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  • 1. Restaurant Industry in India - Trends and OpportunitiesRestaurant Industry in India - Trends and OpportunitiesHVS International (India), Mr. Navjit Ahluwalia, Associate Director andMr. Dushyant Singh, Consulting & Valuation Analyst Research, Report WritingMr. Shyam Suri, Secretary General, FHRAI Editing, Report FianlisationMr. Pooran Chandra Pandey, Assistant Secretary General (Research), FHRAI Hotel Questionnaire & Co-ordinationMr. Raj Rajeshwar Sharma, Computer Data Assistant Design, Graphics, Pre-press & DTPPrinted by :Published in April 2004 by:Secretary General, Federation of Hotel & Restaurant Associations of IndiaB-82, 8th Floor, Himalaya House, 23 Kasturba Gandhi Marg, New Delhi - 110 001Phones : (011) 23318781, 23318782, 23322634, 23322647, 23323770 Fax : (011) 23322645E-Mail : Website :© Federation of Hotel & Restaurant Associations of India (FHRAI), 2004Price: One copy free to concerned FHRAI members. (Additional copies at Rs. 400.00 for FHRAI members and Rs.600.00 for Non-Members.) US$50.00 for foreign dispatches 2
  • 2. Contents Table of Contents1. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72. Background Scenario and Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113. Analysis of Questionnaire Responses 3.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 3.2. Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 3.3. Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214. Food Trends-At home and abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .255. International Restaurant Chains & Franchise Opportunities . . . . . . . . . . . . . . . . . . . . . . . .296. What is my Restaurant Business worth? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .357. Conducting a Feasibility Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .418. Restaurant Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 3
  • 3. Restaurant Industry in India - Trends and Opportunities 4
  • 4. Foreword ForewordFHRAI has been very active in our research studies, but we have done this first research project onthe restaurant industry in India. This present study on Restaurant Industry in India - Trends &Opportunities has been conducted on our behalf by HVS International (India), which is a reputedglobal consultancy company in the field of hospitality industry.Some facts and figures on the operations of restaurants in India have been given in this study from aquestionnaire response from FHRAI hotel and restaurant members. The statistical analysis in thereport has used 165 such responses, which represents about 15% of the 1100 questionnaires whichwere sent to our restaurant members, both independent and in the hotels. Apart from this analysis,the researchers have also quoted some interesting demographic & economic data about theconsumers in India and their expenses on the food services. We are all aware about the boom in therestaurant sector in India, particularly in the metro cities and other large cities. One anecdotalevidence suggests that about two new restaurants are opening in Delhi and Mumbai every weekwhich makes it as 100 new restaurants in the year in these cities. These are in the organised sector,and a huge growth is simultaneously taking place in the unorganized and informal sector also. TheIndian economy is on a high growth curve and experts believe that the economy can generate anaverage 8% growth in the GDP on a sustainable basis for the next few years. This is bound to resultin high disposable incomes and higher consumer expenditure in the food service sector.The report also gives an insight on how to carry out valuation of restaurants and feasibility studies.It also gives average figures of operations and financial ratios for different types and sizes ofrestaurants. There is also information on global trends in the restaurant industry and names ofmultinational brands which are active in India and elsewhere. These facts and estimates should be ofgreat interest to new entrepreneurs as well as operators of existing restaurants. The report also hasfour case studies, which narrate actual experience of 2 failed and 2 successful restaurants. Analysisof these cases should help new entrepreneurs in a better understanding of the factors, which need tobe examined carefully in a new restaurant project.I express my sincere thanks to Mr. Manav Thadani, Managing Director, Mr. Navjit Ahluwalia,Associate Director & Team Leader and Mr. Dushyant Singh, Consulting and Valuation Analyst, HVSInternational (India) for their work on this study.I do hope that our hotel and restaurant members will read this research study with interest and it willbenefit them and the new investors in the restaurant sector in their operations and projects.Vivek Nair,President, FHRAI 5
  • 5. Restaurant Industry in India - Trends and Opportunities 6
