Revenue Sources for a Restaurant

There are typically 5 sources of revenues for a restaurant/food business:

1) Walk-in Customers - Unless you are a take-away/delivery only unit, this will probably be the biggest component of your revenue. You need to figure out a way to get repeat customers and referral customers - the effort for getting new customers all the time is too much.

2) Take-away customers - For reasonably priced/budget restaurants, this could be a reasonable revenue source. This will also depend on the product offering and how convenient you make it for your customers to pick up the food (easy parking for their vehicles - atleast for 2 wheelers, is a big criterion for good take-away joints)

3) Door Delivery Orders - Customers in India expect most restaurants (even some of the fine dining ones) to offer door delivery services. Unfortunately, this one appears easier to do, than it actually is. The dynamics and operational issues related to door deliveries fascinate me and I will write a separate post on this.

4) One Time Party/Bulk Catering Orders - This is a very profitable source of revenue for most restaurants. From what I know, most profitable restaurants get a few party orders every month and this really boosts their profitability and helps them tide over lean days. Here quality of service and felxibility are key. If you can figure this one out and do a good job, it could generate significant repeat/referral orders.

5) Regular Meal Catering Orders - This is one of those very attractive looking revenue sources that a lot of new restaurants try to get into, but in reality turns out to be worthless in most cases. Typically the pricing is so low for these orders that if you include the food cost, the effort for large orders and the transportation, the numbers don't add up. I believe this needs to be managed as a separate business not linked to a restaurant for it to make business sense. I will write a separate post explaining this in detail.

Featured Business: Juice Junction

The information below is based on excerpts from an Interview with Mr.Shodan Bhandary, Founder and CEO, Juice Junction, Bangalore.

About Juice Junction:
• An iconic neighbourhood juice joint in Bangalore that serves quality juices and quick eats (sandwiches, fruit bowls) at affordable prices.
• 45 outlets, all in Bangalore (23 company owned & managed and 22 owned & managed by friends through what I would call a unique “Free Franchising” model - more details below).
• An approximate Rs. 10 Crore business (Rs. 5 Crores generated by the company and the remaining 5 Crores by the free franchise partners independently), with a net profit of about 15%

The Juice Junction Story:
In 1978, Sanjeeva Bhandary started a small juice shop “Suman Juices” in Wilson Garden, Bangalore, as a side business. In 1988, when Shodan Bhandary (Sanjeeva Bhandary’s son) completed his graduation, he wanted something to do, and took over the operations of this juice shop and renamed it “Juice Junction”. After 4 years, he set up their 2nd unit in Richmond Road with an investment of Rs. 1.2 lakhs. In the next 19 years, Shodan grew the business to 23 units (plus another 22 through a very unique business partnership model, I will term as “Free Franchising”). Well, that doesn’t sound like an exponential growth business – but guess what, Juice Junction has grown without any debt (no loans) and no external investments. All the funding for Juice Junction's growth has came through internal cash accruals – the traditional way of doing business. This also highlights how difficult and time consuiming it is to grow a business in this space, even if you have a successful business model.

The Free Franchising Model:
A remarkable thing that Shodan did was to help friends start and run their own “Juice Junction” stores by lending his expertise and support for no direct returns. This is like a franchise model, except that Shodan gets no money/returns from these units. His friends invest, start and run a unit and he just helps them by lending the brand and the expertise - Fascinating stuff in an era, when people expect money even for sneezing.

The Operational Stuff:
Product Pricing - He reviews prices of his products once a year and decides whether to make a change or not. During other times, if a certain fruit is too expensive (e.g. Pomegranate selling at 250 bucks), he does not offer the product in his store. He believes that in his business innovation and hygiene are critical factors. All his stores have feedback forms and customers regularly pass on feedback which he personally reviews and takes action where necessary.
Shodan’s life - As expected, his life is not easy – he personally is there in the city market every morning (6 days a week) at 5:30 AM to buy the fruits that will then be transported to his various stores. He believes that this is the only way, he can control what his stores sell and stay grounded with the supply side of the business. His day typically ends at 9:30 PM and it’s been a long while since he has taken a vacation/break.
Controls - He has put in place innovative ways to track and monitor his stores – using the number of cups used in the store, plus some experiential analytics around number of servings for a portion of a fruit. So if during your next visit the guy refuses to give you an additional cup, you know why?

