Take-Away Units as a Business

I have had a few people emailing me asking about "Take-Away" only units. The underlying interest in this business is quite clear - you need a much smaller space which means the real estate requirement is lower, cheaper and so is the Capital Investment (Rental Deposit, Interiors, furniture etc.). In addition, ongoing operational costs (staffing, utilities etc.) will also be lower. The downside is that your pricing will need to be VFM (Value For Money) - premium priced take-away units are very tough to do as customers will pay only for the food - not for the service, ambience etc.

In the Indian market context, you will need to look at "Take-Away & Delivery" together, as both address the same segment of customers. Take-Away only units will work in very crowded areas (City Market, Outside bus stands, metro stations etc.) where the flow of people is so large that you will get enough traffic easily. A more scalable option will be the Take-away+Delivery model

Dominos Pizza in India is essentially built on this model of Delivery & Take-Away. Their stores have a few tables, but the tables are are simply space for people to buy Pizzas and sit down and eat there if they want to. Some of their units also offer the space for birthday parties, given the fascination kids seem to have for birthday parties at Pizza joints. Pizza Hut has recently launched "PHD" - Pizza Hut Delivery (what a great name - PHD!!!) which is essentially a Delivery & Take-Away unit, again with a few tables available for customers who want to sit down there and enjoy their Pizzas. Other successful businesses built on this model are www.asiainabox.in, and to some extent Ammis Biryani (www.ammisbiryani.com)

For the "Take-Away + Delivery" model to work, here are the key factors:

1) The Location: This is even more critical that that for a restaurant. The location needs to be very convenient - for people to park their bikes/cars for a few minutes.

2) Extremely Quick service: The customer should be able to place an order and get his package within a few minutes. So your menu design needs to support very quick turnaround. Again the simpler the menu is, with a few items, the better are your chances of a quick turnaround.

3) The Layout - The layout of your unit needs to support a number of people waiting for their orders - ideal location would be the garage area of a corner building - where the kitchen and the servicing area can be in the garage, with the drive-way serving as a place to customers to hang around while waiting for their orders.

4) Prompt Deliveries: Like I have mentioned earlier in my post of Door Deliveries, you should be able to deliver the food to the customer's premises within 30 minutes.

If you work out the numbers, making this model work as a business will not be easy as it seems. but if you are able to crack this one, I believe you can build an unassailable business with a loyal customer base - business that will work irrespective of competition, recession etc. I will do some research on Take-away units and post a detailed blog in the future.

ESI, PF, Safety/Fire Dept. NOC, Insurance etc.

I got an email from a reader with the following questions - am posting the questions and the responses for the benefit of the larger reader base:

Disclaimer and Important Note: I am not a legal/accounting/statutory expert. These areas tend to be highly complex, localized and I would strongly advice seeking opinions from qualified accountants/lawyers for these. I have only provided broad guidance below, based on what I know.

1) What is the eligibilty criteria for a restaurant to be ESI and EPF compliant? If a restaurant comes under the purview of these departments, what are the formalities to be complied with?

ESI stands for Employees State Insurance. Essentially, this is a medical insurance scheme for low wage employees (monthly income of Rs.15,000 or below) for availing medical facilities at government hospitals, governed by the ESI Act of the Government of India. ESI is managed by the the Employees State Insurance Corporation (www.esic.in). You can find more information including a copy of the act on their website. Their new portal launched a few months ago is pretty good and a lot of transactions can be completed online with minimal fuss.

If you employ 10 or more employees with wages less than Rs. 15,000 per month, then you will need to participate in the ESI scheme.

EPF stands for Employee's Provident Fund - You need to participate in EPF if you employ 20 or more employees irrrespective of their salary levels. Again you can find information on their website - http://www.epfindia.com/

Most accountants have a external partner (typically a freelancer or who specializes in ESI, Labour & PF) they can refer you to. For a small monthly fee they will help you with the process of registration, ongoing statutory filings and support. Both of these require monthly payments and periodical filings (monthly, annual).Again the freelancer/specialist will help you with these.

2) Does a Restaurant need a fire safety certification / NOC from the fire department?

As far as my limited knowledge goes, buildings require a fire safety certification in certain cases. I am not aware of a restaurant business specifically requiring a safety certification / NOC from the fire department. Again this could be very localized - your best bet would be to ask a neighboring restaurant on if something of this nature is required.

3) Is Insurance (of premises etc) mandatory for a restaurant?

