"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. 

"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.

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. 

Wish you a Happy New Year

My wish for 2012: May this year bring good fortune to all Restaurant Entrepreneurs. We need to turn the statistics upside down - From over 90% of new restaurant businesses failing within the first year to over 90% of new restaurant businesses succeeding within the first year. 

Kitchen Area in a Restaurant

While designing a restaurant space, the normal tendency would be to maximize the number of "Covers" (industry term for seats) and minimize the space required for the kitchen area. What exactly is included when we use the term "Kitchen area" in a typical restaurant.

1) Cooking area - This means the area used for preparing the food - large commercial gas burners, tandoor, grill etc. depending on your cuisine.
2) Work tables adjoining the cooking area for preparing and keeping the final cooking ingredients ready. This could include veggies & meat cut appropriately, sauces, spices etc.
3) A Wash area that can be used for washing the cooking utensils & accessories and another wash area for serving dishes (plates, spoons, forks etc. - cutlery, crockery). In small restaurants, the wash areas for both tend to be combined.
4) A Small Store area - This is a dry area used to store the most commonly used provisions in the kitchen. Even if the restaurant has a separate larger store, the kitchen will need a small store or atleast a few storage shelves.
5) Pantry Area - This is the area where the juices, desserts, maybe even salads and other items which do not need cooking, are prepared.
6) Food Pick-up tables - Generally, you have a small table which is used to assemble the dishes to make it easy for the server/steward to come and pick-up the items and take them for serving to the customers.
7) Preparation Area - This could be an area used to cut meats, maybe have a grinder for grinding flour etc. In small restaurants, the same work table area is used for this. This would depend on your cuisine.
8) Staff Toilet Area: This, in my opinion is critical and a very basic need you need to provide for. A number of small restaurants do not provide this and you can see the kitchen staff using the customer toilet area.
9) Staff Changing Area: A small area for the staff to change to their work uniforms/dresses and hang their clothes and keep their personal belongings.
10) Space for keeping clean cutlery and crockery: This area can be provided for adjoining the kitchen or within the customer area in the form of "Side Tables" - The next time you go to a restaurant, you can see small shelves used to store plates, spoons, forks etc. Providing a space for keeping clean water glasses is also critical as these tend to be fragile and if you do not provide for it, you will end up with lots of breakage.
11) An area where the used cutlery, crockery and glasses can be kept for washing - This is a small area where the steward / clearing boy can leave the used the plates, cutlery and glasses for the washing staff to take and clean.

If you include all of the above, you will probably need 400-600 sft even for a small restaurant kitchen. Again, the exact space requirements would depend on the concept/cuisine. So please use the above as a broad guideline for the kind of space you would need.

Key Non Product/Concept Components to starting a Restaurant Business

I have already provided the below information as a combination in a few posts, but I keep getting several email queries asking the same questions. So I have tried to summarize the key activities involved in starting a restaurant - here I am talking about the activities outside of the main concept, interiors and the product/menu design etc. 

