion is critical and a very basic need you need to provide for. A number of small restaurants do not provide this and you can see the kitchen staff using the customer toilet area.
9) Staff Changing Area: A small area for the staff to change to their work uniforms/dresses and hang their clothes and keep their personal belongings.
10) Space for keeping clean cutlery and crockery: This area can be provided for adjoining the kitchen or within the customer area in the form of "Side Tables" - The next time you go to a restaurant, you can see small shelves used to store plates, spoons, forks etc. Providing a space for keeping clean water glasses is also critical as these tend to be fragile and if you do not provide for it, you will end up with lots of breakage.
11) An area where the used cutlery, crockery and glasses can be kept for washing - This is a small area where the steward / clearing boy can leave the used the plates, cutlery and glasses for the washing staff to take and clean.

If you include all of the above, you will probably need 400-600 sft even for a small restaurant kitchen. Again, the exact space requirements would depend on the concept/cuisine. So please use the above as a broad guideline for the kind of space you would need.

Key Non Product/Concept Components to starting a Restaurant Business

I have already provided the below information as a combination in a few posts, but I keep getting several email queries asking the same questions. So I have tried to summarize the key activities involved in starting a restaurant - here I am talking about the activities outside of the main concept, interiors and the product/menu design etc. 

1. Company Registration - Any accountant/accounting firm will help you with this. You can register the company as a propreitership (easiest, but the firm and you are the same from a legal perspective), Partnership firm (minimal paperwork and minimal ongoing statutory requirements) or a as a Private limited company (reasonable paperwork and costs to set-up and reasonable ongoing activities). LLP is also a new option you can consider. Out of the lot, I would recommend the "Partnership Firm" approach - delinks you (the individual) from the company, gives it a more formal feel and the paperwork/costs involved are minimal both during set-up and on an ongoing basis. Plus if you accountant can help you plan your taxes creatively, you may be able to save some money by paying lower taxes on the profits you make through the presumptive income based model available for small businesses with revenues upto 50 lakhs per annum. Again, I am not a CA or a tax/accounting expert. I would recommend that you talk to your trusted accountant and if you don;t have one talk to 2 or 3 accountants and pick the one you are comfortable with. 
2. Permits / Licence Procurement - Once you find your location, these are not as difficult as it seems - it will just cost you money. So don't worry too much about it, unless you want to serve alcohol, in which case you will need to figure out the way to get the permits/licenses for this earlier. For the standard licenses, your local corporation office and your accountant can help you get all of those. See my post on licenses required for a restaurant business for details. 
3. Financials / Funding - For a restaurant business startup, it will have to be your own money with some support from friends/family. You can get a loan from a bank for property as collateral - Loan Against Property - most banks have a scheme for this. Here you mortgage your property for the loan - in the event you cannot repay the loan, the property will become the bank's and they will dispose it off to recover the loan amount. Working Capital Loans are not typically not available for new businesses. Let's say you have 3 restaurants operational for the last 4 years and your bank has a record of all your business transactions for the last 4 years with them. Based on this history, they may give a working capital loan / overdraft facility. The interest rates for commercial loans are currently in the 14-18% per annum range. I would suggest that you go and talk to the branch manager at the bank where you have your personal account - they will be able to provide you specific details on what options you can avail of in your situation. When you determine the total investment you need, I would strongly urge you to include working capital requirements for the first 3-6 months in your total investment figure, as you will need that time to build your business to an operational break-even level. So you need to have the funds ready to sustain your operational expenses for the start-up period. 
4. Location Search - It is worth hiring a good broker for this once you determine the kind of place you are looking at. You can also drive around, call the numbers from the To Let boards. 
5. Staff Hiring / Training - Staff hiring will be a painful part. The main guys you hire should be able to bring in the rest of the team, but getting the main guys will be the challenge. You can request an existing restaurant business owner to help you find someone good. If you are looking at a reasonable investment (say 25K per month + salary), then Naukri.com, Monster etc. may be a potential source for finding the key staff. Training is not established in this space - There are some consultants who can do some form of training. The main guy you hire should be able to help you train the staff initially.

Formal Research Report on the Indian Restaurant Industry

I recently met with Samir Kuckreja,  the current President of the National Restaurant Association of India (NRAI - www.nrai.org). Samir is also the MD & CEO of Nirula's (www.nirulas.com) - India's own McDonald's. He shared several industry insights and also gave me a copy of the white paper that NRAI released in 2010 on the Indian Restaurant Industry - probably the first formal documented research of this scale in India. This is really an excellent & comprehensive market research report - calling it a white paper does not do justice to the content available in the report. I will share key highlights of the white paper in a few future posts - want to get a formal approval from NRAI before doing so.