  • 6. Executive Summary 1. Executive SummaryPurpose of the Study advised to read the entire report for aThe Federation of Hotel and Restaurant comprehensive view.Industries in India (FHRAI) engaged HVSInternational to research the restaurant Background Scenario and Numbersindustry in India and identify both global and Based on projections extrapolated from thedomestic food trends. 165 questionnaire Third Economic Census conducted in 1990, weresponses from independent and hotel estimate that there are approximately 500,000restaurants in India provided the statistical restaurants in India in the organized sector. Thisbasis for analysis of operations and financials of figure is expected to rapidly increase as a resultthe existing restaurant industry in the country. of the changes in demographic and economicIn addition, a large cross section of factors which are having a significant impact onprofessionals involved in the industry were the restaurant industry in India. Increasingconsulted for their views. The report presents urbanization and rising disposable incomes arethe results of the analysis and includes the characteristics that are common across severalfollowing: emerging economies, particularly in Asia. However, the pace at which this has taken place Background Scenario and numbers which in India in the last few years is likely to continue includes an analysis of the demographic over the next decade and will outpace most changes occurring in India and their other economies in the region. In particular, potential impact on the restaurant industry. Merrill Lynch estimates a growth in urban Analysis of responses collected via the consumption at potentially 20% per annum in questionnaire representing a snapshot of nominal terms (16% in real terms) for at least trends in the Indian restaurant industry. the next 5-7 year period. In addition, higher disposable incomes among consumers A summary of key emerging global food particularly in the top 25 cities and the trend trends as well as international restaurant towards eating out are combining with growth chains that provide franchise opportunities in organized retailing to fuel growth in the for operators in India. foodservice sector. A guide on how restaurants are valued and There are 10 million households in India with guidelines for conducting a feasibility study average household income of Rs 46,000 per before opening a restaurant. month and 2 million households with a Real life restaurant case studies on both household income of Rs 115,000 per month. successful and not so successful Eating out has emerged as a trend, which is restaurants. prevalent within this elite group. Two of out of every five households in this group eat out atConclusions for each of these sections are least once a month. There are 100 million 17-21summarised below and discussed in greater year olds in India, and six out of ten householdsdepth throughout the report. The reader is have a child that was born in the post- 7
  • 7. Restaurant Industry in India - Trends and Opportunitiesliberalization era and has grown up with no acceptance of new fusion concepts andguilt of consumption. establishing of the chef entrepreneur. In India multinational restaurant chains had to make aSales by Indian food service companies totalled downward price revision and offer moreRs 350 billion in 2002. The organized sector is vegetarian toppings to increase sales volume.responsible for approximately Rs 20 billion This led to a dramatic improvement in theirworth of sales. Indian consumers spend only 2.4 performance. They are also adding more spicypercent of their food expenditure in hotels and items in their menus to satisfy Indian taste buds.restaurants (including on premises and take-outsales). American consumers, by comparison International and domestic multi-unitspend 46 percent of their food expenditure on restaurant groups are expected to drive theaway-from-home meals. These demographic expansion in the restaurant industry in India.numbers represent a young nation which has an Among the leading trends in this regard wouldincreased propensity to spend in restaurant and be the expansion of quick service Asianother food service sectors. restaurants, fusion concepts, restaurants with a focus on entertainment, and ethnic and regionalAnalysis of responses cuisine restaurants.An analysis of 165 responses out of 1100questionnaire sent nationwide revealed some Restaurant Valuations and Feasibilityinteresting statistics: Studies There have been very few restaurant A majority of respondents (53%) were transactions that have taken place in India till restaurants that achieved an average check date, largely because the restaurant business of between Rs 200 and Rs 400. has not yet evolved into a mature business. The total number of employees employed However, we foresee a fair bit of activity in this by 66% of the restaurants is under 40 with area in the future: changes in market trends and only 3% respondents employing more than competition, spurred by a huge expansion in the 100 employees. The sample therefore food service industry in all major metro cities, represented mid-size restaurants, which would cause many restaurants to change hands are a majority in the country. from one operator to the other. Restaurant valuation is a specialised art and appraisers of With regards to questions on tip and restaurant real estate normally consider three sharing of tips, 83% of the respondents do approaches to value: the cost approach, the not levy any service charge on the sales comparison approach, and the income restaurant bill. In comparison, 77% of the approach. Each approach has its own strengths respondents do not charge a service charge and weaknesses, depending on the age and in banquets. A majority of the respondents condition of the improvements and whether the (60%) have tip pools. building is occupied by an operating restaurant or is vacant. The cost approach is used toEmerging Food and Restaurant Trends estimate the cost of purchasing a site suitableSome of the emerging culinary trends for restaurant development and building ainternationally include the popularity of health restaurant on the site, including the cost offoods, use of fresh and authentic ingredients, 8
