Graffitea

I arrived in the upscale Panchsheel Park area in Delhi for a meeting ahead of schedule. To bide my time, I walked around the area looking for a coffee shop. I chanced upon a sign board "Graffitea" (what a FAB name!) - I walked up the narrow stairs into this joint. The place looked interesting and I ordered a Masala Tea. The young lady at the counter asked me how I heard about the place. I told her "I hadn't heard about the place, but simply chanced by it when walking around". I asked her how long they have been open and if she was the owner. She enthusiastically replied that they were just 25 days old and it was her place - rented of course.

I decided to do an impromtu interview with the owner, Pooja, on the phone, 2 days after  my visit and feature Graffitea as a business - would be interesting to feature a spanking new business 25 days after they opened, rather than just featuring the long lasting successful ones.

Graffitea was conceptualized by Pooja and her brother based on the market opportunity they saw in Delhi for coffee shops - a little ironic that they ended up starting a joint named after "Tea" after being inspired by Coffee. Guess the name did the trick. If this first experiment of their works well, they plan to open other units in Delhi soon.

How would I evaluate Graffitea as a business? The Good, the Bad and the Ugly

The Good:
1) The Name is "FAB" in my opinion. Why didn't I register this domain? Could have made a few bucks on that.
2) The place has been done up quite well to suit the name and the theme - a cool hangout.
The Bad:
1) It is in the First Floor - a place like this has potential to gather a cult following - so the first floor downside may be mitigated to some extent. Plus the place is small - so they anyway can't handle too many footfalls.
2) For some reason, the place to me seems like a cool Beer joint. They may want to think of offering draught beer - the licenses in Delhi are cheap.
The Ugly:
1) They need to have a lot of Graffiti on the walls, in the toilet (they can go berserk here) etc. to suit their name. Get rid of the paintings and bring on the real Graffiti.
2) Their menu needs to have a focus on "Tea" given their name - but "Tea" is just one of the options on the menu. Plus the "Masala Tea" was run of the mill - they need to make their "Tea" options truly stand out.
3) They have a Display Pastry cooler which stocks what seems to be "Standard" stuff available everywhere. They may want to get creative with this and do cakes and pastries that are very unique - with icing in the form of graffiti.
4) The Split AC looks weird and spoils the look and feel of the place. Guess they don't have a choice. But they may want to use some creativity to make this damn machine look good and fit into the space.

Clearly, it is easy for me to go critical on this place, but I liked the vibe and feel of this place and hope they figure out a way to make money and make this a cool happening joint. From my discussions with Pooja, the owner, they seem to have got the fundamentals right and have started well - they need to quickly get their act together on their financials, refine their customer proposition & menu offerings, to make this place work as a business. I truly hope they do and wish them all the best. 

Cafe Amul - What they need to get right? IMHO - In My Humble Opinion

The amount of interest and enquiries, I have got about Cafe Amul after my post on them (http://restobizindia.blogspot.in/2012/02/cafe-amul-is-this-truly-diamond-in.html) has been unreal. I think I may have conveyed a message that Cafe Amul is absolutely THE BEST franchise opportunity available in India today. Just to set the context right, my belief is that Cafe Amul has the potential to be THE BEST Franchise opportunity and I can see them doing 1000+ stores in India in the next 5-7 years if they want to. But they need to get a number of things really right before embarking on this aggressive growth plan. Again, these are just my thoughts and opinions - so please make your own assessment.

Their Customer Proposition:

They need to define this. It could be something like this:
1) Value for Money (VFM) all day Light Eats, Snacks & Desserts
2) Clean & Comfortable ambience (Air-conditioned to the extent possible) with tidy restrooms
3) Lower Cost option to Café Coffee Day and other Coffee based hangouts
4) An attractive & affordable place for families with kids, college going youngsters and others to hangout and have a light meal/snack/dessert
5) Leverage of the strong Amul brand (Trust, VFM/Affordable, Quality, Family Oriented)


Things they need to do:

1) Offer a better ambience & experience to customers

• –A highly inviting, attractive & family friendly Café design
• –Air conditioned atmosphere (unless excellent outdoor seating option is available) with Wifi access
• –Better seating (more comfortable) with kid friendly options where possible
• –Better leverage of  the iconic Amul ads in the Cafe design (Collage on the walls, tables, LCD Screen) & the Amul girl (a.k.a . The McDonalds  man)
• –Better presentation of food – Better quality crockery/cutlery and clever leverage of  the Amul girl in disposable/take-away cutlery & presentation items (e.g. Sundae spoons)

2) Prepare a more robust Financial Plan

• –Current Investment, financial projections and Operating expenses information need to be projected more accurately.