Interested Readers can purchase a copy of the NRAI White Paper on the Restaurant Industry for a fee of Rs.500/- for Delhi and Rs.600/ for outstation. The payment can be made in cash or cheque drawn in the favor of National Restaurant Association of India. The correspondence address is

National Restaurant Association of India

4^th floor, Phase-1, PHD House, 4/2 Siri Institutional Area,

August Kranti Marg, New Delhi-110016

Main Line: +91 11 4100 0967 Fax: +91 11 2653 6053

Contact: Shilpi Varshney

Marketing and Communications

Email: shilpi.varshney@nrai.org

Meanwhile, here are some press releases that provide a very high level summary of the research report. All these links are also available on the NRAI website - http://www.nrai.org/news.asp?id=6

1) http://www.nrai.org/news/ExpressHospitality-26-05-10.pdf
2) http://www.nrai.org/news/F_B_News.pdf
3) http://www.nrai.org/news/The%20Sunday%20Guardian%20-%2009.05.10.pdf
4) http://www.nrai.org/news/Financial%20Chronicle%20-%2010.05.10.pdf
5) http://www.nrai.org/news/Economic%20Time%20-%2010.05.10.pdf
6) http://www.nrai.org/news/Hindu%20Business%20Line%20-%20Delhi_15.pdf
7) http://www.nrai.org/news/Food%20and%20Nightlife%202.pdf

The Fresh Fruit Juice Business

I recently received an email question - am posting the question and my response as it may benefit a large section of readers:

Email Question: 

Myself and my wife are planning to start a fresh fruit juice centers in and around Bangalore & Mysore..Since you are into restaurant business, can you please throw some light on this area? Need some ideas on locations and general people buying behaviour for fruit juices etc. Also if you can help me in sharing few ideas regarding the finance part too, so that first time entrepreneurs like us would be grateful.

Response:

Do check my post on Juice Junction - http://restobizindia.blogspot.com/2011/03/featured-business-juice-junction.html. I do believe they have got their basics right.

You need a high footfall location - ideally a small unit in a busy pedestrian road, better still - a corner building in that area. You can check the kind of areas Juice Junctions are located. That will give you a great sense of the kind of places that this business will work in. 

This is also a very price sensitive business - again check the Juice Junction pricing. There are folks who have tried more expensive variants in fancy locations / malls - e.g. Booster Juice, Acidic in Bangalore. My assessment is that they are not doing well as a business. In Bangalore, Juice Junction is the benchmark. Ganesha Juice Center is a lower cost variant of Juice Junction. 

For first time entrepreneurs, getting financing / loans is difficult, unless you have some collateral - e.g. property. So you will have to arrange for your own financing

Marketing Option Assessment - Websites offering customers Online Ordering mechanisms

Here I am referring to websites such as www.Justeat.in, www.delyver.in, www.bookmytakeout.com etc. Justeat is clearly the most popular of the lot and I am going to talk about how their model works.

FYI: Justeat is a UK company which acquired Bangalore’s own startup in this space hungryzone.com, started by a few IIT guys.

1. Restaurants can list themselves on Justeat and their menu will be uploaded on the Justeat website. Justeat also actively solicits restaurants to list for free on their website. Justeat works on a commission model - i.e. the restaurant pays Justeat 10% of the order value for all order generated through Justeat. 
2. Customers visiting the website can choose from the various restaurants listed on the website, place an order online. Since they have their profile stored on Justeat, they do not need to enter their address everytime they order. For select restaurants, Justeat also allows payments to be made online (This is a very small percentage currently though I expect this number to increase in the future)
3. Upon receiving the order, a Justeat representative calls the restaurant and places the order. They have recently introduced a device that is distributed to the restaurants, which can communicate the orders automatically to the restaurants.
4. The restaurant then fulfills the Justeat order, like they would do for a normal delivery order. They deliver the food, collect the cash. 
5. At the end of the month, Justeat sends an invoice to the restaurant listing all the orders placed by them with the 10% commission that needs to be paid to Justeat. They send a guy with a hard copy of the invoice and collect the money/check from the restaurant. 

Their business model is quite nice - easily scalable online model with a 10% commission on the order value. They know that restaurants will start complaining about the 15% commission being high. To circumvent this problem, they are trying to market their website very hard to customers hoping that restaurants won't have a choice but to list to Justeat and cough up the commissions. They may well succeed as they do not have any serious competitors in sight - atleast in India. Zomato seems to trying to replicate the Justeat model, in addition to their restaurant review focus. 

Value Adds provided by Justeat:

Justeat, after the acquisition by the UK company, has become very aggressive with their marketing and is also using creative ways to add value to the restaurants. 

1. They offer billboards to restaurants for a discounted fee, but include their logo in the billboard generating a very low cost way to market their brand.
2. They offer carry bags (used for delivery) with the Justeat logo prominently marked on them. They offer these bags at a discount of 20% to the restaurant owner. Again a very creative and low cost way to increase awareness of their brand.
3. They also partner with the restaurants and share the costs of printing flyers - again the Justeat logo is prominently displayed on the flyer alongwith their number. In some ways, customers may call Justeat for the order since their number is the one visible on the flyer. Again they subsidize the cost to the restaurant owner by about 20%. 
4. They are also starting to provide restaurants with napkins, napkin holders, standees for the table and everything else a restaurant needs at a discounted price, but with the Justeat logo on them. 

