Everyone understands the Restaurant Business

I met with a seasoned professional in the investment banking space a few days ago 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, I wanted to be nice. But my guess would be "Once" or maybe 2/3 times at best.

Almost all of us have visited a lot of restaurants over the last several years. This exposure leads us to believe that we understand the business and what works (atleast for me, I thought I had figured it out before starting my restaurant). That is also the reason so many new restaurants open up and that is also the reason why so many of them shut down before their first birthday. Though I do not have any specific research data on this, I can safely say that over 50% (the number may probably be closer to 80%) of restaurant businesses shut down within 12 months. I can also say that about 50% of those who survive have big pockets or just got lucky and things fell in place. Which means that probably only 10-20% of restaurant business are designed in a way to be successful.

So what I am driving at? If everyone understands the business, then chances are, that the bright idea you have come up with, may have been tried elsewhere. So rather than starting with the question 'Will my idea work?", I would ask the question "Why will my idea not work or why hasn't anyone tried it out yet?".

An example - This investment banker lady I met with, told me that it would be a great idea if we could start a business where we have push-carts that serve hot indian hygienic food and that there would be a great market among office-goers for this. This seems to be one of those ideas that sounds really good, but instinctively I can see a number of factors why making this work as a business will be a hugely challenging task. Also if this could be done as a profitable business, I can bet that atleast some of the "Sagar" owners in the city would be doing this rather than investing in a place, paying rent, employing staff and running a restaurant. I believe that the stand-n-eat joints (Darshinis etc.) are the profitable variant of the push-cart idea.

The other analogy I can think of is cricket, especially when we are playing. While watching from the dugout, 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. But when you go out to play, you end up struggling in the same way as your team-mate.

Franchising - The "F" word?

I happened to visit a Franchise expo a few months back and was amazed at the number of food businesses trying to franchise. I have also seen a number of people (some of whom I know) investing large sums of money in picking up a franchise of a food business. Here is my take on franchising in this space.

As a franchisee you will be giving away anywhere between 6 and 10% of your revenues (not profits and whether you are profitable or not) to the franchisor. That is a lot of money and means that your operating margins have to be over 25%, for you to atleast generate 15% profits for you - Not an easy task. Plus there will typically be an upfront franchisee fee of 2 to 10 lakhs. Be assured that the franchisor will also charge you for every single piece of tissue & toothpick that they supply to you from their central purchasing unit - nothing comes from the royalty you pay them. Royalty is pure Royalty. With so much at stake, a franchisor needs to absolutely offer the following, for you to even consider it:

1) A well known brand - i.e. if you open your store in an area, folks there should talk about it - "Hey, do you know that McDonald's has opened in HSR Layout". Essentially the brand needs to be strong enough to create a buzz about it and bring you customers because of the brand.

2) History with Franchisees - Probe their track record with franchising and ensure that you speak with current/existing/past franchisees to understand their experiences (both good and bad) - the more existing franchisees you can speak with (all if possible), the better it will be - pick a diverse mix (different locations/cities, age of the franchise etc). If they don't have an existing franchise, stay away - unless it is a large brand with multiple company owned locations and they are looking at franchising after their business has matured - you can negotiate a good deal with them in this case - no upfront fee, 4% royalty and that too only if operationally profitable. Even in this case, be very careful.

3) Businesses who understand the local market: Try and pick someone who is already doing business in the city/country/region where you are looking to franchise - the operational issues are too localized in this business for an external brand to simply come and be successful.

4) A Strong Franchise Support Structure: They need to have a dedicated team to support franchisees through the entire life cycle - decision making, contracting, location identification and leasing, franchise set-up, hiring staff, marketing material, tools and systems, hand-holding till operational break-even and ongoing support as required post that. If they don't have a dedicated team for this, they will not be able to support you anywhere close to the extent that you expect them to - period. Every franchisor claims they do all this - do your due diligence on this. My assessment is that a lot of them have very little knowledge and experience in franchising and don't really understand the expectations of the franchisee. So you will end up doing as much as you would in creating your own brand, but in this case, you will be paying a franchise fee and eating into your margins on an ongoing basis. The guys who convince you to pick their franchise (the dynamic personalities and people who own the business) will invariably stop showing up and assign a "TEAM" once they encash your checks and make you dive deep enough - so you will have no escape.

In summary, I would suggest that franchising will leave you disappointed unless it is a company with a very well known brand and takes an active interest in making their franchisees successful. According to me, there are very few of these around.
A lot of companies use franchising as an easy route to try and expand - essentially they learn how to grow and understand the operational difficulties with growth, using the franchisee's money. I can give a few examples here, but don't want to hurt the brands (some of them are still operational, are successful and one of them has even raised venture funding)

Consistency over Quality

There is a general belief that if you serve great tasting, high quality food your restaurant business will be successful. This seems to be quite misunderstood. If the above statement were true, all the roadside food joints should have shut shop, but as you can see they have been around for several years/decades and are obviously profitable.

I think the secret is CONSISTENCY rather than QUALITY. If customers clearly know what they are going to get when they come to your restaurant and repeatedly experience the same thing, they will be happy. For e.g. when you go to a Shanti Sagar what you expect is decent quality Idly with Karnataka Sambar and Chutney. You don't go there expecting the softest, best possible idly. On the same note when you go to Brahmin's Coffee Bar (tucked in a little street in Basavanagudi), you expect the idly there to be the softest, freshest and best tasting idly you have ever had.