Insurance of the premises (building) is typically the landlord's responsibility. But Insurance of the fittings, furniture, equipment inside the restaurant is highly recommended. Most general insurance companies have a specific package for hotels/restaurants - E.g. Tata AIG insurance package for Hotels and Restaurants. This insurance is not mandatory, but highly recommended.

Marketing Option Assessment - Restaurant Review Websites

Here I am referring to Restaurant review websites such as www.burrp.com, www.zomato.com, www.eveningflavours.com etc.

Restaurant review sites are becoming popular and with the increase in the number of discerning customers, there is more interest in gathering feedback about a restaurant before making a decision to visit one. Given restaurant spends are a low-ticket, impulse decisions, the impact of review websites may not be as high as in categories such as Cars, hotel stays etc. If you are a fine dining restaurant or a very unique concept, there is a small chance that you can create a fan following on these review sites, which will lead to an increase in the number of visitors to your restaurant. This is a tough one to crack though, as the reviews are posted by end consumers and there is no control over the content that they write. In general, customers like giving feedback in extreme situations - when they are upset with something or when they are mighty pleased with something. So from a planning perspective, you will need to figure out a way to get a lot of reviews written about your restaurant business and hope that your restaurant gets more good reviews than bad ones. Other than reviews, these sites also offer paid options, where your restaurant is featured on top of search results – e.g. if a customer enters a search keyword, “Italian” or selects “Italian” as the category, you can pay “Burrp” to show your restaurant on the top of the list. These paid options are fairly inexpensive (about 15-30K per year), and may be worthwhile for new, unique concepts, to generate some interest and get the word out to active foodies.

Why do you want to start a Restaurant?

Why do you want to start a Restaurant? The “Why” question is really critical as all the next steps you will need to take and the decisions you will need to make, will be driven by the “Why”?

The “Why”?

What could possibly be some of the reasons you want to start a restaurant business?

1. I am tired of sitting in front a computer all day along – I want to do something different. The restaurant business seems easy enough and attractive.
2. I want to be an entrepreneur and create the next big brand/company.
3. The food business in India is expected to grow significantly over the next several years and I want to ride the wave.
4. It could be a “Recession Proof” business – as the food is a basic need and will never lose money
5. It seems to be a very profitable business – most people I talk to tell me that I can recover my investment in 3 years (That turns out to be a 33% annual return on the investment – fascinating)
6. I have a passion/strong interest in this business and want to be seen as a restauranteur.
7. Other Reasons you may have

Reactions to the “Whys” 1 & 2.

• I am tired of sitting in front a computer all day along – I want to do something different. The restaurant business seems easy enough and attractive.

The best way to convince yourself that sitting in front a computer all day along is absolutely worth the effort and the best possible option for you (Return on investment for the amount of work you will put in and the sacrifices you will make), then I would encourage you to quit your job and start a restaurant. You will find yourself running back to the same cubicle you came from, sooner than you can imagine, and this time, you will use Araldite or something even stronger to hold on to your job.

• I want to be an entrepreneur and create the next big brand/company

I find the phrase “I want to be an entrepreneur” very confusing. If you have access to a lot (a few Crores of easy-to-get money – by this, I mean money that you can use to fuel your dreams) – could be your savings, could be from a rich father/father-in-law/wife etc. Essentially this will be money you can use at your will, without having to really tell anyone what you plan to do with the money. Now if your reason is to be an entrepreneur and try to create the next big/brand company, a restaurant business should feature in your evaluation.

If you are want to be a true blue entrepreneur (bootstrapping approach), then I believe there are better opportunities available – ones that are more Venture Capital friendly. With external investment your chances of building a large brand and a business is tremendously accelerated. Professional investors, who invest in start-ups, generally pick businesses where the founders already have some experience in the same business area. Plus they like IP (Intellectual Property) creating businesses, where scaling requires much lesser investment compared to the revenues/profits that can be generated.

I believe that the restaurant business fundamentally is NOT a Angel Fund/Venture Capital friendly business. Why?

Like I mentioned earlier, Angels Investors and VCs seem to like businesses that can create a product/solution/offering using the initial money they invest, that can then be scaled at a rate that is positively disproportional to any additional capital investment. For a restaurant business, even if your first unit is very successful, to grow, you would need a lot of capital again and again. If "x" is the investment for the first unit, to grow revenues by 100 times, you would need an investment of 100x (probably more if you need more money towards marketing/branding). VCs like businesses where if they invest “x” initially to create a product, then to grow revenues by 100x, they would probably need to invest 10x/20x, primarily towards sales, marketing and customer support. Having said this, there are quite a few restaurant businesses in India which have received VC funding so far. Plus with the market expected to grow significantly in the next few years, VCs may start getting more interested.