I must say that I am impressed with the aggressiveness with which they are trying to build their brand. 

Delyver.in, on the other hand is trying to provide genuine value to the restaurants by trying to manage the delivery logistics (i.e. they operate bikes with a delivery box and are trying to get restaurants to outsource their delivery service to them). While this is more value adding and restaurants won't have a problem paying 10% or even higher as commissions to delyver.in for doing this, managing the logistics of their operation is a challenge. If they can get their execution right and figure out a way to monetize their service, then delyver.in would be more useful to restaurant business owners than Justeat. Delyver also supports other establishments (not only restaurants) with their delivery services. 

It will be interesting to see in a few years what happens to both of them. My guess: Justeat with their new investor, cash on hand and some real aggressive marketing will end up dominating this space. Zomato is attempting to catch up with Justeat, but will need to be even more aggressive than Justeat with their marketing and brand building - maybe they can start with the cities not currently supported by Justeat. 

Featured Business - The Sukh Sagar Story

This post is based on an interview with Siddarth Poojari, a second generation member of the Sukh Sagar family.

The Sukh Sagar Story:

In 1962, a young man, Suresh Poojari from Kundapura (a town near Mangalore), went to Mumbai (the City of Dreams at that time for a lot of Indians from the smaller towns). He worked in the docks, local restaurants for a few years. Suresh started his own business by selling fresh fruit juices on a cart in the Chowpatty area. This cart model became famous and thus was born Sukh Sagar – a small joint serving fresh a variety of Vegetarian snacks (Pav Bhaji, Sandwiches, Idly, Chinese fried rice etc.) and fresh fruit juices.

With a successful business under his belt, Suresh’s family urged him to do something in the south – thus was born the first Sukh Sagar in Bangalore – in the Gandhinagar area with a 1000 sft space serving the same cuisine as in Mumbai, with the addition of a variety of Chaats. The proposition was the same – reasonably priced Vegetarian snacks and fresh juices. In the meantime, business in Mumbai expanded with “Sukh Sagar Welcome”, a place which had an AC section and a non-AC section.

Today, Sukh Sagar has 22 units – 8 in Mumbai, 7 in Bangalore, 1 in Mysore, 1 in Chennai, 2 in Dubai, 1 in Saudi Arabia and 2 in Qatar, with a few more already planned (4 in Chennai, 1 in Dubai). A North American foray in the works (based out of Toronto). All these units are company owned and operated.

The company is now managed by Suresh Poojary's three sons. They believe in controlled/conservative growth and have shied away from Venture Capital investments to fuel growth. The company is working on a franchise model though to drive future growth. The first franchise is expected to be operational in Bangalore very soon. The plan is to create a model unit in each city, set-up centralized procurement and support systems and then expand in the city through the franchise model. Their business model is very flexible and depending on the space and the investment the franchisee brings in, they will create a suitable format – QSR, Sit-down restaurant etc. The typical investment range is 30 lakhs to 2 Crores depending on the format.

According to Siddarth Poojari, who also operates City Bar (in UB City), Kobe Sizzlers (Koramangala) and Zafran (St.Mark’s Road), restauranteurs will need to line up enough investment to sustain about 7 months of operations (3-4 months of pre-operating expenses and 3 months for the restaurant to establish and break-even).

What exactly happens when you order something in a restaurant?

Though I have written a post on this earlier, there were a few readers who wanted me to elaborate the process a little more. I am doing this now.

Once again, I am going to talk about the old style Pen and Paper approach – not the fancy electronic touch pad systems that are now available. Having said this, you will notice that most restaurants in India (including the fine dining ones) still use the “Paper & Pen” approach.