  • 8. Executive Summarylandscaping the site. The sales comparison estimate for the restaurant. This investment hasapproach considers recent sales of restaurant to be compared with the returns being indicatedproperties that are comparable to the subject by the income and expense statement torestaurant property in location, size, and brand evaluate whether or not the restaurantaffiliation (if the restaurant was in operation at envisaged is financially feasible.the time of sale). The income approachconsiders the actual or projected rental income Restaurant Case Studiesthat could be generated by a restaurant business Four real life case studies are presented with theoccupying the building. attempt to highlight critical factors that determine the success or failure of a restaurant.A feasibility study is much more than a site- For each case study, we interviewed thelocation study - this approach involves entrepreneur and asked him/her to identify thegathering and analysing a great deal of key lessons learnt in running a restaurant. Weinformation, from demographics to design, describe the experience of each entrepreneur,which helps the operators make a better together with their perceptions of where theyinformed decision about the potential success of were right, or where they went wrong. Two casea specific concept at a certain location. In order studies represent entrepreneurs who believedto establish the feasibility of the proposed they had the right idea as well as the resourcesrestaurant, one must first estimate the to make a success in the restaurant business,development costs of the project. By analysing and they succeeded The other two casesboth development cost figures and current highlight some of the factors that did not allowmarket conditions, and by making adjustments the restaurant to succeed and both of them hadfor the specific characteristics attributed to the to close down. The studies give the factors,proposed restaurant (such as location, size, which led to the success of these enterprises.facilities, class and so forth), one will be able toderive an appropriate construction cost 9
  • 9. Restaurant Industry in India - Trends and Opportunities 10
  • 10. Background Scenario and Numbers 2. Background Scenario and NumbersSignificant economic & demographic facts urban consumption at potentially 20% perIndia has arrived on the global roadmap. It is annum in nominal terms (16% in real terms) forthe only country that has experienced at least the next 5-7 year period. What explainsacceleration in growth rates of per capita this phenomenon? The answer lies in theincome over the past decade. Almost all other demographic shift that is taking place in India.economies have shown growth rates lower than To put it simply, India is producing a muchIndias through the decade. Also, Indias per larger number of young people entering the jobcapita income growth over the past five years market compared to other Asian economies. The(1997-2002) has outperformed that of other number of working-age adults in the country isdeveloped and major Asian economies, save rising at a fast pace. While this is true of ChinaChina. as well, the pace of increase is faster in India than in China. Thus, even with Chinas vigorousIndias per capita income grew by about 19% in population policies, its per capita income1997-2002, second only to China, whose per growth is not rising as fast as India.capita income grew by 39% during this period.The only other emerging Asian country that The restaurant industry is an importantcompares with Indias growth rates is Korea, component of our nations economy, andwhich has grown around the same rate as India. employment opportunities in this sector shouldTaiwan comes fourth with a growth rate of 13% continue to grow in the future as a direct resultduring the period. of the demographic changes taking place. Indian consumers spend only 2.4 percent ofDuring 1992-2002, Indias per capita income their food expenditure in hotels and restaurants.grew by 46% - a rise of 980 basis points (9.8%) American and British consumers, byfrom the 36.5% growth rate observed during comparison, spend 46 percent and 29 percent1982-92. On the other hand, China has shown a respectively, of their food expenditure on away-decline in growth rate over the decade by as from-home meals. This indicates that there ismuch as 700 basis points (7%). And countries significant scope for the growth of food servicesuch as Thailand and Hong Kong have seen a sector in India in the years to come.fall in growth rates by as high as 6,200 basispoints (62%) and 5,100 basis points (51%) A number of factors are driving increasedrespectively. foodservice sales in India:Increasing urbanization and rising disposable Growth in personal income- The increase inincomes are characteristics that are common buying power of Indian consumers is driving theacross several emerging economies, particularly growth in the foodservice sector. Apart from thein Asia. However, the pace at which this has growth in per capital income, as per figurestaken place in India in the last few years is likely given above, there are other important factorsto continue over the next decade and will also contributing to this kind of consumption.outpace most other economies in the region. In Just 2.4 percent of Indian households earn 50%particular, Merrill Lynch estimates growth in of Indias GDP The top 3.9 million households . 11
