By Manu Kaushik for Business Today on May 3, 2018
If Priyank Sukhija, the promoter of First Fiddle Restaurants, was not a restaurateur, he would probably be working with Google Maps or Apple Maps. He knows prime properties on India’s high streets and in malls like the back of his hand. When everybody was neglecting New Delhi’s Connaught Place (CP), he opened a series of restaurants there. The reason – location.
“Every city has a centre. New York has Times Square, London has Oxford Street. The city centre of Delhi is CP. It is huge. If anybody from South and West Delhi enters CP, he enters via Baba Kharak Singh Marg, and the first thing he sees is Lord of the Drinks [a brand owned by Sukhija]. Enter from Janpath, and the first thing they see is Teddy Boy [Sukhija’s another brand]. Enter from KG Marg, and the first thing they see is Townhouse Cafe. Five years from now, even if these restaurants stop doing well, the location will never be obsolete. I can always convert them into something new,” he says, adding that it’s nearly impossible to find better locations in the area. He has 12 restaurants in CP under six brands.
Sukhija is among a host of new-age entrepreneurs who are transforming the Indian restaurant scene. According to a Ficci-Technopak report, the domestic food services market – organised and unorganised – is estimated to grow 10 per cent annually over the next five years to touch `5.52 lakh crore. The organised segment, which includes both standalone outlets and chains, accounted for 34 per cent market last year. Chain restaurants are classified into fine dining; casual dining; pubs, bars, clubs & lounges (PBCL); quick-service restaurants (QSRs); cafes; and frozen desserts – based on pricing, service, experience and offerings. Each segment is gaining traction, but casual dining (like Mainland China, Farzi Cafe, Social, Mamagoto) and QSR (McDonald’s, Domino’s, and KFC) seem to be leading the pack with 34 per cent and 45 per cent market share, respectively.
Although QSRs are more scalable, casual dining chains earn much higher revenue per outlet, reducing to an extent the effort and risk as compared with QSRs. “All-day dining, or casual dining, is the most promising bet right now. People are experimenting with newer things. Instead of eating at Domino’s or McD’s, they are going to casual dining places,” says Vivek Kaul, Head (Retail Services, India), CBRE South Asia, a real estate consultancy.
The growth is being fuelled by changing habits of the urban population, especially those who are well-travelled, tech-savvy and have high disposable incomes. CBRE says millennials in India are dining out almost five days a month.
Zorawar Kalra, Founder of the 24-outlet Massive Restaurants, says Indians are eating out more but there’s still a huge potential. “Britishers eat out 10 times a month, Americans 20 times a month, South-east Asians 24 times a month and urban Indians just twice a month. The business size is $60 billion. If we just mobilise the 350-million strong middle-class, and they start eating out twice a month, it will translate into 700 million meals a month,” he says.
For Kalra, son of the famous food writer Jiggs Kalra, this is second innings. The first venture he had started in 2005 was about traditional north Indian cuisine such as dal chawal and butter chicken. But he sold it to Lite Bite Foods, a 14-brand chain promoted by Dabur scion Amit Burman, as he saw that consumers’ preferences were changing. Molecular gastronomy was becoming mainstream. He started Masala Library and Farzi Cafe with focus on food innovation.
“I knew traditional food was passe. Nobody used to go to an Indian restaurant for a date night. People would go for parents’ anniversary or birthdays. Look at the modern food. It’s the fastest expanding genre in India,” he says. Kalra operates seven brands that target different wallet sizes: starting from `700 per person (Made in Punjab) to `3,000 per person (Masala Library). Kalra says food innovation is the key to standing out. “We are a hardcore food company. Anybody can serve beer or Scotch whisky. What’s the innovation in that?,” he says. Alcoholic drinks account for 50 per cent sales of Farzi Cafe, but Kalra says people don’t come back for drinks as they enjoy the food more.