• The Waiter notes down the items that you want to order – usually most restaurants will have their own short name for each item that all the staff understand. E.g. Gobi Manchurian could be G.Manch.
• The pad/paper on which the waiter notes down the order is called KOT (Kitchen Order Token/Ticket). Usually, KOT books are printed as a 2 copy (Duplicate) or as a 3 copy (Triplicate) – i.e. The first sheet could be white, the second sheet will be of a different colour (say yellow) and the third sheet (if it is a 3 copy KOT) will be in yet another colour (say blue) – then the sheets repeat themselves in the same colour order. There is also a serial number generally printed – 1 number for one set of 2 or 3 pages to enable tracking if required.
• KOT books are usually of A8 size (one fourth of a A4 sheet) or of A5 size (half of a A4 sheet).
• The waiter inserts carbon sheets to make automatic copies – 1 if it is a 2 copy KOT book, or 2 if it is a 3 copy KOT book. Nowadays you get self copying paper (i.e. a carbon sheet need not be inserted to make a copy) at reasonable prices. Most banks now issue check books of this nature.
• The waiter starts with writing down the table number (in most restaurants, the tables are numbered and allotted to waiters – i.e. one waiter is responsible for a set of tables – say Tables 4 to 8). The waiter then notes down the order.
• One copy of the KOT is given to the cashier (for billing purposes). Another copy is given to the kitchen for preparing the dishes - Usually, to the “Barker” in the kitchen. The waiter keeps the third copy with himself. In small restaurants, a 2 copy KOT is sufficient as the waiter does not need one and can always refer to the cashier’s KOT if there is any confusion with the orders.
• The role of the “Barker” is to collect the KOTs, literally shout out the orders to the respective kitchen staff (i.e. for juices, he shouts the order to the guy in the pantry, for starters to the cook who is responsible for making the starters, for the entrees to the main cook who prepares the entrees etc.). Once the respective food items are prepared, the barker then assembles the dishes according to the KOT and hands over the prepared dishes to the respective waiter.
• Having a good barker is very critical in most restaurants – especially during busy times. Think of the Barker as a Orchestra Conductor. The Barker also makes decisions on whether to send an order in full or in parts – e.g. if a table has ordered drinks, starters and entrees, the barker will make a decision to send the drinks and the starters first and then the entrees. In some cases, if the food order is going to be delayed, he may send some of the entrees earlier.
• The waiter then hands over the dishes to the respective table.
• Additional orders are noted down on a new KOT, with the same table number and the process is repeated. The cashier collates all the KOTs received by table number and when the waiter asks for a bill, the cashier prints out the bill.
• Once the payment is made, all the KOTs for that particular table are stapled and filed. At the end of the day, the cashier and the manager are expected to compare the KOT orders with the bills that have been generated to ensure that all orders have been billed. The kitchen is also typically instructed not to prepare any food without a KOT for audit/control purposes.

So the next time you go to a crowded restaurant, be a little more nice to the staff – most of them are typically on their feet most of the time and are trying their best to keep things under control.

Take-Away Units as a Business

I have had a few people emailing me asking about "Take-Away" only units. The underlying interest in this business is quite clear - you need a much smaller space which means the real estate requirement is lower, cheaper and so is the Capital Investment (Rental Deposit, Interiors, furniture etc.). In addition, ongoing operational costs (staffing, utilities etc.) will also be lower. The downside is that your pricing will need to be VFM (Value For Money) - premium priced take-away units are very tough to do as customers will pay only for the food - not for the service, ambience etc.

In the Indian market context, you will need to look at "Take-Away & Delivery" together, as both address the same segment of customers. Take-Away only units will work in very crowded areas (City Market, Outside bus stands, metro stations etc.) where the flow of people is so large that you will get enough traffic easily. A more scalable option will be the Take-away+Delivery model

Dominos Pizza in India is essentially built on this model of Delivery & Take-Away. Their stores have a few tables, but the tables are are simply space for people to buy Pizzas and sit down and eat there if they want to. Some of their units also offer the space for birthday parties, given the fascination kids seem to have for birthday parties at Pizza joints. Pizza Hut has recently launched "PHD" - Pizza Hut Delivery (what a great name - PHD!!!) which is essentially a Delivery & Take-Away unit, again with a few tables available for customers who want to sit down there and enjoy their Pizzas. Other successful businesses built on this model are www.asiainabox.in, and to some extent Ammis Biryani (www.ammisbiryani.com)

For the "Take-Away + Delivery" model to work, here are the key factors:

1) The Location: This is even more critical that that for a restaurant. The location needs to be very convenient - for people to park their bikes/cars for a few minutes.

2) Extremely Quick service: The customer should be able to place an order and get his package within a few minutes. So your menu design needs to support very quick turnaround. Again the simpler the menu is, with a few items, the better are your chances of a quick turnaround.

3) The Layout - The layout of your unit needs to support a number of people waiting for their orders - ideal location would be the garage area of a corner building - where the kitchen and the servicing area can be in the garage, with the drive-way serving as a place to customers to hang around while waiting for their orders.

4) Prompt Deliveries: Like I have mentioned earlier in my post of Door Deliveries, you should be able to deliver the food to the customer's premises within 30 minutes.

If you work out the numbers, making this model work as a business will not be easy as it seems. but if you are able to crack this one, I believe you can build an unassailable business with a loyal customer base - business that will work irrespective of competition, recession etc. I will do some research on Take-away units and post a detailed blog in the future.

ESI, PF, Safety/Fire Dept. NOC, Insurance etc.

I got an email from a reader with the following questions - am posting the questions and the responses for the benefit of the larger reader base:

Disclaimer and Important Note: I am not a legal/accounting/statutory expert. These areas tend to be highly complex, localized and I would strongly advice seeking opinions from qualified accountants/lawyers for these. I have only provided broad guidance below, based on what I know.