  • 11. Restaurant Industry in India - Trends and Opportunitieshave an average household income of households in middle, upper and high-incomeapproximately $35,000 per annum. According segments has grown by 12% the National Council for Applied Economic Approximately 23.6 million households haveResearch (NCAER), as indicated in Table 2-1, been added to the high, upper and middlehigh income households in urban India grew at income segments of Indian consumers fromover 21.5% on a compounded annual growth 1990 to 1998. These households have higherbasis between 1995-96 and 1998-99. disposable income per member and have a greater propensity to spend on food. Table 2-1 growth in per capita income by income classes Urbanisation- Most high income IndianIncome Class* Average Annual Growth in per consumers live in urban India. Approximately capita income (CAGR in %), 50 percent of households in the high, upper and 1995-96 to 1998-99 Urban Rural Total middle income groups reside in urban areas.Lower -10.8 -4.5 -5.5 Over one-third of urban Indian consumersLower-middle 0.9 7.7 5.6Middle 5.3 7.8 6.6 reside in less than one percent of the totalUpper-middle 9.9 8.6 9.3 number of cities in India. The percentage ofHigh 21.5 14.3 18.6* inflation adjusted, comparable over time Indians living in cities has increased from 19.9Source: NCAER percent in 1980 to 30.5 percent in 2000.The consuming classes consist of 40 million Growing number of women in the workforce-income-earners with a per capita income of The number of dual income households where$4,000 (Rs. 1.8 lakhs) and 10 million with a per both husband and wife work is increasing. Overcapita income of $12,000 (Rs. 5.4 lakhs). 16 percent of the population of Indian womenConsumers are also migrating up the income work full-time and spend most of their timechain - from the "have nothing" to the "have away from home; this has been an importantsome" to the "have more" to the "have lots" and, factor influencing the trend towards more mealsfinally, "have all". These numbers for different away from home.income groups are given in Table 2-2. Emergence of the Liberalisation Children- Table 2-2 No of Households by income There are a 100 million, 17-21 year olds in classes India, and six out of ten households have aNo of Category Anuual Monthly "liberalisation child" (Post 1991). This is aHouseholds Income USD Income Rs2 Million Have All 30,000 115,000 generation that was born in the post-10 Million Have Lots 12,000 46,000 liberalisation era and has grown up with no40 Million Have More 4,000 16,000100 Million Have Some 1,500 6,000 guilt about consumption.30 Million Have Nothing 200 700Source: IMA Research The rise of the self employed- The proportion ofConversion rate of 1 USD = Rs 46 was used for this table. self employed in urban India has risen to aboveShrinking household size- The size of the Indian 40%, replacing the employed salary earner ashousehold has declined over the last few years the new "mainstream market". A Hansa(from 5.9 people per household in 1990 to 5.5 Research Group study shows the even in thepeople in 1998). The total number of households creamy layer, comprising the top two socialin India has increased by less than 3 percent per classes in towns having a population of 10 lakhyear from 1990 to 1998; however, the number of plus, in urban India, 40% of chief wage earners 12
  • 12. Background Scenario and Numbersin households are shopowners, petty traders, households. Only 3.4 percent of the householdsbusinessman and self employed professionals. in those six metros qualified to be included inUnlike the salary earner, the self employed use the Platinum category.products much more to signal success. The average monthly household income (MHI)Menu diversification- High-income Indian of a Platinum household is Rs 23,000. And,consumers are seeking variety in their choice of interestingly enough, every month, 60 percentfood. Urban Indian consumers are aware of of this amount is spent to maintain the life andvarious international cuisines (Continental, style of the household.Chinese, Mexican, Italian, Thai and Japanese)and an increasing number are willing to try new Well-heeled Capital of Indiafoods. As per the study, every second Platinum household is in Delhi. Mumbai comes next, butSuper Rich Defined the probability drops down to one out of five. ItThe Media Research Users Council (MRUC) is true that today, Delhi is, by far, the city of theundertook a study of the incomes and spending super rich of India. The citys Platinumpatterns of households and called it The IRS households have an average income of RsPlatinum. The data collected was then analysed 24,450. Mumbai earns the highest (Rs 31,970)by the Communication Channel Planning (CCP) and Bangalore earns the least (Rs 20,180). Thedivision of Initiative Media. chief wage earner of the family is highly educated. In terms of occupation, he isIRS Platinum defines super rich as any predominantly a businessman in Mumbai,household that has a colour television, Chennai and Ahmedabad. In the other cities herefrigerator, washing machine and a car. The is either an officer or an executive at a seniorstudy was restricted to Mumbai, Delhi, level. Moreover, eighty-eight per cent ofAhmedabad, Bangalore, Chennai, and Pune - Platinum households adult members have athe cities having a high proportion of college-level degree.households that satisfied the above criteria.These towns account for 39 percent of all the In these households the housewife is also highlysuper rich households that reside in urban India educated (68 per cent are at least graduates).today. However, in spite of their high education, only 17 percent are working, either full-time or part-It is interesting to note that metros such as time. The average household size is 4.5, whichCalcutta and Hyderabad are missing from the reflects the nuclear structure of the families. 