A Food Business without the real estate

Over the last 12 months, almost a dozen investors/well heeled folks have approached me to talk about a food business without the real estate. Essentially they want to explore the possibility of setting up a delivery only food business with a kitchen in a non-prime low cost location. This would make the capital expenditure significantly lower, make the operations easier (due to no customer footfalls in the real estate space).

While on a excel sheet this model looks reasonably attractive, I have been a little skeptical about this business model for the following reasons:

1) Buying food from a restaurant is a impulse decision. It is also typically not a "Necessity" but a "Nice" purchase - though it sometimes feels like a necessity given our hunger pangs. Because of this, reinforcing your existence becomes very critical - i.e. a customer sees your place everyday when he comes home and simply by seeing you everyday, he decides to try it out one day. Without a retail location, you don't get this visibility. So you will have to invest in extensive branding - bill-boards, flyers, etc. repeatedly. The cost of doing this is also quite high and may offset the rental savings to a large extent, atleast in the initial few months/years while your brand is being established.
2) Several customers like to visit a restaurant, try out the food and then start ordering food from there. With the above business model this option is not available. So they will have to be coerced to place a delivery order and try it out once - again this will require some marketing spend. This can be done by placing attractive offers during the initial few months to get customers to try it out.
3) The Real Cost of delivery is higher than it seems. My estimate is that the variable cost of delivery ranges between 15-20% of the order value - this includes the following costs: Staff, Vehicle fuel and maintenance, order taking and tracking system. While a lot of these can be optimized on paper, in reality streamlining delivery is not easy. In a discussion with a Domino's executive, he told me that they undertook a study to optimize the delivery process and the conclusion to the study was to have more delivery vehicles per unit.
The rentals for a restaurant in a high visibility location is typically 15-20% of the sales. So the delivery costs are not lower than the rental costs, but the initial capex and capital at risk is significantly lower.

Despite the above skepticisms, I think it will be worthwhile for folks to experiment with this format - and like I have mentioned several times, if your initial plan on paper requires "X" amount of funding, keep 2-3X handy to give you enough cushion and enough of a runway to try and take-off.

The Service Tax Confusion

In the 2013 budget, the finance minister announced that all AC restaurants will be liable to pay service tax. 40% of the bill value will be assumed to be for service and service tax of 12.36% would be applicable on 40% of the bill value. So technically, a service tax component of 4.944% will need to be added to the bill value. If 40% of the bill value was for service, then shouldn't the VAT be applicable only on 60% of the bill value? But No - customers will have to pay VAT on 100% of the bill value and then service tax on 40% of the bill value.

For most restaurants, which add tax (VAT of 14.5%) as a separate component this is not too difficult to administer. Their bill will now look like this:

For restaurants which charge a service charge (now a common practice atleast in casual dining/fine dining restaurants), they will charge the service tax of 12.36% on this service charge amount, plus charge service tax on 40% of the bill value.

So for a customer, the bill value will go up by about 5%. For the restaurants, this may work out well as they can charge the customer this additional service tax, plus claim inputs credits. Most restaurants now pay service tax on the rental. They can now claim some input credit for this. So this may not necessarily be a bad things for restaurants and my assessment is that customers will get used to paying this 5% additional tax.The only impact could be a macro-level reduction in consumption - i.e. consumers reduce their eating out frequency owing to the higher costs. I believe that this will only be a short term behaviour.

For restaurants on the composite tax model, this will get a little more complicated and the government has not clarified how the service tax levy will work. The easiest way to do this would be for the government to say that the composite tax would now be increased by 40% - i.e. if it is 4% now, the new composite tax will be 5.6% out of which, 4% will be the VAT payable and the remaining 1.6% will be the service tax payable. It will be good to get a clarification on this.

I'm back

My blog train got derailed a little bit over the last 2 months. While I can think of several reasons for my temporary pause in writing posts on my blog, the honest reason is simply laziness. It took emails from about a dozen readers enquiring if all was well and why I had stopped blogging, to wake me up from my slumber. With my post on the impact of inflation and increase in various input costs, I am hoping to restart posting regularly. Hope I don't doze off again.