3) Improve Real Estate Leverage

• –Reduce Real Estate Space Requirement to about 800-900 sft (down from the current requirement of 1200 sft)
• –Reduce the space required for the kitchen & pantry area by refining the menu offerings, while maximizing the customer area

3) Make Operations simpler to manage

• –Fewer Menu Varieties
• –Lesser Staff
• –Better leverage of 2 shifts (unit can be open from 8 AM/10 AM to 11 PM)

4) Reduce Upfront Investment Commitment

• Set up a unit with a Capex of  around INR 30-35 Lakhs (down from 40 lakhs – 50 lakhs currently) – including working capital provision for the first few months
• –Smaller investment due to smaller real estate space requirement & lesser kitchen equipment

5) Refine Menu Offerings

• –Better leverage of a small kitchen with minimal equipment, while still offering reasonable variety to customers
• –Hot Kitchen Focus on Dosa, Paratha & Sandwich Varieties and offer consistent and great quality food. Consider adding Egg preparations (sensitive issue???)

6) Remove or clearly separate the Amul product sales counter in the Café

• –Do not offer low margin products inside the Café (e.g. Stick ice-creams)

7) Reduce Revenue Target to INR 7-7.5 lakhs per month

• –15% Operating Margins (EBITDA) Target (Cost of Sales / Food Cost < 50%)
• –Offer an attractive Return on Investment (RoI) – Investment Recovered in 4 years
• –Operational Breakeven under INR 5 lakhs monthly revenue

8) Create a strong Franchise support team with a focus on:

• –Recruiting & Setting up Franchise Cafes
• –Providing Ongoing support (Marketing, Operations, Best Practices sharing)
• –Ensuring Quality (Audits, Process Improvements etc.) & Brand Promise
• –Ideal model would be to set-up one company owned & operated unit in each new city/region before inviting franchisees
• –Reasonable Franchise fees can be charged to fund the Franchise Support organization (Not a revenue share)

What should their menu look like?

Hot Kitchen Menu Design Principles:

• –Dishes that appeal to customers throughout the day (Breakfast, Lunch, Snacks, Tiffin, Dinner)
• –Dishes that are prepared fresh using minimal kitchen equipment
• –Dishes that can support overall food cost at less than 50% (ideally <40%)
• –Dishes which allow offering reasonable variety and options to customers

All-Day Light Eats

• Dosa Varieties
• Paratha Varieties
• Sandwich Varieties (Grilled & Non Grilled)
• Omelette Varieties (Egg??)

Minimal Kitchen Space & Equipment needed:  Tava (2), Sandwich Griller, 1 or 2 single burners, Work Tables, Wash Area

Desserts & Beverages

• Ice-Cream Scoops & Sundaes
• Gulab Jamun & Shrikand
• Chai & Coffee
• Milkshakes & Ice-Cream Milk Shakes
• Buttermilk & Lassi Varieties

Mid-Size Pantry Area for Desserts & Beverages: Display Freezer, Blender, Dum Chai Boiler, Filter (Coffee), Small Milk Bain Marie, Work Tables

When should you approach VCs/Institutional Investors?

While the restaurant business is not exactly a very VC (Venture Capital) friendly business (see my earlier post on this - http://restobizindia.blogspot.in/2011/03/restaurant-business-angel-investment.html), there have been a few transactions in this space recently (Mast Kalandar - Investment by Helion Ventures, Fasoos - Investment by Seqouia Capital). Given the expected growth in the Restaurant industry in the next few years, I expect investment transactions to increase in this space. So if you are a start-up in the restaurant space, what do you need to do to attract VCs and when is a good time for you to approach them?