1) What is the eligibilty criteria for a restaurant to be ESI and EPF compliant? If a restaurant comes under the purview of these departments, what are the formalities to be complied with?

ESI stands for Employees State Insurance. Essentially, this is a medical insurance scheme for low wage employees (monthly income of Rs.15,000 or below) for availing medical facilities at government hospitals, governed by the ESI Act of the Government of India. ESI is managed by the the Employees State Insurance Corporation (www.esic.in). You can find more information including a copy of the act on their website. Their new portal launched a few months ago is pretty good and a lot of transactions can be completed online with minimal fuss.

If you employ 10 or more employees with wages less than Rs. 15,000 per month, then you will need to participate in the ESI scheme.

EPF stands for Employee's Provident Fund - You need to participate in EPF if you employ 20 or more employees irrrespective of their salary levels. Again you can find information on their website - http://www.epfindia.com/

Most accountants have a external partner (typically a freelancer or who specializes in ESI, Labour & PF) they can refer you to. For a small monthly fee they will help you with the process of registration, ongoing statutory filings and support. Both of these require monthly payments and periodical filings (monthly, annual).Again the freelancer/specialist will help you with these.

2) Does a Restaurant need a fire safety certification / NOC from the fire department?

As far as my limited knowledge goes, buildings require a fire safety certification in certain cases. I am not aware of a restaurant business specifically requiring a safety certification / NOC from the fire department. Again this could be very localized - your best bet would be to ask a neighboring restaurant on if something of this nature is required.

3) Is Insurance (of premises etc) mandatory for a restaurant?

Insurance of the premises (building) is typically the landlord's responsibility. But Insurance of the fittings, furniture, equipment inside the restaurant is highly recommended. Most general insurance companies have a specific package for hotels/restaurants - E.g. Tata AIG insurance package for Hotels and Restaurants. This insurance is not mandatory, but highly recommended.

Marketing Option Assessment - Restaurant Review Websites

Here I am referring to Restaurant review websites such as www.burrp.com, www.zomato.com, www.eveningflavours.com etc.

Restaurant review sites are becoming popular and with the increase in the number of discerning customers, there is more interest in gathering feedback about a restaurant before making a decision to visit one. Given restaurant spends are a low-ticket, impulse decisions, the impact of review websites may not be as high as in categories such as Cars, hotel stays etc. If you are a fine dining restaurant or a very unique concept, there is a small chance that you can create a fan following on these review sites, which will lead to an increase in the number of visitors to your restaurant. This is a tough one to crack though, as the reviews are posted by end consumers and there is no control over the content that they write. In general, customers like giving feedback in extreme situations - when they are upset with something or when they are mighty pleased with something. So from a planning perspective, you will need to figure out a way to get a lot of reviews written about your restaurant business and hope that your restaurant gets more good reviews than bad ones. Other than reviews, these sites also offer paid options, where your restaurant is featured on top of search results – e.g. if a customer enters a search keyword, “Italian” or selects “Italian” as the category, you can pay “Burrp” to show your restaurant on the top of the list. These paid options are fairly inexpensive (about 15-30K per year), and may be worthwhile for new, unique concepts, to generate some interest and get the word out to active foodies.

Why do you want to start a Restaurant?

Why do you want to start a Restaurant? The “Why” question is really critical as all the next steps you will need to take and the decisions you will need to make, will be driven by the “Why”?

The “Why”?

What could possibly be some of the reasons you want to start a restaurant business?

1. I am tired of sitting in front a computer all day along – I want to do something different. The restaurant business seems easy enough and attractive.
2. I want to be an entrepreneur and create the next big brand/company.
3. The food business in India is expected to grow significantly over the next several years and I want to ride the wave.
4. It could be a “Recession Proof” business – as the food is a basic need and will never lose money
5. It seems to be a very profitable business – most people I talk to tell me that I can recover my investment in 3 years (That turns out to be a 33% annual return on the investment – fascinating)
6. I have a passion/strong interest in this business and want to be seen as a restauranteur.
7. Other Reasons you may have

Reactions to the “Whys” 1 & 2.

• I am tired of sitting in front a computer all day along – I want to do something different. The restaurant business seems easy enough and attractive.

The best way to convince yourself that sitting in front a computer all day along is absolutely worth the effort and the best possible option for you (Return on investment for the amount of work you will put in and the sacrifices you will make), then I would encourage you to quit your job and start a restaurant. You will find yourself running back to the same cubicle you came from, sooner than you can imagine, and this time, you will use Araldite or something even stronger to hold on to your job.

• I want to be an entrepreneur and create the next big brand/company

I find the phrase “I want to be an entrepreneur” very confusing. If you have access to a lot (a few Crores of easy-to-get money – by this, I mean money that you can use to fuel your dreams) – could be your savings, could be from a rich father/father-in-law/wife etc. Essentially this will be money you can use at your will, without having to really tell anyone what you plan to do with the money. Now if your reason is to be an entrepreneur and try to create the next big/brand company, a restaurant business should feature in your evaluation.