“Managing food is the easiest thing. There are many talented chefs today,” says First Fiddle’s Sukhija, who derives 65-70 per cent sales from alcohol. “We have defined standard operating procedures. There’s a corporate chef to watch whether the chefs are following our recipes and presentation procedures,” he says.
While Kalra has a family history in the food industry, others are taking time to discover their path. After working for 15 years in the corporate sector, textile engineer Rahul Singh decided to start his own business. His first two ventures failed. The second one, Golfworx, an indoor golf facility, turned out to be an idea generator for The Beer Cafe, his third venture. In Golfworx, the bulk of sales were coming from F&B and not golfing. That’s when he thought he should focus on F&B. Within F&B, he had several choices, but Singh was overcautious. “There were two choices – food and beverages. Food is a skilled job and requires some background. In beverages, there were two choices: hot and cold. Hot means tea and coffee. I knew I couldn’t stand in front of Starbucks and Barista. The tea market has limited scope. Cold beverages are about juice and alco-beverages. India is 80 per cent spirits but it is not a scalable business. Beer is the second-largest sold packaged beverage after carbonated drinks,” says Singh. He started his first outlet in 2012. Now, he has 40.
Setting up the restaurant is the easy part. Making it successful is not. Most of these entrepreneurs have been through a large number of failures. There seems to be no standard recipe for making restaurants work.
Kayum Dhanani, Managing Director of Bangalore-based Barbeque-Nation Hospitality, says single-brand strategy and flexibility (in menu and pricing) have helped him grow fast. Barbeque-Nation has 102 restaurants and plans to open over 25 every year, making it one of the fastest-growing chains in the country. “We have one brand and we have been improvising on it. People in different regions have different tastes and preferences. Our menus are fixed for just one week. We have 72 menus that we keep rotating in every outlet. Being relevant to the area, correct pricing and great service is our way of working. Sometimes, we have different prices within the same city,” he says.
Unlike Barbeque-Nation, most prefer more brands. Sukhija of First Fiddle says he could not have opened 12 restaurants in CP under one or two names and, hence, created more brands. “These were created because of proximity to each other. I had to work on how to make each different. Lord of the Drink is high energy. Tamasha is Cafe-esque and more concentrated on food. Flying Saucer an artist-oriented place,” he says. In his future plans, Sukhija is focussing on just four brands. He thinks he cannot take all of them forward at the same time.
For Kalra, having more brands helps him attract people with different income levels and expand faster. “There’s a limit to the number of Farzi Cafes we can open. If I can open 10 Farzi Cafes in Delhi, then my potential is 40 restaurants across the country,” he says.
Despite having 15 brands in his portfolio, Anjan Chatterjee, Managing Director of Mumbai-based Speciality Restaurant, says the restaurant space has gone through a period of enthusiasm where promoters have tried to launch brands that are multi-locational. “Consolidation is the name of game. We have learned this the hard way. We thought we will disrupt the food services industry but it takes time to understand that you cannot spread yourselves too thin in order to scale up. We are now focussing on oriental food segment,” he says. Speciality operates brands like Mainland China and Oh! Calcutta.
Experts say the addressable market for these brands is limited. “Except for cafes and QSRs, restaurant business is a 15-city play. The potential markets for fine dining and PBCL are even more limited,” says Ankur Bisen, Senior Vice President, Technopak.
The two big metros – Mumbai and Delhi-NCR – account for 22 per cent of the food services market, followed by six mini metros (Pune, Ahmedabad, Bengaluru, Chennai, Hyderabad and Kolkata) with 20 per cent share, says the Ficci-Technopak report.
Close to 60 per cent restaurants are on high streets and 29 per cent in malls. However, the number varies from one format to another. For instance, 25 out of 40 Beer Cafe Outlets are in malls. That’s because malls are like community centres, says Singh of The Beer Cafe. “Food courts have no time. We want to be in that time frame. Every mall owner wants us. When they plan, they put The Beer Cafe without even asking us. The reason is that we give them higher revenue share [than most food outlets]. Our revenue is more than that of a coffee shop on a per sq.ft. basis. Mall owners don’t like churn. They know we are a steady brand,” he says.