Based on my interactions with about half a dozen partners in VC firms, here are some broad guidelines. Professional/Institutional investors evaluate opportunities using the following 4 criteria:

1) Growth potential of the opportunity area - will this space allow a few businesses to the tune of 100 Cr each to be set up in 5 to 7 years. In general investors invest in not more than 1 or 2 businesses in a specific area to de-risk their investments. Currently the appetite for early stage investments in the restaurant space is low (especially given that VC investments in Yo China, Kaati Zone, Booster Juice etc. do not seem to have generated returns for the investors yet - even after about 5-6 years. Typical VC investors seem to look for an exit in 5-7 years). So if a VC has invested in a restaurant business already, chances are they will not make additional investments. Other VCs will also be cautious. This will change in the future once a few businesses succeed and generate significant returns for the investors.
2) Quality of the Management team - Self explanatory
3) Scalability of the specific business model with some validation - This, in my opinion, is the most critical yard-stick. The broad consensus is that you need to have about 10 operational and profitable units, with atleast 1 unit in another city. At this number, the team has proven that they can manage scale to some extent, the business model is validated to a large extent and if funds are available, the same model can be replicated quickly without too much further experimentation. Having a unit in another city is some validation that the model will work in multiple cities and the management team has the ability to manage remote operations. At this stage of your business, a VC will put in money to help you scale to about 100 units in 5-7 years and exit through a IPO or by selling to a large private equity player.
4) Price at which the investment opportunity is available - Equity % in return for the investment. This is again self-explanatory. A VC will be expecting a 10x return at a minimum on the investment. So expect to give up reasonable equity for the money.

In summary, the right and the earliest time for you to approach VCs would be when you have atleast 10 profitable and operational units with atleast 1 unit in another city. By bootstrapping, this will realistically take you anywhere between 3-10 years depending on how capital intensive your business is and how much money you personally have access to. In this business, it is unlikely that you will get money based on a 1/2 units, a concept and business model on paper. 

Cafe Amul - Is this truly a "Diamond in the Rough" in the Franchising space?

From my earlier posts, you would have seen that I am not a fan of franchising in the food business, except for very few opportunities - see my post on this: http://restobizindia.blogspot.in/2011/03/franchising-f-word.html

I was out with a few friends on Saturday and we wanted to do a quick "Coffee Break", use the rest-rooms, sit and chat for about 10-15 minutes taking a break. Not wanting to spend too much money by going to a Cafe Coffee Day, I took them to a "Cafe Amul" in the area which served coffee for 15 bucks. This was my 5th visit to this Cafe Amul. During all my previous visits, I was not very impressed with the concept and felt that Amul was still experimenting with the concept & format. I was even more shocked to learn that this was actually a franchise. A brand and company like Amul experimenting at a Franchisee's expense - I was disappointed.

During this visit, a gentlemen approached our table, introduced himself as a representative from Amul and wanted our feedback on the Cafe Amul concept. I gave him candid feedback and out of curiosity started asking him questions about the Cafe Amul proposition and their plans with it. He mentioned that they have 3 formats - Amul Scooping parlors (simple ice-cream kiosks), Amul parlors without a kitchen (just sandwiches, ready to eat stuff & ice-creams etc.) and then Cafe Amul (with a hot kitchen serving fresh food and snacks). Their proposition was to offer Value for Money all day dining options (Dosas, Sandwiches, Parathas, Pizzas etc.) in a comfortable casual setting. He also told me that the franchise had a lot of flexibility in designing menu options that suited the specific location and those that could be operationally managed. I probed him further on their commercial model and his response stunned me. He told me that Amul did not charge a franchise fee, nor did they have a revenue share.  They only required franchises to pay a refundable deposit of 3 lakhs (More details available on their website http://www.amul.com/m/cafe-amul). They of course made money on supplying Amul products to the franchise, but the cost for these products is the same as it is for any retail store selling Amul products and in some cases even lesser. So why was Amul doing this? His response was that this a brand building effort from their side and being a cooperative, they wanted to help entrepreneurs leverage the Amul brand (trust, VFM, good quality etc.). They would anyway make money since their products would be sold and also used in the Cafes.

Well, like Juice Junction (see my post on this http://restobizindia.blogspot.in/2011/03/featured-business-juice-junction.html ), this model seems to be almost unreal in today's competitive and cut-throat business world. I sincerely do hope that Amul manages to tweak the offerings (there is some serious work to be done on this - they still seem to be in the experimentation mode) to make Cafe Amul appealing enough to customers to meet the revenue/profitability targets and wish them and all their franchises success. Way to go Amul.

Kindly see my follow-up post on Cafe Amul - http://restobizindia.blogspot.in/2012/03/cafe-amul-what-they-need-to-get-right.html

"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.