If you are want to be a true blue entrepreneur (bootstrapping approach), then I believe there are better opportunities available – ones that are more Venture Capital friendly. With external investment your chances of building a large brand and a business is tremendously accelerated. Professional investors, who invest in start-ups, generally pick businesses where the founders already have some experience in the same business area. Plus they like IP (Intellectual Property) creating businesses, where scaling requires much lesser investment compared to the revenues/profits that can be generated.

I believe that the restaurant business fundamentally is NOT a Angel Fund/Venture Capital friendly business. Why?

Like I mentioned earlier, Angels Investors and VCs seem to like businesses that can create a product/solution/offering using the initial money they invest, that can then be scaled at a rate that is positively disproportional to any additional capital investment. For a restaurant business, even if your first unit is very successful, to grow, you would need a lot of capital again and again. If "x" is the investment for the first unit, to grow revenues by 100 times, you would need an investment of 100x (probably more if you need more money towards marketing/branding). VCs like businesses where if they invest “x” initially to create a product, then to grow revenues by 100x, they would probably need to invest 10x/20x, primarily towards sales, marketing and customer support. Having said this, there are quite a few restaurant businesses in India which have received VC funding so far. Plus with the market expected to grow significantly in the next few years, VCs may start getting more interested.

Reactions to reasons 3 to 7 to follow soon.

Why do a lot of people have a fascination with the Restaurant Business?

There seems to be something fascinating about owning and running a restaurant, a coffee shop, or even a really small business in the food industry. It is probably something like getting attracted to the opposite sex. A large number of people are infatuated towards the restaurant business, and by the law of averages, a small percentage of them actually end up doing something about their infatuation.

Why does this fascination/infatuation happen?

Reason 1: Everyone Understands this Business

Cricket – The unofficial national game of India, evokes significant emotions both when we play and when we watch India play. Almost everyone in India plays cricket or strongly believes that he or she knows how to play cricket. While watching from the dugout or on TV, you feel that your team member batting in the centre is not playing the shots he should and you feel you should be there whacking the ball around or telling him how to play. But when you go out to play, you end up struggling the same way as your team-mate or even worse.

I met with a seasoned professional in the investment banking space and one of her statements really caught my attention. We were talking about a specific restaurant "Biryani Merchant" that was set up in Bangalore a few years ago. The restaurant shut shop after about a year in operation. She told me that service in that restaurant was really bad and that was the reason they shut down. Though I quickly wanted to ask her how many times she had visited the place and on what basis she was making such a strong statement with so much conviction, I wanted to be nice. But my guess would be "Once" or maybe 2 or 3 times at best.

Almost all of us have visited a lot of restaurants over the last several years. We all have opinions about what is good and bad in any restaurant we visit and what needs to be done to fix the restaurant. This repeated exposure to the business as a customer leads us to believe that we understand the business and what works. Add to this, the age old adage that “If you understand the customer needs and fulfill them, your business will be very successful”.

Reason 2: The Restaurant business seems very successful a.k.a profitable

Most restaurants we visit are typically crowded whenever we visit them – it is another matter that we mostly visit restaurants during weekends or the same times when everyone visits the restaurants. We also typically visit restaurants that are good, recommended by others and the ones we like. Most of these businesses have typically figured out the basics of the business and tend to be operationally profitable. But given our incorrect sampling (even if we have visited over 100 places, most of the 100 end up belonging to the same sample set), we tend to intrinsically believe that all restaurant businesses are very profitable.

Now you have an easy formula – I understand the customer need, the business seems very profitable – let me get into it and make some money and become famous.

Reason 3: Low Entry Barriers

Starting a restaurant business has very little entry barriers. The only real barrier is having some cash to invest. Most people end up saving enough money over a decade or so to be able to invest in a restaurant if they have a real interest. In a number of cases, a few like minded friends are willing to chip in with some money for you to play around with.

Reason 4: The Cool Quotient

Owning a restaurant seems to evoke certain emotions, which make you feel really good and proud – you are probably considered “Cool”. Maybe it is about having a popular place everyone knows about, a place where you can invite friends and contacts and show them a good time. Visiting a restaurant is a “Feel Good” experience for customers – the restaurant is typically filled with positive vibes – the business in general evokes only positive emotions. I believe this is one of the big reasons for a lot of people to get infatuated with the business.

Reason 5: Advice from Successful people & I can work hard

Once you have an initial interest, you talk to a few restaurant business owners – typically the owners of the restaurants you frequent (essentially from the same sample set above of restaurants which are successful and have figured out the basics of the business). In general, we tend to talk to successful people for advice, the media writes about success stories that we read. The unsuccessful people like to forget their bad experiences and move on – so they don’t really want to talk about it or build associations with their unsuccessful efforts. I am firm believer that “Success breeds success and confidence”. So when you talk to successful people, they tend to encourage you and indirectly push to take the leap.