85list. These cities would have definitely qualified percent of this elite group has its own house andby the normal demographic parameters. They is gradually going in to buy its second TV set.missed out since the penetration of one or more Almost all the households in this group have aof the listed durables was low in these otherwise cable and satellite connection.large metros.A sample of 5,226 households was surveyed by If you have it then spend itORG-MARG on behalf of MRUC to understand The interesting part is the information that IRSthe lifestyles of the affluent, with media and Platinum provides on the monthly familyconsumer habits of such individuals and their expenditures. The patterns are indeed very 13
  • 13. Restaurant Industry in India - Trends and Opportunitiesrevealing. On an average 61 percent of MHI is surprise package is Internet. It has alreadyspent to maintain the life and style of these elite overtaken Radio (30 percent). Platinumhouseholds. It rises to 69 percent in Ahmedabad households are spending more time on theand drops to 56 percent in Chennai. The Internet than on reading.expenditure is tracked across 20 heads rangingfrom the monthly electricity bill to the amount Number of Restaurants in Indiaspent on last eating out. On an average, each It is difficult to assess the number of restaurantshead accounts for about 5 percent of the total in India. They receive their licenses from theexpenditure. The highest amount goes for local municipal authority, which is mainly amonthly provisions accounting for almost 17 licence from the point of view of health andpercent of the total spend. hygiene. In certain bigger cities, there is also a requirement of a license from the local policeChennai is the surprise package for starting operations. RestaurantAt city level certain interesting patterns establishments in semi-urban and rural areas,emerged. Chennai had the highest average which may also include road-side restaurantsmonthly telephone bill. Its residents spend the and dhabas on inter-city roads and highways,maximum on personal care products as well as may not be possessing any license, from anyon cosmetics. Likewise, they spend the authority. It is, therefore, difficult for anyone tomaximum while eating out, on alcohol and compile statistics of all the restaurants in India.beverages, on buying gifts and also on charity We believe that the best effort in this regard hasand donations. Bangalore pays the highest been made in the government census. We havemonthly rents, and spends the highest among all figures available from The Third Economiccities on maintenance and on travelling and Census which was conducted in all cities/unionconveyance. territories except Jammu and Kashmir duringIn terms of occupation, it is the reflection of the 1990, along with the house listing operations ofIndian economy with 44 percent focussing on the 1991 population census. We have not beenthe manufacturing sector. Within this, able to access the economic census which mayengineering goods alone account for 8 percent have been done in 2000, as part of theof them. This is the largest skew across all the population census of 2001.three sectors put together. Financial services The economic census of 1990 divided hotel andincluding banks (5.5 per cent) and the current restaurant enterprises in two categories, Ownfavorite, IT and software (4.2 per cent) stand out Account Enterprises (OAE) and Establishmentsamongst the rest. (Estt). The figures of the two categories haveIn terms of their media habits, as expected, been separately given for rural and urban areas.almost all the Platinum households can be easily Table 2-3 reflects the break-up of hotel andreached through either the print or the restaurant establishments for rural and urbantelevision. Radio has lost out (25 percent), but of India. Table 2-4 reflects data relating to thethose tuning in, almost 90 percent are tuning state-wise distribution of hotel and restaurantinto FM. However, unlike the West, enterprises in the country.predominantly they tune in at home. But the 14