Key Challenges:
Shodan today feels that his biggest challenge is “labour”. If he can get people, he says that he can open 50 stores quickly. To keep his people engaged, he pays them higher than market salaries, gives them a generous food allowance in addition to letting them eat what they want at his stores. He also provides accommodation, bus fares and is diligent about giving his people salary increases every year. In his early years, he would have 3 or 4 people waiting at his office everyday asking for a job. Now he says that he hardly gets anyone who comes in search of a job.

Vision and Future Plans:
• He is very happy where he is and plans to grow the business at his own pace. He employs 212 people, runs a profitable small business and is proud of his accomplishments. Today setting up a new unit costs him between 10-12 lakhs. He picks only those locations which can generate sufficient footfalls – he is particularly careful about choosing locations that offer a large captive base (a large company or college), with scope for additional footfalls.
• He does not want external investors as he believes that he will have a tough time meeting their documentation/reporting requirements and business expectations and may not be able to focus on his core business and do what he wants to do.
• It was not until 2005 that he realized that the brand “Juice Junction” was actually valuable and he got the trademark registered.
• Juice Junction is still a propriety concern even after 33 years in business. He is considering making it a private limited company.
• He has invested in his own farmland in Hosur, where he plans to grow Organic fruits and vegetables which he can use in his stores. He is already seeing “Healthy/Healthier products” playing a big role in his business and expects this to increase significantly moving forward. By setting up his own backend Organic farm, he believes Juice Junction’s proposition will be very unique and differentiated from his competitors.

Alcohol - Licenses / Permits and Costs

If you want to serve alcohol in your restaurant, you will need to shell out big bucks for the liquor license. Essentially, in Karnataka (similar in a number of other states), the government has stopped issuing new liquor licenses - so you are at the mercy of the folks who have a license with them. The common practice used is to sell or lease the liquor license to an interested restaurant owner.

1) If you want to serve bottled beer and hard liqour, you will need to get a Liquor license (called CL-9). This will cost you about 50-60 lakhs in Bangalore if you want to purchase it (saw an ad 2 weeks ago for 70 lakhs - http://bangalore.olx.in/cl-9-bar-liquor-license-for-sale-70-lacs-negotiable-bangalore-iid-177156604) . If you want to lease it, you will still have to shell out about 40-50 lakhs as a deposit and then pay the guy a monthly lease amount (could vary between 50K and 2 lakhs, depending on the demand and supply situation).

2) If you want to serve only draught beer, there is a separate draught beer license you can get - this will cost you about 20 lakhs to purchase, or to lease a deposit of about 10 lakhs and a monthly lease amount of 20-40K.

3) To encourage wine consumption, the government now issues wine licenses directly for a small amount of 5K. You may have to pay an additional 10K towards miscellaneous charges, but for under 20K, you can get a license to serve wine at your restaurant.

This entire business of liquor is quite a messy area and unless you have the money (big bucks) this may be a difficult one to handle. The trouble is, even if you buy the license, you never know when the government will decide to issue new licenses - then the value of the license you hold will become much less/worthless.

Note: I am not an expert in alcohol licenses and will not be able to help anyone procure these licenses. Most hospitality consultants offer license procurement as a service - Kindly use Justdial to find out hospitality consultants in your area. The license norms tend to be very location specific (state, district which your place comes under) and you will be better off working with a local consultant or asking an existing bar / liqour store owner for help.

APC - Average Per Customer

"APC" is a term you will commonly hear in the business. I don't know if APC stands for "Average Price per Customer" or simple "Average Per Customer", but the meaning is the same - how much revenues can you generate from each customer who walks into your restaurant. APC becomes critical while planning your restaurant and the space you would need and how you expect the customer flow to be at your restaurant.This is quite complex to explain in a single post as there are too many dynamic factors that determine APC, but I have made an attempt below.