Reactions to reasons 3 to 7 to follow soon.

Why do a lot of people have a fascination with the Restaurant Business?

There seems to be something fascinating about owning and running a restaurant, a coffee shop, or even a really small business in the food industry. It is probably something like getting attracted to the opposite sex. A large number of people are infatuated towards the restaurant business, and by the law of averages, a small percentage of them actually end up doing something about their infatuation.

Why does this fascination/infatuation happen?

Reason 1: Everyone Understands this Business

Cricket – The unofficial national game of India, evokes significant emotions both when we play and when we watch India play. Almost everyone in India plays cricket or strongly believes that he or she knows how to play cricket. While watching from the dugout or on TV, you feel that your team member batting in the centre is not playing the shots he should and you feel you should be there whacking the ball around or telling him how to play. But when you go out to play, you end up struggling the same way as your team-mate or even worse.

I met with a seasoned professional in the investment banking space and one of her statements really caught my attention. We were talking about a specific restaurant "Biryani Merchant" that was set up in Bangalore a few years ago. The restaurant shut shop after about a year in operation. She told me that service in that restaurant was really bad and that was the reason they shut down. Though I quickly wanted to ask her how many times she had visited the place and on what basis she was making such a strong statement with so much conviction, I wanted to be nice. But my guess would be "Once" or maybe 2 or 3 times at best.

Almost all of us have visited a lot of restaurants over the last several years. We all have opinions about what is good and bad in any restaurant we visit and what needs to be done to fix the restaurant. This repeated exposure to the business as a customer leads us to believe that we understand the business and what works. Add to this, the age old adage that “If you understand the customer needs and fulfill them, your business will be very successful”.

Reason 2: The Restaurant business seems very successful a.k.a profitable

Most restaurants we visit are typically crowded whenever we visit them – it is another matter that we mostly visit restaurants during weekends or the same times when everyone visits the restaurants. We also typically visit restaurants that are good, recommended by others and the ones we like. Most of these businesses have typically figured out the basics of the business and tend to be operationally profitable. But given our incorrect sampling (even if we have visited over 100 places, most of the 100 end up belonging to the same sample set), we tend to intrinsically believe that all restaurant businesses are very profitable.

Now you have an easy formula – I understand the customer need, the business seems very profitable – let me get into it and make some money and become famous.

Reason 3: Low Entry Barriers

Starting a restaurant business has very little entry barriers. The only real barrier is having some cash to invest. Most people end up saving enough money over a decade or so to be able to invest in a restaurant if they have a real interest. In a number of cases, a few like minded friends are willing to chip in with some money for you to play around with.

Reason 4: The Cool Quotient

Owning a restaurant seems to evoke certain emotions, which make you feel really good and proud – you are probably considered “Cool”. Maybe it is about having a popular place everyone knows about, a place where you can invite friends and contacts and show them a good time. Visiting a restaurant is a “Feel Good” experience for customers – the restaurant is typically filled with positive vibes – the business in general evokes only positive emotions. I believe this is one of the big reasons for a lot of people to get infatuated with the business.

Reason 5: Advice from Successful people & I can work hard

Once you have an initial interest, you talk to a few restaurant business owners – typically the owners of the restaurants you frequent (essentially from the same sample set above of restaurants which are successful and have figured out the basics of the business). In general, we tend to talk to successful people for advice, the media writes about success stories that we read. The unsuccessful people like to forget their bad experiences and move on – so they don’t really want to talk about it or build associations with their unsuccessful efforts. I am firm believer that “Success breeds success and confidence”. So when you talk to successful people, they tend to encourage you and indirectly push to take the leap.

The only real negative thing that successful restaurant business owners will tell you is that it will be a lot of hard work. Even when they tell you this explicitly, we tend to feel that if others can do it, I can – so you really don’t assess how much hard work setting up and running a restaurant business is, compared to most other businesses.

So what you have is a cool profitable business that is easy to understand – so you get infatuated. And then if you have the money and the time, you jump into it. Now isn’t the world becoming very analytical where we try and make every decision very rationally after diligently evaluating the pros and cons? So when you are putting your life, your career and your money on the line for starting a restaurant business, why aren’t we rational about the decision making process and the approach we take?