I actually think there is a problem in giving great quality stuff - once you become known for it, managing customer expectations becomes all the more difficult. It is kind of like the effort required to score 60% in a exam, versus the effort required to score 90%.

I am not saying that you should not serve high quality food, but you need to think through whether you can do it in a sustainable/consistent manner.

I am going to use McDonald's as an example again - they don't claim nor will anyone say that they serve the best quality burgers in the world - but whichever McDonald's you go to, at any time of the day, the Burger tastes pretty much the same. They are the world's largest restaurant company and they have been built on CONSISTENCY.

The Restaurant Business, Angel Investment and Venture Capital Funding

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

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. As the examples below illustrate, it seems to be easier to get first round funding once you have a successful brand rather than getting angel funding.
1. Yo China (www.yo-china.com) – Matrix Partners (www.matrixpartners.in) - 25 Crores in 2006
2. Kaati Zone (www.kaatizone.com) – Erasmic Ventures (www.erasmic.com), Accel Partners (www.accel.com) and Draper Investment (www.draperco.com) – Interesting interview with Kiran Nadkarni, Founder & CEO of Kaatizone (http://bangalore.citizenmatters.in/blogs/show_entry/141-interview-kiran). Exact investment not known, but my guess would be about 10-15 Crores.
3. Mast Kalandar (www.mastkalandar.com) – Footprint (www.footprintventures.com), Salarpuria Group (www.salarpuriagroup.biz) and Helion Ventures (www.helionvc.com). They received 2 rounds of funding – about 4 Crores in 2008 and about 40 Crores by Helion in late 2010.
4. Brand Calculus - Booster Juice and Kiwi@Kiss Frozen Yogurt (www.brandcalculus.com) – 16 Crores in 2009 from Helion Partners (www.helionvc.com).
5. Cocoberry (www.cocoberry.co.in) – Ajay Relan of CX Partners (www.cxpartners.in) – 9 Crores in 2011.

I am not including large Private Equity investments that Café Coffee Day, Encore Hotels (Rajdhani) and certain other large brands may have received.

Restaurants offering a Single Product - Why I really like them?

I am a huge fan of restaurants which offer a single product - by this I don't mean just one item on the menu, but just one comprehensive and well designed product offering for the customer. I will give you a few examples of such offerings.
• Rajdhani (http://www.rajdhani.co.in/) - Gujarati/Rajasthani Thali
• Barbeque Nation (www.barbeque-nation.com) - Kababs on the table and an Indian buffet
• Maiyas/MTR (www.maiyas.in) - Traditional Karnataka Meal
• Buffets in Restaurants

Why do I like such offerings?

• There is exceptional clarity to the customers on how much they are going to spend at the restaurant and what exactly they will get at the restaurant. So if you have a good product offering, satisfying customers and generating repeat customers/referrals becomes easier.

• Typically with such offerings, it will be difficult for the customer to NOT feel satisfied at the end of the meal. Out of the various dishes, everyone will like a few items, you typically can get unlimited servings of the items you like and of course you always have a couple of dessert options that will please the customer even if everything else was not that great. If customers leave your restaurant satisfied, it is really good for your business.

• Operationally it makes things a lot easier (This is a big one if you run/manage a restaurant)
1) There is no confusion with order taking and fulfillment. In a typical restaurant, communicating the orders to the kitchen, prioritising the food preparation, assembling the food for a table and serving the right order to the right table is quite a process - during busy times, the kitchen area is literally like a warzone.
2) Since the food is prepared in advance (i.e. the cooks don't start preparing the dish once the customer places the order), the customer gets the food quickly. No one really likes waiting for food in a restaurant - that is why even in a lot of fine dining restaurants, you will notice that they will serve complementary bread/nibbles immediately after the customer gets seated at the table to keep them happy till their order arrives. This is particularly critical during busy times, when your kitchen will invariably delay orders and frustrate your customers.
3) Billing once a customer has finished the meal is easier - no need to track specific orders for a specific table. This minimizes possibilities of errors, wrong billing and scope for any hanky-panky by the cashier/restaurant staff.
4)Menu Planning and Cost Control: This is another big one for me.
* Since you don't have a fixed menu, managing and controlling your inventory of raw material becomes easy.
* Within your broad concept, your chef can play around with the specific menu options, make changes easily (based on customer feedback) and have more scope for innovating. Running Food festivals/thematic events is easier - e.g. Holi Special, Diwali Special etc.
* Also with the way raw material costs have fluctuated over the last few years, a good chef can quickly remove high cost offerings and replace them with alternatives. e.g. If the cost of Capsicum goes up signifcantly, the chef need not buy Capsicum for that particular period, and instead prepare a brinjal dish that is aligned with the overall concept.

Hopefully I have convinced a few of you about this theory of mine.

Business Tip: I think there is fantastic potential in India for an All-Day Buffet Restaurant - in the lines of Ryans (www.ryans.com), Old Country Buffet (www.oldcountrybuffet.com), Cici's Pizza (www.cicispizza.com) etc. in the US.