The Ice Cream Parlor Business - Is it the best investment option in the food business in India today?

Based on what I know, I believe that starting an ice-cream parlor (similar to Corner House in Bangalore) is one of the best investment options in the food services business currently in India, especially for first generation entrepreneurs with minimal investment capital radily available to them.

The attached link will give you the financial model for this.

https://docs.google.com/spreadsheet/ccc?key=0ArRHiZ3ki5n9dE9WNkNQdXVxVHJLN3BWWTZuVTdraVE&hl=en_US#gid=0

My big reasons for this:
1) Real Estate Costs are Lower: A small space is sufficient (300-400 sft) - so even a really prime location won't cost you as much to rent and of course the rental deposit will be lower, thus reducing the overall initial investment you will need to make.
2) Food Wastage and Pilferage is easy to contain: Wastage will be minimal without any pressure on forecasting volumes. Most ice-cream suppliers provide ice-creams that have a shelf-life of 6 months. So if you have a good freezer, you can store the ice-cream. Plus you can easily track the quantity of ice-cream bought with the number of ice-creams sold and contain pilferage. See note on this below.
3) Easier Labour Management: An ice-cream shop does not require a lot of skilled labour. 1 or 2 good/trusted guys with a few more helpers thrown in will do the job and keep your place up and running throughout the day. Making sundaes etc. is a easy skill to pick up in a couple of days.
4) Easy avaiability of ice-cream: There are quite a few ice-cream makers in each city and they will be happy to supply ice-cream at ridiculuously low prices (a gallon - 4 litres of ice-cream at around 160-200 bucks). Most manufacturer's ice-creams taste the same - except for folks such as Naturals and Orchard Fresh.
5) Tremendous scope to creatively serve ice-cream that appeals to different segments. e.g. servings for kids in cartoon cups. The ambience of the parlor can also be creatively designed based on your concept.
5) India's ice-cream consumption is very low (outside of Gujarat) compared to most other countries, thus offering tremendous growth potential. A Google search should return a few research reports on this.
6) Amul, Unilever India (Swirls - Walls Ice-cream), Vadilal (Happinez), Nirulas, Naturals, Dairy Day (Scoops), Amritha Dairy (Natural Fresh Chennai) etc. are trying to grow the ice-cream parlour business very aggressively. So if these big guns are so bullish about the market opportunity, that validates the idea quite a bit.

Note on storing ice-cream in a freezer: If you have wondered why the Walls ice-cream you pick at your grocery store doesn't taste as good as the ice-cream at Corner House or at an ice-cream parlor, here are the reasons:
1) The parlors store ice-cream in a freezer that can be set at the most optimal temparature range for ice-creams (temparature at which the ice-cream will not become icy or too soft). Grocery stores use freezers for all kinds of frozen food and set a generic temperature.
2) Fresher ice-cream stays fresh - the parlors typically buy ice-cream atleast once a week - so most ice-creams you get there are quite fresh and hence tastes better. The packaged ice-cream you buy at grocery stores have probably been manufactured atleast a month or two before you buy them - they do have a printed shelf life of 6 months.

Marketing Option Assessment - Advertisements in Newspapers

In general, newspaper advertising is too expensive for restaurant businesses – so unless you have a large marketing budget, this may be tough to do in a meaningful manner.

The good news is that most newspapers seem to offer a specific value priced spot on Friday/Saturday meant for restaurant businesses to advertise in - e.g. "Wine & Dine" section in the Bangalore Times (supplement to the Times of India) every Friday. A single ad in this section will cost you about 8000 bucks. The Times offers some discounts for running a 7 week/13 week series. Deccan Herald and the Hindu offer cheaper options.

If you are looking to use this medium, you should stick to the newspaper where a lot of other restaurants advertise in – definitely worth the premium you will be paying over less popular newspapers. There is a strong reason why a lot of restaurants advertise in a specific newspaper – typically higher circulation, resulting in better visibility and potential business from the advertising spend.

I would highly recommend newspaper advertising if you believe you have a unique product offering – it is probably the most effective way to get a lot of people to know about your product quickly. I would also recommend a series of ads over a 4/6 week period rather than a single ad for this medium to really work for you.

Marketing Options for your Restaurant Business

For a restaurant business (especially at the start-up stage), marketing tends to be quite expensive. I have listed below various options you have available with you

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 / Posters
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

I will discuss the pros/cons and dynamics of each of these marketing options in individual posts.

Growing a New Restaurant Business

Let’s say you have come up with a restaurant/QSR concept and have invested in setting up 1 unit. If the unit is doing reasonable business, how do you go about getting investment and scaling up your business?

Though the answer to this would depend very much on the concept, the founding team etc., I have tried to provide some broad guidelines on the areas you can focus on depending on how well your single/few units are doing.

The Key Figure you need to look is “Operating Margins”.

Operating Margins = Revenues – Costs (Food Costs + All Other Overhead Costs). You need to look at average figures (atleast for 6 months).

Typically most founders pretty much work full-time running the business, but do not take a salary in the initial few years. If you are running the business on a full time basis, and are not taking a salary, you should include a salary component for yourself (equivalent of what you would need to pay someone to do what you do) and then calculate these figures. Essentially, you should consider that you are playing 2roles - one of an investor and one of a employee.

If after including all these costs,
1) Your margins are over 25%, you have a really good business going on. VCs and Institutional investors may be interested.
2) If your margins are between 15-25%, you have an OK business going on. You may be able to find a high net worth indvidual/angel investor to establish your ability to successfully operate multiple units.
3) If your margins are below 15%, you are not ready for outside investors yet. More than scaling, you will be better off figuring out ways to improve your margins. Any additional investment required may have to come from yourself, friends & family.

Remember this: For an entrepreneur
1) Revenues, Number of locations, brand etc. is Vanity
2) Profitability is Sanity
3) And Cash is Reality

Given that the restaurant business is a Cash Flow generating business (unless you run a catering business), Collections is a non-issue. So I would urge you to focus on Profitability and figure out ways to get it up to the 25% level.

If you believe that you can get profitability to the 25% mark, by opening 2/3 more units (atleast your salary costs will get averaged out across the units) then you need to do that using your own resources (maybe with help from friends & family).

Buying an existing Restaurant Business

If you browse through the classified sections of newspapers, you will invariably find a restuarant or two for sale every week. If any of these seem to be a very attractive deal, what do you do?

For a newbie, my recommendation would be to avoid resale units, unless the complete set-up can be reused as is, without making any changes, whatsover.

Here are the big reasons:

1) Irrespective of what the seller tells you, I can bet that 9 out of 10 times, the reason the restaurant is up for sale, is that it is not making money (not even enough to cover operational running costs).

2) If you are going to make changes to the restaurant - kitchen set-up, interiors, seating etc., the effort will typically not be worth it and may also be frustrating. You will eventually spend more money than you expected to and would feel that you might have been better off starting from scratch.

3) Now here is the big trouble - If you are going to do exactly the same thing as the previous owner, what makes you think that you would make money while the previous guy wasn't able to? Chances are, your business will see a similar fate.

4) If you going to offer something different and can reuse the exact same set-up, then your chances of success go up a little. But then, you will have to evaluate diligently why the previous business wasn't working.

5) Most new restaurants shut shop within a year if it does not make money. So if a business comes up for sale after running in that location for 3+ years, it may be worthwhile looking into.

6) In most situations, the owner of the property will increase the rental to current market rates when the ownership of the restaurant transfers. So factor this into the negotiations.