Marketing a Restaurant Business

Since the restaurant business typically targets end-consumers as customers, it is critical to create a “PULL” for customers to try out your restaurant. So from a marketing perspective, you will need to think like a FMCG (Fast Moving Consumer Goods)/Consumer services company. The trouble is that implementing a good Marketing plan costs a lot of money (when you look at absolute amounts required). Like in most businesses, you will want to allocate a portion of your revenues as marketing expenses – say 5-10%. For a FMCG company like ITC, their revenues for each of their products run into several hundred Crores – so 5-10% of such a large amount is substantial and lets them do some great things with their marketing budget. For a Restaurant business your annual revenues will typically be 1-2 Crores per annum per unit. So, unless you have a large number of units (like say Dominos Pizza), your marketing budget will be very small in absolute terms. So realistically, you cannot use some of the same marketing options that the larger players and other FMCG/Consumer services companies use, but will need to efficiently reach out to your target customers and create the “PULL” factor.

The biggest and the best marketing investment a restaurant business can make is by picking a great location that has very high levels of visibility. We have already beaten to death and even more the topic around the “importance of location”. This is just another nail in the same coffin.

The second best marketing for your business will come from “Word of Mouth”. You need a lot of your customers to talk about/recommend your restaurant to their friends. If you have read the book “Outliers” by Malcolm Gladwell, you need a lot of connectors and mavens to visit your restaurant, like your restaurant and then spread the word as much as possible.

As a restaurant customer, if you look at the number of new restaurants you have made a decision to try out – i.e. it does not include new places you go to because you are invited there by someone else, I can bet, without doing any kind of research or surveys, that over 50% would be because of its location –

1) You are in the area, the place looks like something you want to try out, or

2) You keep seeing the place so often (it is in your neighbourhood or in an area that you frequent) that you almost feel bad not to check it out.

The remaining 20-30% would be because a friend (someone you trust or someone in your circle who is considered a foodie) recommended a certain place.

So that leaves the other 20% or so new restaurants, which you have visited, to other marketing initiatives that have caught your attention – maybe an ad or a flyer or a review you saw.

If you get the drift of what I am getting at, 80% of your marketing impact will come from your location and “Word-of-mouth” referrals from customers who have visited you. So if you don’t get these two right, whatever else you try will make absolutely no sense and the results will leave you disappointed.

So in reality the remaining marketing options we are talking about are like the cherry on top the cake – they can help improve the number of customers visiting your place by a bit, but will probably not turnaround your business by opening the floodgates.

One caveat to the above theories: When you are launching a new restaurant, a number of these marketing options mentioned below may help drive the initial traffic to your restaurant and may be quite effective.

The secondary marketing options that are available to you and those that restaurants typically tend to use.

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
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

Interview with the Founder of Kaati Zone

The post below is from http://bangalore.citizenmatters.in/blogs/show_entry/141-interview-kiran.

This was an interview conducted by Anjana Vivek, that was published in Citizen Matters on Apr 28. 2008. There are some useful insights - so I am sharing this through my blog. All credits and copyrights related to this interview belongs to Citizen Matters.

Interview: Kiran Nadkarni, Founder Kaati Zone

It gives me great pleasure to start the interviews on this blog with Kiran Nadkarni. Kiran is Founder & Director at Kaati Zone, a chain of quick service restaurants specializing in Indian foods.

Kiran was among the early VCs in the country. Prior to starting Kaati Zone, he has held positions such as President, ICICI Ventures, and Managing Director, Jumpstartup Ventures. He has been an entrepreneur for over three years now and has raised funds for this venture.

Read on to know more about why he turned to entrepreneurship and his experiences in running his venture started in Namma Bengaluru with global aspirations...

Question: You have been one of the early VCs in India, what triggered you to move from someone who invests in entrepreneurs to an entrepreneur who is invested in by someone? We have heard of many entrepreneurs who become investors, you are following the reverse route!

Answer: I had spent 18 years in early-stage venture investing, and wanted to rediscover myself in a way. I was living in the US during 2002-2005, when I first thought of doing the Kaati Zone venture. I felt there was an opportunity to take a brand in Indian foods to the mainstream US markets. Initially, I had planned my involvement in the venture to be much like that of a venture investor, providing strategic inputs to an operating team. However, when I returned to India, I realized my full-time involvement with the venture was very important for it to succeed. You can say, I got sucked into full-time entrepreneurship gradually.