PS: The pic above is from the telugu movie "Eega" (dubbed in hindi as "Makkhi" and also in several other languages). This is one of those movies I really enjoyed watching. 

Impact of increasing food costs on the restaurant business

Over the last 3-4 years, food costs have consistently been spiralling upwards. Most food items are now atleast 15-20% more expensive than they were 3-4 years ago, with a number of products almost at double the prices (e.g. Paneer - I remember having bought Milky Mist Paneer at Rs.95/kg at Metro in early 2009. Today the price of the same is Rs.185). Same story with good quality branded ghee and several other products.

The impact of such high increases is severe on the restaurant business, especially the value for money affordable food joints. Let's assume a local north indian joint. If the cost of the raw materials for a curry was 38 bucks earlier, the joint could price the item at around 100 bucks. The net sale price would be 96 bucks (after taking out 4% VAT). So the food cost would be 40%. Now if the cost of the raw materials go up by about 20% = 45 bucks. To maintain the food cost @ 40%, the new selling price would need to be 117 bucks. Now it would not be easy for the affordable food joint owner to suddenly increase prices by 17-20 bucks. This is just for a 20% increase in the cost of the raw materials. Given the prices have gone up by over 40% on an average, the local affordable & VFM food joints are no doubt in trouble.

What do I foresee for the industry in the next year? 
NOT GOOD STUFF
I can see a lot of the VFM affordable businesses struggling to stay alive. The market will slowly start accepting increased prices, but a lot of the businesses may not be able to hold on till that happens. This is because of the high increase in the food costs, plus an equally high increase in labour costs. Rentals, utilities etc. have also been very high, but even there the increases over the last 3-4 years have been significant (e.g. LPG cylinders now sell at 1700 bucks. 4 years ago the prices were at the 800 bucks level). Most businesses can absorb high cost increases in one or two of the key factors. Today, all the cost factors are coming into play, and the prices can only be increased by so much and may offset one or two of the factors.

The ones who manage to stay afloat?
GOOD STUFF
The businesses which manage to survive and sustain longer should be able to grab a larger share of the customer's wallet. While the increased sales will not lead to increased profits, it should help offset the increased cost of all the input factors.

So all the affordable VFM food joints need to get their seat belts on and survive the turbulence. As the famous dialogue in "The Dark Knight", the night is darkest just before the dawn. I sure hope that this is true for the restaurant business in India.

A 100,000 Thanks

A big heartfelt thanks to all of you for getting this blog to cross a significant blogging milestone - 100,000 pageviews. This gives me the energy and motivation needed to continue posting content that will hopefully  be useful.

Our Restaurant "Mani's Dum Biryani" now open in Indiranagar

The Birth of RestoFund: Your Opportunity to Run a Small Pizza Restaurant in Bangalore

This is not one of my typical blogposts, giving some gyan about the Restaurant business. This is about a rare opportunity for a passionate individual/team to set-up and run a small Pizza focused Restaurant/Cafe in Bangalore, thanks to the generosity of some well-heeled gentlemen, through an experimental initiative called "The RestoFund" to financially support passionate folks to become Restaurant Business Entrepreneurs. Here is a quick summary of the first opportunity offered through the RestoFund:

What you will get?
1) A 400 sft space on the ground floor in a prime location in Bangalore
2) Interiors, Furniture & Fixtures, the way you want it
3) All kitchen equipment needed for you to run a small Pizza & Ice-Cream joint including a fancy big Pizza oven
4) All statutory approvals needed to run a cafe/restaurant
4) Reasonable support to set-up and run your business both financially & operationally
5) All the money you need for doing the above (You are not dreaming), including a small fixed salary  to support you financially coupled with an aggressive profit share

What do you need to bring to the table?
1) Currently based in Bangalore
2) Strong passion for running a small restaurant/cafe
2) Willingness to spend the time and effort required to make the business a successful one
3) Strong interest in cooking with some experience making Pizzas and Baking. If you are chef/cook in a restaurant/hotel currently, that would be a huge plus
4) High energy levels and an ability to convince us that you are right person for us to invest in

If you are interested in exploring this opportunity, write to me at jayanth@jlnventures.in with a small write-up on why you are interested in this opportunity (a few lines will do). If possible attach your profile/resume.