1. Company Registration - Any accountant/accounting firm will help you with this. You can register the company as a propreitership (easiest, but the firm and you are the same from a legal perspective), Partnership firm (minimal paperwork and minimal ongoing statutory requirements) or a as a Private limited company (reasonable paperwork and costs to set-up and reasonable ongoing activities). LLP is also a new option you can consider. Out of the lot, I would recommend the "Partnership Firm" approach - delinks you (the individual) from the company, gives it a more formal feel and the paperwork/costs involved are minimal both during set-up and on an ongoing basis. Plus if you accountant can help you plan your taxes creatively, you may be able to save some money by paying lower taxes on the profits you make through the presumptive income based model available for small businesses with revenues upto 50 lakhs per annum. Again, I am not a CA or a tax/accounting expert. I would recommend that you talk to your trusted accountant and if you don;t have one talk to 2 or 3 accountants and pick the one you are comfortable with. 
2. Permits / Licence Procurement - Once you find your location, these are not as difficult as it seems - it will just cost you money. So don't worry too much about it, unless you want to serve alcohol, in which case you will need to figure out the way to get the permits/licenses for this earlier. For the standard licenses, your local corporation office and your accountant can help you get all of those. See my post on licenses required for a restaurant business for details. 
3. Financials / Funding - For a restaurant business startup, it will have to be your own money with some support from friends/family. You can get a loan from a bank for property as collateral - Loan Against Property - most banks have a scheme for this. Here you mortgage your property for the loan - in the event you cannot repay the loan, the property will become the bank's and they will dispose it off to recover the loan amount. Working Capital Loans are not typically not available for new businesses. Let's say you have 3 restaurants operational for the last 4 years and your bank has a record of all your business transactions for the last 4 years with them. Based on this history, they may give a working capital loan / overdraft facility. The interest rates for commercial loans are currently in the 14-18% per annum range. I would suggest that you go and talk to the branch manager at the bank where you have your personal account - they will be able to provide you specific details on what options you can avail of in your situation. When you determine the total investment you need, I would strongly urge you to include working capital requirements for the first 3-6 months in your total investment figure, as you will need that time to build your business to an operational break-even level. So you need to have the funds ready to sustain your operational expenses for the start-up period. 
4. Location Search - It is worth hiring a good broker for this once you determine the kind of place you are looking at. You can also drive around, call the numbers from the To Let boards. 
5. Staff Hiring / Training - Staff hiring will be a painful part. The main guys you hire should be able to bring in the rest of the team, but getting the main guys will be the challenge. You can request an existing restaurant business owner to help you find someone good. If you are looking at a reasonable investment (say 25K per month + salary), then Naukri.com, Monster etc. may be a potential source for finding the key staff. Training is not established in this space - There are some consultants who can do some form of training. The main guy you hire should be able to help you train the staff initially.

Formal Research Report on the Indian Restaurant Industry

I recently met with Samir Kuckreja,  the current President of the National Restaurant Association of India (NRAI - www.nrai.org). Samir is also the MD & CEO of Nirula's (www.nirulas.com) - India's own McDonald's. He shared several industry insights and also gave me a copy of the white paper that NRAI released in 2010 on the Indian Restaurant Industry - probably the first formal documented research of this scale in India. This is really an excellent & comprehensive market research report - calling it a white paper does not do justice to the content available in the report. I will share key highlights of the white paper in a few future posts - want to get a formal approval from NRAI before doing so.

Interested Readers can purchase a copy of the NRAI White Paper on the Restaurant Industry for a fee of Rs.500/- for Delhi and Rs.600/ for outstation. The payment can be made in cash or cheque drawn in the favor of National Restaurant Association of India. The correspondence address is

National Restaurant Association of India

4^th floor, Phase-1, PHD House, 4/2 Siri Institutional Area,

August Kranti Marg, New Delhi-110016

Main Line: +91 11 4100 0967 Fax: +91 11 2653 6053

Contact: Shilpi Varshney

Marketing and Communications

Email: shilpi.varshney@nrai.org

Meanwhile, here are some press releases that provide a very high level summary of the research report. All these links are also available on the NRAI website - http://www.nrai.org/news.asp?id=6

1) http://www.nrai.org/news/ExpressHospitality-26-05-10.pdf
2) http://www.nrai.org/news/F_B_News.pdf
3) http://www.nrai.org/news/The%20Sunday%20Guardian%20-%2009.05.10.pdf
4) http://www.nrai.org/news/Financial%20Chronicle%20-%2010.05.10.pdf
5) http://www.nrai.org/news/Economic%20Time%20-%2010.05.10.pdf
6) http://www.nrai.org/news/Hindu%20Business%20Line%20-%20Delhi_15.pdf
7) http://www.nrai.org/news/Food%20and%20Nightlife%202.pdf