Question: Why this industry, how did you zoom in on this?

Answer: I was living in the US from 2002 to 2005. I noticed that, while Indians were a significant minority in the US and Indian food is popular among locals, most Indians who entered this industry were targeting the ethnic Indian community and did not address themselves to the larger local population. I felt there may be an interesting opportunity to take an Indian food brand to mainstream American market. We chose the quick service format, as it is a scalable business and one can build a significant company with this format. We studied the characteristics of and the current trends in the quick service foods industry in the west and planned our venture accordingly. We had planned to build out the concept on a pilot scale in Bangalore before moving to markets overseas, but things changed as we moved forward.

Question: Did being an investor in companies help you when you started your own venture?

Answer: My involvement as an early-stage venture investor in young companies did help in conceptualization, planning and defining strategies. However, I must admit day-to-day execution was something new to me.

Question: In your mind, what is it in your business that has helped you raise venture capital funding for your company? Any lessons you learnt that you would like to share with entrepreneurs re the fund raising process?

Answer: An early-stage investor assesses three important parameters in a business. He invests in the management team, a business idea that is scalable and can be built into a large enterprise, and a product offering that stands differentiated in the marketplace. My prior experience in venture industry clearly helped me define the initial goals to be achieved before tapping external capital. We invested in a central kitchen that serviced all outlets and demonstrated the hub-and-spokes model that can be scaled. We established a unique identity for Kaati Zone through our products and packaging that signified quality, health and elegance. We built a strong customer base not only for dine-in but for take-away and deliveries (including bulk deliveries to over 80 corporates in Bangalore, many of whom are multinational corporations). We have also ensured that we have retained most of our talent (from restaurant manager level upwards) during the difficult phase of our company. We have achieved it through regular interactions and communication about our vision, growth plans and innovativeness. Our team members have seen opportunities in Kaati Zone and have benefited from our growth.

Question: What is the best thing about being an entrepreneur?

Answer: The idea of introducing innovation in marketplace and making it a success drives the entrepreneurs most. I have also enjoyed charging up my colleagues with entrepreneurial zeal and passion. Young companies are usually unable to hire the best and most experienced talent. The entrepreneurial passion among team members can, to some extent, make up for this handicap.

Question: Is there anything you dislike about being an entrepreneur?

Answer: There is nothing about entrepreneurship that I dislike. I have always respected entrepreneurs and the spirit of entrepreneurship. However, I am extremely disappointed with the system within which we expect our entrepreneurs to deliver success.

• There is not much early-stage venture capital in India. Most investors focus on late-stage private equity deals of multi-million dollar size. I can count only a handful of silicon-valley style venture firms who are willing to back start-ups. Even the silicon-valley based venture firms which have entered India are shying away from start-up deals. I would have liked the Indian national financial institutions, banks and insurance companies to create a pool of capital that could support private initiatives in venture capital to support start-ups and young companies. The Small Business Administration (SBA) in the US contributed significantly to the growth of venture capital industry there. We require similar initiative to create an ecosystem of risk capital.
• The large-scale corruption in different agencies of Central and State Governments takes a heavy toll on young companies.
• Entrepreneurship is a high-risk game, and failure is part and parcel of it. Unfortunately, failure carries a stigma in our society and among investors.

Question: Are there any other insights / learnings / experiences you would like to share with an early stage entrepreneur in Bangalore or someone who is thinking of becoming an entrepreneur?

Answer: Here are a few suggestions for potential entrepreneurs:

• Entrepreneurship is a tough business. It requires staying power and perseverance on the part of entrepreneurs. Do not get into it because it appears glamorous. Attempt it only if you are passionate and are willing to hang in there for a long-term.
• Plan a business that can be built into a large enterprise. Very rarely do venture capital firms invest in small niche businesses.
• Innovate and stand differentiated in the marketplace. Build entry barriers for competition.
• Work actively to hire and retain quality talent. With most industrial sectors booming, employment opportunities are aplenty and retention of staff a very difficult task. This is a test of leadership skills of the entrepreneur.
• Leverage your contacts and networks to grow the business quickly. Also, focus on growth of topline even if it means sacrificing profits in short-term. Profits will grow with scaling up of the business. Venture capital investors like a growing business. They may not necessarily like a business that is profitable but growing moderately.