The only real negative thing that successful restaurant business owners will tell you is that it will be a lot of hard work. Even when they tell you this explicitly, we tend to feel that if others can do it, I can – so you really don’t assess how much hard work setting up and running a restaurant business is, compared to most other businesses.

So what you have is a cool profitable business that is easy to understand – so you get infatuated. And then if you have the money and the time, you jump into it. Now isn’t the world becoming very analytical where we try and make every decision very rationally after diligently evaluating the pros and cons? So when you are putting your life, your career and your money on the line for starting a restaurant business, why aren’t we rational about the decision making process and the approach we take?

Marketing a Restaurant Business

Since the restaurant business typically targets end-consumers as customers, it is critical to create a “PULL” for customers to try out your restaurant. So from a marketing perspective, you will need to think like a FMCG (Fast Moving Consumer Goods)/Consumer services company. The trouble is that implementing a good Marketing plan costs a lot of money (when you look at absolute amounts required). Like in most businesses, you will want to allocate a portion of your revenues as marketing expenses – say 5-10%. For a FMCG company like ITC, their revenues for each of their products run into several hundred Crores – so 5-10% of such a large amount is substantial and lets them do some great things with their marketing budget. For a Restaurant business your annual revenues will typically be 1-2 Crores per annum per unit. So, unless you have a large number of units (like say Dominos Pizza), your marketing budget will be very small in absolute terms. So realistically, you cannot use some of the same marketing options that the larger players and other FMCG/Consumer services companies use, but will need to efficiently reach out to your target customers and create the “PULL” factor.

The biggest and the best marketing investment a restaurant business can make is by picking a great location that has very high levels of visibility. We have already beaten to death and even more the topic around the “importance of location”. This is just another nail in the same coffin.

The second best marketing for your business will come from “Word of Mouth”. You need a lot of your customers to talk about/recommend your restaurant to their friends. If you have read the book “Outliers” by Malcolm Gladwell, you need a lot of connectors and mavens to visit your restaurant, like your restaurant and then spread the word as much as possible.

As a restaurant customer, if you look at the number of new restaurants you have made a decision to try out – i.e. it does not include new places you go to because you are invited there by someone else, I can bet, without doing any kind of research or surveys, that over 50% would be because of its location –

1) You are in the area, the place looks like something you want to try out, or

2) You keep seeing the place so often (it is in your neighbourhood or in an area that you frequent) that you almost feel bad not to check it out.

The remaining 20-30% would be because a friend (someone you trust or someone in your circle who is considered a foodie) recommended a certain place.

So that leaves the other 20% or so new restaurants, which you have visited, to other marketing initiatives that have caught your attention – maybe an ad or a flyer or a review you saw.

If you get the drift of what I am getting at, 80% of your marketing impact will come from your location and “Word-of-mouth” referrals from customers who have visited you. So if you don’t get these two right, whatever else you try will make absolutely no sense and the results will leave you disappointed.

So in reality the remaining marketing options we are talking about are like the cherry on top the cake – they can help improve the number of customers visiting your place by a bit, but will probably not turnaround your business by opening the floodgates.

One caveat to the above theories: When you are launching a new restaurant, a number of these marketing options mentioned below may help drive the initial traffic to your restaurant and may be quite effective.

The secondary marketing options that are available to you and those that restaurants typically tend to use.

1. Advertising in Newspapers – Paid Ads
2. Advertorials in Newspapers – Paid articles written about your restaurant in a newspaper
3. Just Dial and similar Directory Services
4. Bill Boards
5. Restaurant Review websites such as Burrp.com, eveningflavours.com
6. Online Menu and Order enabling services such as Justeat.in/Hungryzone.com
7. Flyers in the Newspaper
8. Deal Websites such as Taggle, Snapdeal, Koovs, DealsandYou, Dealivore etc.
9. SMS marketing providers such as mGinger.
10. Google Adwords

Interview with the Founder of Kaati Zone

The post below is from http://bangalore.citizenmatters.in/blogs/show_entry/141-interview-kiran.

This was an interview conducted by Anjana Vivek, that was published in Citizen Matters on Apr 28. 2008. There are some useful insights - so I am sharing this through my blog. All credits and copyrights related to this interview belongs to Citizen Matters.

Interview: Kiran Nadkarni, Founder Kaati Zone

It gives me great pleasure to start the interviews on this blog with Kiran Nadkarni. Kiran is Founder & Director at Kaati Zone, a chain of quick service restaurants specializing in Indian foods.

Kiran was among the early VCs in the country. Prior to starting Kaati Zone, he has held positions such as President, ICICI Ventures, and Managing Director, Jumpstartup Ventures. He has been an entrepreneur for over three years now and has raised funds for this venture.

Read on to know more about why he turned to entrepreneurship and his experiences in running his venture started in Namma Bengaluru with global aspirations...

