Tuesday, January 31, 2012

"Restaurant for Sale"

I spent a large part of the last weekend checking out 5 restaurants that were up for sale in Bangalore - a friend of mine wanted to see if he could get a bargain and jumpstart his business quickly. Kindly see my previous post on this topic to understand my perspective on buying a restaurant that is for sale - http://restobizindia.blogspot.in/2011/03/buying-existing-restaurant-business.html.

Here is my assessment of the ones I checked out this weekend.

1) "iT***e" Restaurant in Belandur (Green Glen Layout): This small restaurant located amidst a thriving residential area was interesting. Started just about 2 months ago, the owner had shut it down primarily due to operational difficulties with staff. This restaurant would work well as an all day Darshini or Sagar (interior changes required especially in the customer seating area to suit a Sagar) or as a low cost multi-cuisine restaurant (the restaurant can pretty much be used as is) with a strong delivery and take-away model. If you get the place at a bargain, it may be worth considering.
Pros: Low Rental, Reasonable Kitchen space and equipment, Ground Floor.
Cons: Sale Price (owner looking to recover entire investment made), Location is poor for a typical restaurant (will only work for select models).
2) "P*****i" Restaurant in JP Nagar: This is a large multi-cuisine restaurant (2800 sft) that has been running for over a year now. Though the restaurant is in on the 2nd floor, visibility is excellent, is located at a major intersection and a lift facility is available. This place can work as a reasonably priced restaurant with a bar (like a Bhagini) - liqour license will need to be obtained. Alternately, the space can be split into 2 parts and 2 restaurants can be created in the space while using the same kitchen to dish out the 2 different cuisines - e.g. Indian and Chinese.
Pros: Reasonable rental for such a large place, Large space for kitchen, Location has potential
Cons: Second Floor, Interiors have a worn-out look (so investment needs to be made in renovation), Kitchen plan needs work (which means more investment).
3) Taste of Punjab in Whitefield: This place was Spice'n'wok for a few months, and Saffron Patch for about a year prior to that. Located on the 3rd floor of a building that has clearly been built for offices poses a huge disadvantage for this space, though there are some positives - great frontage on the main road, ample parking (in front of the building and in the basement), generator back-up for the entire building and very low rentals for such a space in Whitefield. This place will work for a fine dining concept restaurant (especially one that is already established and has brand recall) - significant investment will need to be made for the interiors (including possibly installing a capsule lift).
Pros: Very low rentals, Parking
Cons: Access to the floor poor (narrow alleyway, small lift), 3rd floor, Significant interior investment required.
4) P***i Restaurant in Banasankari 2nd stage: This is a very old run-down restaurant in not such a great location, but on the Ground Floor. This space will work for a Sagar or a Darshini - but the entire place has to be worked upon (including the kitchen space). So you will need to consider this as leasing a building and doing everything from scratch.
Pros: Low rentals
Cons: Nothing in the restaurant can really be used (old & worn-out), location not great for non-Darshini/Sagar type concepts.
5) S****K Restaurant in Koramangala: This was an interesting one. The restaurant is on the First floor of a corner building in a decent street (high footfalls). The restaurant interiors are not bad (can suit multiple reasonable price concepts). There is a very large kitchen and cooking area on the 2nd floor. The BIG negative is the customer access to the restaurant - very narrow staircase and alleyway. Just this access issue makes this space unsuitable for a restaurant. The only model I see working here is a low priced "Mess" style restaurant with a very strong delivery focus.
Pros: Reasonable Rentals & Sale Price expected, Highly usable space, Separate pantry near the restaurant area.
Cons: Customer Access, Operational issues with cooking food in the 2nd floor and bringing it to the first floor.

At the end of this trip, I am even more convinced that buying a restaurant that is up for sale is not such a good idea, unless you get the place at a bargain/throwaway price AND the rentals are ridiculously low AND you are convinced that your concept will surely (200%) work there.

I will try and track what happens to these places in the next several months and post an update. 