In simple terms, if you expect to generate revenues of Rs. 15,000 per day and have a 50 seater restaurant, your APC will probably have to be Rs. 150 (let's assume 50 customers for lunch and dinner each). For a premium fine dining restaurant, the APC will be higher (Rs. 300 to Rs. 1000) and you can expect only one rotation of customers (i.e. each seat in the restaurant gets used only once during a lunch and dinner session). So if you plan to service 100 customers for lunch, you will need a 100 seater restaurant. For a budget restaurant, you can expect 2 rotations per session - i.e. each seat in the restaurant gets used by 2 different customers in each session. In Darshinis and Sagars, they end up doing 3 to 4 rotations. So a 20 seater Sagar restaurant will probably serve 80 customers during a lunch/dinner session.

Food Costs - Why it really matters?

I believe that the key to success in this business is to figure out a way to get your customers to pay as much as possible for food that does not cost much to produce. To put this theory into perspective, the most successful and fast growing food businesses in India are Coffee Day (800+ locations) and the Pizza chains (Dominos alone has 300+ locations in India). Dominos had a food cost of 26% in FY 2009-10, and Coffee Day probably has a food cost of under 20%. Most other restaurants which offer a wide range of food options have struggled to keep food costs in check over the last year or so because of the inflated costs. This has hit their profitability

Let's take an example of an Indian restaurant - let's say they have an item "Paneer Butter Masala" on their menu. Let's say the cost of all the ingredients works out to about Rs. 40. The dish is priced at Rs. 120 (33% food cost). Now if the cost of Paneer and some of the other ingredients goes up by 20%, it may result in a small 10-15% increase in the cost of the dish (so the cost is now Rs. 46). To keep the food cost at 33%, the price of the dish now has to be Rs. 138 (a price you won't be able to charge your customer). In the last 2/3 years, inflation has taken a huge toll on the prices of ingredients, pushing costs up. This has made it very challenging for restaurant business owners (especially the budget restaurants) to maintain their profitability.

Private Limited vs Partnership vs Proprietership

How do you legally set up your restaurant company? You talk to an accountant and they will advise you - the trouble is that the advice may be more beneficial for the accountant than for you - i.e. they will try and make you set up a Private Limited company (the advice will be that in the long run it will help, especially if you get external investors - what they won't tell you openly is that you can always convert your partnership firm/proprietorship concern to a private limited company quite easily, if and when the need arises, )

For newbies, I would strongly urge you to launch your venture as a partnership firm or as a proprieter concern. Both of these options will cost you less, require very minimal paperwork upfront and more importantly very little compliance/reporting requirements on an ongoing basis. Plus for a restaurant business, there is nothing operationally that you can't do as a partnership firm/proprietership concern. As a private limited company, you will need to file annual returns and audit your finances - all of these cost you money and will require painful documentation effort - while you are focusing on getting customers and your business in order, the last thing you want to is to spend time with documentatiion.

Investment for various Food businesses

I received a query on the total investment one would need for setting up and operating a food business. Though the exact investment will depend on the concept and the location, the ranges given below should be useful for those ideating about setting up a restaurant. These are applicable in Bangalore. Please note that the figures below do not include a liquor/beer license - A liquor license currently costs around 50-60 lakhs and a draught beer only license will cost around 15-20 lakhs. I will write a separate post on liquor/beer licenses with specifics and the process involved. Also note that the figures include some working capital provisions that you will need (pre-operating expenses, initial cash flow requirements till you break-even etc.)

1) A Fine-Dining Premium Restaurant (80-120 seater) - 1.5 to 2.5 Crores e.g. Barbeque Nation.