  • 14. Background Scenario and Numbers Table 2-3 No of Hotel and Restaurant categories. Although the overall PFCE is Enterprises in India available for 2001-02, the disaggregate data isLocation OAE % Estt % Total %Rural 459,134 42.6 133,240 12.4 592,374 55.0 available up to 2000-01. There were only nineUrban 243,044 22.5 242,888 22.5 485,932 45.0 PFCE segments that have recorded continuousTotal 702,178 65.0 376,128 34.9 1,078,306 100.0Source: The Economic Census of India, 1990 high growth performance and include hotels and restaurants.If we assume that there may have been a growthof 6% annually in hotels and restaurant Another survey that captures eating out habits isestablishments after 1990, the number of the Readership Survey. Table 2-5 and Table 2-6establishments would have doubled in the 12 illustrate the eating out habits of the sample byyears upto 2002. We therefore estimate that city and for the country as a whole. The surveythere are approximately 2.2 million or 22 Lakh helps in identifying certain trends as regards thehotel and restaurant establishments in India in use of restaurants and frequency of their use.the year 2002. We further estimate that of the The results indicated that Bangalore scored thetotal figure, approximately 500,000 restaurants highest in terms of the percentage ofqualify as establishments in the organized sector respondents eating out more than once a weekwith more than 20 seats, an entrance door, a followed by Kolkata and Chennai. On a broadermenu card and waiter service. As the number of level the all India average of respondents rarelylodging or hotel units in these figures would not eating out was 70%, once again indicating thebe more than 20,000 or 30,000, we can presume potential that exists for the food service sector inthat the entire figure of 22 lakhs can apply to the the country in the years to sector. For restaurants, the growthpatterns would be different for different cities, Table 2-4 Geographical Distribution ofwith metro cities achieving about 15-20% Hotel and Restaurant Enterprises Own Accountgrowth and smaller cites about 5%. State/UT Enterprises Establishments All Andhra Pradesh 69,979 26,504 96,483 Arunachal Pradesh 446 1,029 1,475The eating out culture Assam 12,005 14,713 26,718Eating out has evolved into a popular trend Bihar 39,822 21,599 61,421 Delhi 10,917 10,642 21,559among Platinum households. Two out of five Goa 1,740 1,189 2,929such households eat out at least once a month. Gujarat 14,759 12,945 27,704 Haryana 11,971 5,426 17,397This is highest in Bangalore (43 percent) and Himachal Pradesh 7,931 3,214 11,145lowest in Pune (33 percent). It is estimated that Karnataka 60,093 34,429 94,522 Kerala 71,472 27,483 98,955Indians spend Rs 350 billion annually on eating Madhya Pradesh 39,248 24,412 63,660 Maharashtra 47,828 52,237 100,065out. Moroever, of this Rs 350 billion, the Manipur 2,174 794 2,968organised sector accounts for only Rs 20 billion, Meghalaya 2,222 3,100 5,322 Mizoram 1,010 619 1,629suggesting a tremendous potential for growth in Nagaland 589 949 1,538this area. Orissa 34,811 18,007 52,818 Punjab 10,006 6,694 16,700 Rajasthan 29,426 14,820 44,246An analysis of National Accounts Statistics data Sikkim 261 398 659with regards to private final consumption Tamil Nadu 85,563 36,637 122,200 Tripura 4,096 1,254 5,350figures (PFCE) reveals interesting insights as Uttar Pradesh 73,911 28,760 102,671well. The national accounts provide West Bengal 68,179 26,508 94,687 Others 1,719 1,766 3,485disaggregated data for 37 consumption Total 702,178 376,128 1,078,306 15
  • 15. Table 2-5 Dining out Habits for seven Indian Cities Delhi Greater Mumbai Chennai Kolkata Hyderabad Bangalore Ahmadabad Pune Eating Out In Restaurant (000s) % (000s) % (000s) % (000s) % (000s) % (000s) % (000s) % (000s) % More Often Than Once A Week 113 1.4 162 1.4 135 2.7 260 2.8 96 2.2 175 4.7 23 0.8 34 1.5 Once A Week 240 3.1 319 2.7 139 2.8 183 2 148 3.4 281 7.6 47 1.6 74 3.3 Once A Fortnight 211 2.7 320 2.7 152 3.1 115 1.2 127 2.9 271 7.3 80 2.7 65 2.9 Once A Month 579 7.4 976 8.3 675 13.7 362 3.9 268 6.2 492 13.3 228 7.7 243 10.9 Once In 2-3 Months 470 6 1232 10.5 546 11 448 4.8 229 5.3 318 8.6 277 9.4 277 12.5 Less Often/Only At Festivals 495 6.4 941 8 610 12.3 2143 23 134 3.1 293 7.9 253 8.6 235 10.6 Rarely/Never/Cant Remember 5477 70.3 6792 57.9 2283 46.2 5442 58.4 3150 73.1 1817 49.1 1611 54.7 1143 51.5 Source: Readership Survey Table 2-6 All India Urban Dining out Habit16 All India Urban Eating Out In Restaurants (000s) % More Often Than Once A Week 3068 1.7 Once A Week 4568 2.5 Once A Fortnight 3800 2.1 Once A Month 10046 5.5 Once In 2-3 Months 9858 5.4 Less Often/Only At Festivals 14599 8 Rarely/Never/Cant Remember 127822 69.6 Source:Readership Survey Restaurant Industry in India - Trends and Opportunities
  • 16. Analysis of Questionnaire Responses 3. Analysis of Questionnaire Responses 3.1 GENERAL independent restaurants operating a single unit and 19% were multi-unit restaurants operatingThis study of Restaurant Industry in India- two or more units. Moreover, 40% of theTrends & Opportunities is based on data and restaurants that participated in the survey werecomments provided by members of the owned by sole proprietorships, 15% wereFederation of Hotel and Restaurants Association through partnerships and 40% were privateof India. In order to reflect a comprehensive limited companies. Large hotel and restaurantview of the restaurant industry, we have companies were conspicuous by their absenceincluded comments and data from both chain and contributed only 1% of the total responses.affiliated and independent restaurants. This can also be explained by the fact that largeAbout 1,100 questionnaires were sent out hotels do not maintain detailed/accuratenationwide to independent restaurants and financial break-up of costs by restaurant, as theyhotels. A total of 165 restaurants responded, of use a number of central services like a commonwhich 90 responses were from the metro cities laundry, housekeeping and security and, in mostof New Delhi (18), Mumbai (43), Kolkata (2), cases, a central kitchen.Chennai (6) and Bangalore (10). The