Question: You have been one of the early VCs in India, what triggered you to move from someone who invests in entrepreneurs to an entrepreneur who is invested in by someone? We have heard of many entrepreneurs who become investors, you are following the reverse route!

Answer: I had spent 18 years in early-stage venture investing, and wanted to rediscover myself in a way. I was living in the US during 2002-2005, when I first thought of doing the Kaati Zone venture. I felt there was an opportunity to take a brand in Indian foods to the mainstream US markets. Initially, I had planned my involvement in the venture to be much like that of a venture investor, providing strategic inputs to an operating team. However, when I returned to India, I realized my full-time involvement with the venture was very important for it to succeed. You can say, I got sucked into full-time entrepreneurship gradually.

Question: Why this industry, how did you zoom in on this?

Answer: I was living in the US from 2002 to 2005. I noticed that, while Indians were a significant minority in the US and Indian food is popular among locals, most Indians who entered this industry were targeting the ethnic Indian community and did not address themselves to the larger local population. I felt there may be an interesting opportunity to take an Indian food brand to mainstream American market. We chose the quick service format, as it is a scalable business and one can build a significant company with this format. We studied the characteristics of and the current trends in the quick service foods industry in the west and planned our venture accordingly. We had planned to build out the concept on a pilot scale in Bangalore before moving to markets overseas, but things changed as we moved forward.

Question: Did being an investor in companies help you when you started your own venture?

Answer: My involvement as an early-stage venture investor in young companies did help in conceptualization, planning and defining strategies. However, I must admit day-to-day execution was something new to me.

Question: In your mind, what is it in your business that has helped you raise venture capital funding for your company? Any lessons you learnt that you would like to share with entrepreneurs re the fund raising process?

Answer: An early-stage investor assesses three important parameters in a business. He invests in the management team, a business idea that is scalable and can be built into a large enterprise, and a product offering that stands differentiated in the marketplace. My prior experience in venture industry clearly helped me define the initial goals to be achieved before tapping external capital. We invested in a central kitchen that serviced all outlets and demonstrated the hub-and-spokes model that can be scaled. We established a unique identity for Kaati Zone through our products and packaging that signified quality, health and elegance. We built a strong customer base not only for dine-in but for take-away and deliveries (including bulk deliveries to over 80 corporates in Bangalore, many of whom are multinational corporations). We have also ensured that we have retained most of our talent (from restaurant manager level upwards) during the difficult phase of our company. We have achieved it through regular interactions and communication about our vision, growth plans and innovativeness. Our team members have seen opportunities in Kaati Zone and have benefited from our growth.

Question: What is the best thing about being an entrepreneur?

Answer: The idea of introducing innovation in marketplace and making it a success drives the entrepreneurs most. I have also enjoyed charging up my colleagues with entrepreneurial zeal and passion. Young companies are usually unable to hire the best and most experienced talent. The entrepreneurial passion among team members can, to some extent, make up for this handicap.

Question: Is there anything you dislike about being an entrepreneur?

Answer: There is nothing about entrepreneurship that I dislike. I have always respected entrepreneurs and the spirit of entrepreneurship. However, I am extremely disappointed with the system within which we expect our entrepreneurs to deliver success.

• There is not much early-stage venture capital in India. Most investors focus on late-stage private equity deals of multi-million dollar size. I can count only a handful of silicon-valley style venture firms who are willing to back start-ups. Even the silicon-valley based venture firms which have entered India are shying away from start-up deals. I would have liked the Indian national financial institutions, banks and insurance companies to create a pool of capital that could support private initiatives in venture capital to support start-ups and young companies. The Small Business Administration (SBA) in the US contributed significantly to the growth of venture capital industry there. We require similar initiative to create an ecosystem of risk capital.
• The large-scale corruption in different agencies of Central and State Governments takes a heavy toll on young companies.
• Entrepreneurship is a high-risk game, and failure is part and parcel of it. Unfortunately, failure carries a stigma in our society and among investors.

Question: Are there any other insights / learnings / experiences you would like to share with an early stage entrepreneur in Bangalore or someone who is thinking of becoming an entrepreneur?

Answer: Here are a few suggestions for potential entrepreneurs:

• Entrepreneurship is a tough business. It requires staying power and perseverance on the part of entrepreneurs. Do not get into it because it appears glamorous. Attempt it only if you are passionate and are willing to hang in there for a long-term.
• Plan a business that can be built into a large enterprise. Very rarely do venture capital firms invest in small niche businesses.
• Innovate and stand differentiated in the marketplace. Build entry barriers for competition.
• Work actively to hire and retain quality talent. With most industrial sectors booming, employment opportunities are aplenty and retention of staff a very difficult task. This is a test of leadership skills of the entrepreneur.
• Leverage your contacts and networks to grow the business quickly. Also, focus on growth of topline even if it means sacrificing profits in short-term. Profits will grow with scaling up of the business. Venture capital investors like a growing business. They may not necessarily like a business that is profitable but growing moderately.