2) A Casual Dining Restaurant (60-80 seater) - 60lakhs to 1 Crore. e.g. Rajdhani

3) A Budget restaurant (40-60 seater) - 40 lakhs to 60 lakhs. e.g. Mast Kalandar

4) A Coffee Shop (40-60 seater) - 40 lakhs to 60 lakhs. e.g. Coffee Day

5) A take-away joint/Stand and eat place - 15 lakhs to 25 lakhs. e.g. A small Darshini

6) A Cake shop/Ice-Cream Parlor - 15 lakhs to 20 lakhs. e.g. Corner House

Tip: If you manage the investment tightly you may be able to save reasonable amounts of money - but I would strongly advise having the above amounts available from a planning/budget perspective and then managing your costs really tightly.

New Unit Financials - Excel Template with indicative numbers

This is perhaps the most valuable piece of information on this blog. The attached link will open a spreadsheet that details out the various financial components of a restaurant - The Initial Investment, The Operating Costs and Staffing Costs. I have used a standard 1000-1500 sft (about a 40 seater) Indian restaurant serving food at reasonable prices (Rs. 100-150 per person per meal) as an example. You can play around with the data to suit your specific business idea.

Disclaimer: Please note that the numbers are indicative and based on information I know. So kindly validate the figures for yourself. The spreadsheet needs to be used more as a template than as an actual financial planning document.

https://spreadsheets.google.com/ccc?key=0ArRHiZ3ki5n9dG1Kclk3NHFQZzloWjBfVURSXzJKSWc&hl=en&authkey=CPqU_ekG#gid=0

Licenses Required for a Restaurant Business

One area everyone is really worried about is the various licenses/government approvals required for running a restaurant. These are not as complicated as you think or as consultants make them out to be:

Here are the licenses you need to get in Bangalore - other locations will be similar.

1) Trade License for running a restaurant - from the BBMP (Municipal Corporation) office for your location.
2) Health Certificate - again from the health department of BBMP (Municipal Corporation).

For these 2, just ask a restaurant/fast food joint near where you are planning to start and they will give you a contact at BBMP to help you - depending on the size of your project, these 2 will cost you between 10K and 1L (fine dining) with the unofficial fees being the big component - actual license fee is 5K-8K for a small restaurant/fast food joint. You do not need to hire consultants for this. I would strongly recommend that you befriend a fast food/restaurant owner in your area, ask him how much he paid and then request him to help you out with the licneses.

3) VAT registration - your accountant can help you with this. The actual terms vary by state. You have 2 options in Karnataka - composite where you pay 4% of the sale value as VAT - no input credit adjustments need to be made. The other option is to charge the customer 13.5% VAT and then pay the VAT after adjusting for input credit. For a new business, I would recommend the Composite option as no documentation needs to be maintained - so it will be easier to manage when you start afresh. You can always move to the other model later.

4) Shops & Establishment License - your accountant can get you this.

5) Labour License - again your accountant can help you with this.

4 & 5 comes from the Labour department for your area.

These are the 5 licenses you would need to get started. Once you identify the premises, you can work on these licenses (should not take you more than a month to get all these in place).

Is it a Food Business or a Location Business?

Veterans in the restaurant and food business will tell you that this business is more of a location business than a food business.

If you are investing in a restaurant business - listen to this advice very carefully - Pick a ground floor location in a street that already has a few thriving/successful restaurant businesses, offering products at a similar price point that you plan to offer.

A 500 sft ground floor space in a great street will be far better than a 1500 sft first floor space on the same street or a 2500 sft ground space in a road that is off the main road - even if it is just around 200-300 m from the main road. Essentially, if your restaurant business is not visible to a lot of folks, you will not be able to generate enough traffic/footfalls into your restaurant to justify the numbers.

Unless you are actively involved in this business, it will be tough for your mind to reason this and accept this thoroughly. But consider the following example - have you ever seen a McDonald's in a location different from the one I described. Even in a mall, McDonald's is present right at the front where it gets maximum visibility. If a brand such as McDonald's is so particular about the location, should'nt you be?

When we start, we tend to compromise on the location, as we may not be able to afford the rental or we want a larger space for the same rental value etc. This is being "Penny Wise and Pound Foolish". I would go to the extent of saying that if you don't get a location at a rental that meets your requirements exactly, it may not be worth investing in and starting your business.