remaining75 responses reflected a homogenous mix from Highlights & Characteristics44 cities in India with the maximum responses Table 3.1-1 on page 18 summarizes thefrom Pune (11), followed by Agra (8) and Jaipur responses to Section I of the questionnaire and(5). However, it is important to note that provides a view to some importantresponses for the financial data were not as characteristics representative of restaurants incomplete when compared to the general India.questions. This factor combined with our The majority of respondents (53%) werestringent criteria to accept only validated restaurants that achieved an average checkfinancial data resulted in fewer responses, between Rs 200 and Rs 400. The second-providing us a total of 72 usable responses. As largest group, comprising 36% of thethe data in the following paragraphs shows, the respondents, had an average check ofrespondents belong to the upper end segment of between Rs 400 and Rs 650. A muchrestaurants in India. They are the ones who are smaller percentage of restaurants, 5% andmore organized to respond to questionnaires. 6%, had an average check of either over RsThis may not be a negative factor for this study, 650 or below Rs 200, they are usually trend setters which othersfollow. 60% of the respondents indicated full liquor service and 5% indicated a license for onlyComposition of Participating Restaurants wine and beer. 35% of the respondentsThe survey indicated that 40% of the served no alcoholic beverages.respondents were restaurants located within a Multicuisine restaurants, serving a varietyhotel. A slightly larger proportion (41%) were of cuisine including Indian, Continental 17
  • 17. Restaurant Industry in India - Trends and Opportunitiesand Chinese, constituted a fairly large restaurant on renovations was Rs 9 lakh.segment (17%) of the respondents to the A majority of restaurants (73%) respondedsurvey. that they did not have a loyalty program. InRecorded music (62%) is the most widely fact, we believe a much larger percentageused entertainment in the restaurants. A of restaurants do not have any loyaltynumber of respondents (17%) use live programs, but some hotel respondents maybands. have confused restaurant loyalty program with the hotel loyalty program.The response with regards to the site andbuilding on which restaurants are located Table 3.1-1 Composition of Participatingdrew an almost equal response between Restaurantsowned and leased. This is also indicative of Type of Ownershipthe fact that a majority of restaurants Sole Proprietorship 19 % Partnership 40responding to the survey (63%) have been Government Owned -in the business for over ten years and only Private Company 40 Public Limited Company. 16% of the respondents have been in Type of Organisationbusiness for under two years. As leasing Independent (operates one unit) 41 %restaurant buildings is a fairly recent trend, Multi-Unit (operates two or more units) 19 Hotel restaurants 39we assume that, had the respondents been Others 1skewed towards more recent entrants, the Primary Type of Businesspercentage of sites leased as opposed to Fine dining (average check over Rs. 650) 5 %owned would have been higher. Fine dining (average check over Rs. 400) 36 Fine dining (average check over Rs. 200) 53 Any Other (Average check below Rs. 200) 6Almost all respondents are open for lunch Limited service (only quick service / fast food) 0and dinner. 44% of the respondents are Liquor Serviceopen for breakfast and 13% responded as Full liqour Service 60 %being open for nearly 24 hours. Most of the Only Wine and Beer 5 No alcholic beverages 35last two categories must be hotelrestaurant. Primary Menu Theme Indian Mughlai 22 % Indian Fast Food 10The survey indicated that the majority of French / Continental 9restaurants (38%) are between 50 and 100 Western Fast Food 4 Regional (eg. South Indian etc) 12seats. Coffee Bar 4 Asian (chinese, Indonesian, Japanese, Korean) 15The total number of employees employed Mexican 2 Italian 4by 66% of the restaurants is under 40 with Multicuisine 17only 3% respondents responsible for Any otheremploying more than 100 employees. Entertainment in Restaurant Live band / Show 17 %Over one-third of the restaurants Television Monitor 18 Recorded Music 62responded to having renovated their All the above mentioned entertainment 2restaurant in the last one year but an equal Any other 1number also had not renovated for over Site on which restaurant is locatedthree years. The average amount spent per Land owned 30 % land leased 11 18
  • 18. Analysis of Questionnaire ResponsesBuilding ownedBuilding leased 31 27 3.2 TRENDSNumber of Years in Business Section II of the questionnaire was designed tounder 2 years 6 % highlight emerging trends within the restaurant2 to 5 years 145 to 10 years 17 industry in India. The questions covered a wideover 10 years 63 area ranging from employee hiring andRestaurants best estimate of sales if offered in % motivation to locations and menu themes forTake out 5 %Outside Catering new restaurants.Banquet ServicesRestaurant Opened for Highlights & CharacteristicsBreakfast 44 % Below, we highlight some of the importantLunch 96Dinner 100 trends that emerged from the analysis of the24 hours (nearly) 13 responses received.Number of SeatsUnder 50 4 % Referrals were ranked as the first choice as5o to 100 38 an avenue to recruit staff, followed by100 to 150 31150 to 200 14 advertising, placement agencies