Barbeque-Nation says its rent-to-revenue ratio is less than 10 per cent, the lowest in the industry, as it doesn’t go for most expensive locations, main road buildings and ground floors. Most of its customers come in groups, and 70 per cent book in advance. Since visiting Barbeque-Nation is not an impulsive decision – rather a planned one – the location doesn’t matter a lot.
Limited availability of quality locations has led to overcrowding and cannibalisation in the market. “When I opened The Beer Cafe in CP, there were 10 bars. Today, there are 100. The supply is more than demand across India, primarily with liquor-oriented restaurants,” says Singh of The Beer Cafe. He says he gets almost one request per week for opening of franchisee in smaller towns. He is careful because he doesn’t want to compromise on location and brand standards. For instance, the franchise owner of Flying Saucer in Lucknow approached Sukhija for opening an outlet in his hometown. “He was passionate about it. We agreed. We designed the product, trained the staff and designed his event calendar. He’s doing a great job,” says Sukhija.
“Franchisee requests from smaller towns and rising competition between standalone and hotel restaurants are the two biggest trends,” says CBRE’s Kaul. There’s a growing chatter in the hospitality industry for reduction in the number of food outlets in hotels and outsourcing existing restaurants to specialists. “Free-standing restaurants are doing better than 5-star restaurants unless we are talking about iconic places such as [ITC Maurya’s] Bukhara and Dum Pukht,” says Sukhija.
To keep the momentum going, Barbeque-Nation and The Beer Cafe are expanding in smaller towns. Barbeque-Nation operates 22 outlets in Tier-II and Tier-III cities, and nearly 70 per cent of its upcoming stores are planned in smaller towns.
Priyank Sukhija, First Fiddle Restaurants
The sector is attracting interest from domestic and international institutional investors such as Goldman Sachs, India Value Fund, Everstone Capital, CX Partners and Samara (see Big Bucks).
While investors are rushing to grab a piece of the pie, the regulatory crackdown has dampened sentiment. The reversal of input tax credit under GST, last year’s liquor ban in some states and sealing drive in Delhi have hit sales. “My sales have been low for the last one year because of the rooftop ban in Delhi. Government regulations are the only roadblock,” says Sukhija.
Operating a restaurant in India requires 12-15 government licences as compared to four in China and Singapore, seven in the US and five in Thailand. “Each and every licence of a beer cafe is separate. We are not allowed to warehouse and transfer the stock. There’s no return even if the liquor expires. We are not allowed to throw it away either. It’s as crazy as the mining licence,” says Singh of The Beer Cafe.
Restaurants are a high-margin business – 60-70 per cent – if fixed costs (rentals, staff salaries, licence fees) and corporate-level costs are not included. Most restaurants work on 10-15 per cent operating profit margins, which makes it a high investment-low return business. “What are we working for? This business has the highest failure rate in the world. Almost 90 per cent failure rate in 12 months and 96 per cent in 24 months,” says Kalra.
“Policy issues are tougher in any business where liquor is involved. They have to live with it,” says Technopak’s Bisen.
“GST is the biggest killer. It has led to jump in capex and operational costs. I think the industry expansion is going to stop unless someone is backed by institutional capital. We are asking the government to bring back input tax credit system, and introduce grade-based GST rates,” says Chatterjee.
Despite this, some restaurateurs are optimistic. “It’s not easy to work with the government, but at the end of the day they will have to listen. They have a lot at stake too. They want to run the state, and they want revenues,” says a promoter.
The restaurant business has come a long way from early 1980s when there were a handful of organised players and the market was largely unregulated. As experts suggest, this is the tip of the iceberg, and folks who are on top of the game will survive in long term.