Tuesday, January 24, 2012

"The Restaurant Industry" - OOPS!!! Technically you can't use that term

I recently learnt that you cannot technically use the term "Restaurant Industry" - the government of India does not recognize the Restaurant business as a separate industry - it is currently clubbed with the "Hotel" industry. Are there any implications because of this or is it just a semantic issue?

There are several implications to not being recognized as a "Industry".

1) All government policies, subsidies are framed and designed to meet the needs of the industry - by getting clubbed with the "Hotels" business, all the rules and regulations governing restaurants are pretty much the same as the ones that govern hotels. Given that the nature of the hotel and the restaurant businesses are quite different, the current government rules and regulations are more appropriate for hotels than for restaurants.
2) The organized Hotel industry is larger & involves higher investments. So if the Restaurant industry is clubbed with the Hotel industry, chances are - the hotel industry folks will dominate the proceedings and any discussions related to the industry. Any engagement/discussions with the government on policies, tax benefits, subsidies for the Restaurant industry currently need to be routed through the folks responsible for the "Hotels" industry. Invariably, the voice of the Restaurant industry folks will not be heard. e.g. In Tamilnadu, a Restaurant cannot serve liqour currently. You need to be a hotel with a minimum number of rooms to be able to get a liquor permit.
3) The Restaurant industry has historically and still is largely unorganized. So issues around compliance etc. are not enforced as strictly as in the case of hotels. If the "Restaurant Industry" receives a separate status, it may be easier for the government to enforce compliance (this may be resisted by the large unorganized segment of the Restaurant industry).
4) Getting access to financing options becomes difficult for Restaurant business as the metrics used by the financial organizations are similar to that for hotels. If the Restaurant business gets "Industry" status, banks & financial institutions will create a set of assessment metrics more suitable for the industry. This will enable more folks to gain access to financing and avail special industry schemes.

The NRAI (National Restaurant Association of India) is working on trying to get "Industry" status. Hope they are successful in this endeavour in the next few years.

Monday, January 16, 2012

Lessons from the Poster Boy of the Indian Restaurant Business - Dominos Pizza India

Jubilant Foodworks (the company which operates Dominos Pizza in India, Sri Lanka & Bangladesh through a master franchisee agreement with Dominos Pizza International) is, without contention, THE success story everyone in India in the restaurant business wants to emulate, especially after their blockbuster IPO in 2010. At one point of time the value (market capitalization) of Dominos India was larger than the value of Dominos worldwide.

If we were to evaluate Dominos India (Jubilant Food Works) as a business, what would their key metrics look like?

Note: All the data below is based on analysis of publicly available information about Jubilant Foodworks, including their annual report. Data is based on Mar 2011 operations. The numbers may vary slightly from the figures in their annual report due to certain assumption I have made to make the analysis and the presentation of the data easier to understand.

* - Employee Costs include Salaries, Bonuses, Benefits (Allowances, PF, ESIC, Gratuity, Superannuation) & Staff Welfare related expenses

What is the break-up of their Operating Expenses?

Important Data to Note in the table above:
1) Dominos India pays Dominos International a franchise fee of 3.31% of Net Sales (it was 3.30% the previous financial year). In addition, there seems to be a small charge paid to Dominos International for every store that is opened.
2) They have been able to get great properties at attractive rentals (7.87% of net sales). Actual store rentals will be slightly lower than this, as the rent shown above includes rentals of non revenue generating space such as the corporate office and commissaries.
3) For all the advertising they do (TV, Flyers in Newspapers etc.) they spend only about 4% of their sales on advertising. This is where their scale of operations is really helping them.

If Dominos were a single store, how would their numbers look like?

Note 1: In true financial terms ROI (Return on Investment) is calculated on Profit After Tax (PAT) and not on EBITDA. But as you can see from the numbers above, Dominos has got their unit level economics really right.
Note 2: The numbers above are based on a number of assumptions I have made to make the analysis and presentation of the data easier.
Note 3: I have assumed that it will cost about 60 lakhs to set-up a standalone store like Dominos. The actual cost may be higher depending on the location and back-end support requirements.