There are a few restaurants, which are doing well despite a significant location disadvantage (e.g. Kanua in Sarjapur Road), but I believe there are other factors (not visible and apparent), that have made the place successful. We will explore these factors in detail in some of the later posts.

Sales vs Profitable Sales - Part 2

I got a few queries around this concept of "Profitable Sales". I will try and explain this a little better below using an example.

Let's say you open a specialty sandwich restaurant and start selling sandwiches. Now as far as a customer is concerned, he will have a price range in mind for a sandwich - Rs. 20 at a kiosk (like a Juice Junction in Bangalore), Rs. 50-60 in a coffee shop (Cafe Coffee Day). Now you start selling sandwiches (exact similar ones that Coffee Day sells), at Rs. 40-50 in a Coffee Day like setting, you will get customers. The trouble is you will probably be offering customers a product that costs much more for you to make than what is does for Coffee Day - The cost of the ingredients will be more for you (you don't have the volumes to justify discounted prices), wastage will be much higher for you (especially when you start as you will have a tough time forecasting the number of customers and the last thing you want is to say "Not Available" to customers). So let's say the cost of the sandwich for Coffee day is Rs. 20 and for you is just 4 bucks more - Rs. 24. Now to keep the food cost at 33%, Coffee Day will sell the sandwich at Rs. 60. You will have to sell the same sandwich at Rs. 72. So why would customers come to your place? To make it attractive to customers, you offer your sandwiches with french fries and a cole-slaw salad. Now the cost of these 2 additions would be about Rs. 8-10 for you. So now, your price will need to Rs. 100 (for you to keep the food cost at 33%). What practically will happen is that you will price the sandwich at Rs. 60 (same as coffee day) and offer these extra items to make it attractive for customers and get them to come in. Now your food cost is Rs. 32 and your selling price is Rs. 60. So your food cost is 53%. Your numbers go for a toss. So even if you start getting a lot of customers, your business metrics go for a toss. Even with large volumes, negotiated rates with suppliers etc., your food costs will not come down below 50% (simply because you are offering too much for too little). So now you will end up with a business that gets a lot of customers, generates revenues, but may actually be making an operating loss. So it is like running in a treadmill - you work hard and put in a lot of effort and energy to run, but you end up staying at the same place. After some time, you get tired and give up and get off the tread-mill. So you will end up shutting shop.

I am not sure if I made it clearer for folks to understand, but essentially unless your product design and pricing are carefully done to ensure that your business will be profitable, the effort will not be worthwhile.

Sales vs Profitable Sales

The reason why the food business looks very attractive to most people is the illusion of profitability and success when you visit a restaurant as a customer. Clearly a lot of the restaurants are very profitable and successful.

I believe that the difference between successful restaurants and the others is their ability to generate profitable sales rather than just sales. Whenever most people start a restaurant the focus is so much on getting customers and generating sales that they do not price their product at a level that is required for the business to sustain itself and generate profits. The trouble is that after the inital round of sales, when you change your price, the customers disappear. In this business the price of the product is as important as the product itself. This is especially critical if your business is a low cost/budget offering - as the market segment is exceptionally price sensitive there. With a high priced concept restaurant, you can still get away with increasing prices, if the concept is received well by customers.

The Restaurant Business - Metrics 101

What are the key metrics of the restaurant business? There are really 3 components - the Food Cost, the Overhead Costs and the Gross Profits.

The Food Cost: This is essentially the direct cost of the product you will be selling. One of the reasons the food business has historically been very profitable is that customers are willing to pay 3 to 4 times the cost of the product. So for a good restaurant business, you should target your food cost to be between 25% to 33% of the selling price.

The Overhead Costs: This includes all non-food costs: the major ones being Rental of the premises, Staff salaries, Utilities (Gas, Electricity), Marketing expenses. For a good business, the target for the overhead costs would be around 33%.

The Gross Profits: Total Revenues - Food Costs - Overhead Costs = Gross Profits. So the target for a really good business needs to be 33% of the Revenues.

Well, this sounds cool - Right. In the next few posts, we will explore each of these components in detail and understand the challenges/issues you may face.