Friday, July 29, 2011

Breakfast is good for health, bad for business

A number of restaurants try offering breakfast as a unique offering.

The rationale is typically this - "No restaurants in my city offer breakfast for customers - you either have the low cost local joints (like the Sagars/Darshinis) or the hotel buffets (priced at around 400-500 bucks). I think there is potential to offer good breakfast at around 100-200 bucks and make money. No one else in doing it. So my restaurant will be unique and I will make some money".

The restaurant launches breakfast as an offering and withdraws it within a few days. I have seen this movie play out so many times that it I feel bad and frustrated at the same time.

I don't believe that there is a market in India for restaurants to offer breakfast, outside of very selected pockets/areas. Why?

1) Eating out is still an event in India - unlike in the developed world where eating out is typically the norm. So when customers want to spend money, they want to do it for the big ones - lunch and dinner.

2) Though health experts advocate eating Breakfast like a king, we still eat Dinner like a King and breakfast like a pauper. Changing this fundamental mindset if at all possible, will take several decades. Once the mindset changes, we still have the issue of getting people to pay big bucks for breakfast.

3) Breakfast items in India are generally low value items - Idly, Dosa etc. in the south, and Poha, Parathas etc. in the north. Customers are unwilling to pay 200-300 bucks for this.

4) Most of the hotels offer breakfast as a buffet to service their in-room guests. The cost of breakfast is typically included in the room rates - even otherwise the rates are quite attractive for the spread (The lavish Leela Bangalore breakfast buffet costs about 500 bucks). So the customer expectation around what he can get for breakfast for a small amount of money is huge. A restaurant will not have the volumes on an ongoing basis to do a lavish buffet, and if they don't do a big buffet, customers will not come. So it is kind of a Catch 22 situation. From a customer's perspective - "When I can get a breakfast buffet in a 5 star hotel for around 400-500 bucks, why would I want to go to anywhere else?"

5) Staffing up to support breakfast is difficult for standalone restaurants as it will require additional staff to be hired as the bulk of the staff will be needed for lunch and dinner. So any restaurant/joint that serves breakfast is typically open throughout the day so you can staff 2 shifts. Doing just breakfast makes this difficult.

I could go on with this, but I guess you get the message - don't waste time and money trying to offer breakfast at your restaurant - this will be a really tough one to crack.

Monday, July 25, 2011

Door Delivery - Why every new restaurant gets it wrong?

Almost every new restaurant that opens, typically announces that they offer "Free Door Delivery" within a few weeks of operations. Invariably, they make a mess of it, primarily because of extensive delays in fulfilling the orders. "Door Delivery" will undoubtedly feature as one of the most messed up initiatives a new restaurant business undertakes - the complexity is grossly under-estimated, possibly due to the seemingly simple nature of the task. Here is a high level overview of the key issues.

1) The 30-40 Minute Issue: Some quick research indicated that customers who order food to be delivered to their homes/offices, call in about 30-40 minutes to check the status of their order. Invariably, they tell you that they placed the order about an hour earlier. Even if you have the call data, there is no way that you can really tell the customer that it has only been 30 minutes since he/she placed the order without pissing them off. This is despite you telling the customer in the first place that the order will take 45-60 minutes to be delivered. So if you really believe that "Door Delivery" is going to be a critical part of your business, you better be prepared/set-up operationally to actually deliver the order to the customers in about 30-40 minutes.

2) The Order Concentration Issue: Most restaurants will tell you that their delivery orders are very concentrated into a 45-60 minute window - i.e. lunch orders are placed between 12:45 & 1:30 and dinner orders between 8:00 & 9:00 PM. This means that you need to prepare the food, package it and deliver all those orders around the same time - difficult to execute (especially the delivery piece). So if your business forecast is for fulfilling 20 orders per hour during dinner (a 3 hour window), you need to be operationally set-up to fulfill 50-60 orders (as all your orders will come in the same one hour). This means you need a lot more delivery guys than your total business volumes can justify.

3) In-Restaurant vs Delivery Orders - Kitchen Prioritization Issue: Invariably, your kitchen staff will struggle in fulfilling all the orders they receive. So when you have 3-4 waiters in the kitchen shouting for their orders to be completed, the delivery orders will take a back-seat - kind of like a "Out of Sight, Out of Mind" issue. Also, you cannot tell a customer in the restaurant why an order takes 60 minutes to be served. While for a delivery customer, he can either shout at the delivery guy or on the phone - definitely easier to manage than a customer who is physically present in the restaurant. Unfortunately, the restaurant also gets busy at the same time that the delivery orders are placed.

I can keep writing about "Door Delivery" issues and how to plan for this - it will consume several pages. So I will try and break the article in several smaller future postings to make it easier to folks to read and understand.

Friday, July 15, 2011

Using a Consultant to start a Restaurant Business

Over a dozen people have asked me to recommend a good consultant to help them conceptualize and start a restaurant/food service business. The next question they asked was if it was worth the money to hire a consultant. This is a very tricky question and depends on the profile of the consultant, past record of helping start-up restaurant businesses and the fee they would charge. But here are some general guidelines you can use:

1) My personal belief is that consultants are more helpful for established businesses looking to fine-tune their business model/operational processes.
2) For start-ups they are useful for creating theoretical business viability plans i.e. while you are still evaluating whether to invest or not.
3) They can provide you some useful contacts - brokers, interior designers, kitchen equipment manufacturers etc. But you can find a lot of these nowadays quite easily though services like Justdial, meet with a few vendors and evaluate them. The value of using a consultant for putting you in touch with useful contacts is overstated in my opinion.
4) As a new restaurant business, if you are hiring a consultant, here are the kind of areas you will really need support and guidance on - so make sure if the consultant can deliver along these lines:
a) Refine your business concept to one that can make money for you. This will mean doing a reasonably accurate cost estimate/analysis with all the components involved.
b) Refining your product proposition very clearly - will the customer clearly understand what your USP is and will they be willing to pay what your business model wants them to pay? This will also include giving you very specific inputs on what to include in the menu and what not, how to price he products etc.
c) At the location you have chosen, will you be able to realistically achieve the customer volumes that your business plan forecasts. i.e. will you be able to get say "100" customer walking in everyday, if that is what your business plan is built on.
d) Help with hiring staff across all levels - the chef, the kitchen staff, the stewards, delivery boys, washing staff, assistants etc. This is an area consultants may be very weak on.
e) Telling you how and what to budget for marketing and identifying options where you can get the most bang for the buck and why? Most consultants are comfortable with a few avenues (e.g. newspaper advertising) and they will push you towards that irrespective of whether that will work for your specific business or not.
f) Help you with licenses (you will get little support from them on this - check my post on licenses required for a restaurant
g) Giving you MIS templates and teaching you how to measure and track the progress of your business. I haven't seen consultants having these - very scary as they are advising you on how to run your business without even prividing you with the basic tools to help you find out where you stand.
f) Essentially you will need a consultant who can tell you what to do if he were investing his own money into the business. This is where I see a conflict - consultants are focused on keeping you happy to get their fees - so they won't tell you that something is a dumb idea - e.g. it is in their interest that you identify a location and start your business soon, so that they can collect their fees quickly. So they will find it difficult to directly tell you that this is a bad location for your concept and drive them towards makign compromises for you, while these compromises help them finish their work quickly. These conflicts typically arise in every single component of starting your business.

5) I would recommend an alternate approach of hiring a really good person to create and run the businesses, even if you end up paying him more than market salary to him, offer an aggressive profit sharing mechanism and also offer some sweat equity. You will end up paying this individual almost the same as you would to a consultant, but this individual will be more interested in making your business successful than a consultant who has no stake in the business. I have been very surprised with the quality of people available - it's just that they may not be very articulate and it will take you time before you are confident with their skills - essentially think of the second level staff in good restaurants/hotels - e.g. not the Chef, but the F&B manager or the assistant chef in a good restaurant in a hotel like Taj. Finding a really good person with whom you can build trust and business chemistry will not be easy - but will be worth the effort.

Tuesday, July 12, 2011

Rental - How much can you afford to stretch?

As a restaurant business how much rental can you really afford to pay?

Unfortunately the answer is easy, but accepting it, especially for those who are currently hunting for a space for their restaurant business, will be difficult.

For most restaurant businesses to be profitable and sustainable, the rental will need to be less than 15% of the estimated revenues. So if you are planning a budget restaurant that can generate revenues of about Rs.15,000 per day, the maximum rental you can afford is Rs. 67,500. Do remember that you need to pay service tax of 10.3% on the rental amount - so you realistically can afford a place that charges a rental of 60K.

If you are planning a fine-dining/expensive restaurant that can generate about 30K-40K revenues every day, you can afford a rental of about Rs. 1.5 lakhs per month. Do remember that for generating 30-40K revenues you would probably need a restaurant with about 100 seats, which means you are looking at a 3500-4000 sft space in a prime location - not easy to find at a rental of 1.5 lakhs.

In most cities in India, this really means that starting and running a viable restaurant business is going to be tough, till the real estate rentals become affordable and reasonable again.

Tuesday, July 5, 2011

The Office Meal Catering Business

This is a food business that is seemingly very attractive from the outside, but extremely painful once you get into it. I do not see this as a viable business model. Why?

1) The price points companies are willing to pay is very low (In Bangalore the typical rates for an office lunch is around Rs. 40/45 all inclusive). To run a sustainable/profitable business you need to be very large (e.g. RKHS, Sodexho, Nammura etc.), so that the volumes justify the low price points or be a local proprietary firm (i.e. you, as the owner buy the raw materials, cook the food, pack and deliver it to a small set of clients in the area).

2) One of the major attractions for folks to get into the food business is that, this business is a "Cash Positive" business - i.e. you collect your revenues instantly, while you can pay your suppliers later. For a catering business, where the company pays you, they will typically have a credit period - i.e. they will pay once a month/fortnight, requiring you to manage receivables and cash flow issues.

3) A number of companies are moving to the "Cash & Carry" model, where employees directly pay the pre-negotiated amount to you while picking up their lunch. The trouble with this model - you need to forecast and manage the volumes - i.e. there is no order commitment from the client. This is definitely better than the monthly invoicing model, though, and you don't have to deal with TDS (Tax Deducted at Source) issues.

4) Transportation costs are significantly increasing and is making the business un-viable at the price points expected by customers.

5) The employees (the end customers) are generally unhappy with the quality of the food - they just get tired of the same caterer and no single caterer is able to provide the variety that will keep the end-customers happy on on ongoing basis.

My prediction on how this business will evolve:

1) This business of preparing food in an external kitchen, transporting it to the office and setting up a food pick-up area everyday will vanish. The entire process is too inefficient, expensive and hygiene issues will become more visible.
2) Larger Companies will move to a food court model, where they will offer space for external brands to set up their units within companies - maybe push them to offer lower prices, by subsidizing rent, utility costs.
2) Small companies will stop offering this facility and some of them may just offer a cash equivalent or food coupons, in lieu of arranging for a caterer to come in and serve food. Employees will need to use options available in the locality.
3) Manufacturing set-ups will continue running their canteens, where the food is prepared and served on-site by a contractor.
4) Companies which do not have enough space to house external brands, will carve a small pantry area for atleast an on-site cafe/juice/snack stall - like a Juice Junction, so employees can atleast have some option on-site. Again, this will be contracted out.