and200 to 250 7 internet sites. Some respondents indicated250 to 300 3Above 300 3 campus recruitments, walk ins and directTotal Square Footage applications as other avenues used by themUnder 1,000 6 % in this regard.1,000 to 2,000 212,000 to 3,000 14 Higher Salary, followed closely by Growth3,000 to 4,000 184,000 to 5,000 17 Prospects, were the leading motivationAbove 5,000 24 factors indicated by respondents.Total no of employeesUnder 20 25 % Respondents chose business people as their20 to 40 41 most important customer group. This is40 to 60 1360 to 80 12 perhaps in line with the characteristics of80 to 100 6Above 100 3 the majority of restaurants participating in the surveyLast renovation carried outUnder 1years 34 % More than 80% of the respondents felt that1 to 3 years 30Over 3 years 36 the culture of eating out has increased overTotal cost of renovating (Lakhs) 9 the last three years.What services do you outsource/contract ?Cleaning 20 % With regards to what would be theirPayroll and Accounting 9 success formula for a new restaurant inLaundry 52Marketing 9 terms of menu theme, 28% of theRepair and Maintenance 38Food production 7 respondents chose Multicuisine, 17% choseAny other 7 Indian Mughlai, 16% chose Asian and 10%Do you have Loyalty program ? pointed to regional Indian.Yes 27 %No 73 Almost half the respondents preferred their restaurants to be located in a commercial 19
  • 19. Restaurant Industry in India - Trends and Opportunities market, while 26% preferred to be located Table 3.2-1 Trends as indicated by in a hotel. respondents The survey indicated that the majority of What avenues do you use to recruit staff Rank * Advertisements 2 restaurants (38%) would price a new Internet Sites 4 restaurant they opened between an average Placement Agencies 3 Refferals 1 per cover of Rs 200 and Rs 400. Any Other 5 Over one-third of the restaurants use What do you consider the most important ways to motivate staff Rank imported raw food materials and 44% stock Higher salary 1 imported alcoholic beverages. Flexible working hours 4 Increased training 3 Modern restaurant/ kitchen equipment 5 A majority of restaurants (59%) responded Growth prospects 2 that they did not import or use imported Any other kitchen or restaurant equipment. However Who is your most important customer group? Rank a significant 41% did. Business People 1 Tourists (out of town) 3 Families/housewives 2 With regards to questions on tip and Parties for children 4 sharing of tips, 83% of the respondents do Young people (15 to 30 age group) 5 Any other not levy any service charge on the restaurant bill. Among the 17% who do levy Which success factors are most important to you? Rank a service charge, the median with regards Quality of food 1 Entertainment 5 to the percentage charged is 8%. Quality of service 2 Promotion/ Marketing 4 In comparison, 77% of the respondents do Restaurant seting/décor 3 not levy a service charge in banquets. Do you feel in the last three years the Banquets is mostly a hotel activity and it is culture of eating out has Increased a lot 58 % possible that those who said yes, were hotel Remained the same 6 restaurants. However, the 23% that do, Increased marginally 29 Decreased 6 have a median charge of 10%. A majority of the respondents (60%) have tip pools. If you were to build another restaurant today(what in your view will be a success formula) ? Interestingly, where restaurants levy What would be your Menu theme service charge as part of the bill, the Indian Mughlai 17.4 % Indian fast food 15 median percentage retained by French/ Continental 1 management is 25% as compared to 10% in Western Fast Food 5 Regional (eg. South Indian etc) 10 case of tip pools. Also, the median Coffee Bar 5.16 percentage retained by service staff is much Asian (Chinese/Indonesian/Japanese/Korean) 16.1 Mexican 0 higher in the case of tip pools (97%), as Italian 1 compared to a situation where service is Multi Cuisine 28 charged and the money distributed more Would you prefer to be located in/attached to A hotel 26 % equitably among all staff with the service In a commercial Market 48 staff retaining a lower figure (53%). Residential Area 14 A transportation center(airport, railway station) 13Table 3.2-1, summarizes the responses to What kind of Restaurant would it be?Section II of the questionnaire on the trends. Fine dining (average check over Rs. 650) 11 % 20
  • 20. Analysis of Questionnaire ResponsesFine dining(average check over Rs. 400)Fine dining(average check over Rs. 200) 33 38 3.3 FINANCIALSLimited Service (all quick service/ fast food) 19 Section III of the questionnaire was designed toDo you use imported materials? capture the financial structure of theFood and non alcoholic beveragesYes 37 % restaurants in India. The questions covered theNo 63 profit and loss account. The section belowAlcoholic spirits highlights some of the important trends thatYes 44 %No 56 emerged from the analysis of the responses.Kitchen or restaurant equipmentYes 41 % Understanding Medians & MeansNo 59 This section utilizes medians for reportingWhat is your policy on tips? results. A median is defined as the middle valueDo you levy service charge in Rest. Bills of all amounts reported for a specific line item.Yes 17 %No 83 For example if we received nine responses for% of bill amount 8 number of employees-8,4,2,6,9,7,5,1,3- theseDo you levy service charge on banquets? numbers would be arranged sequentially (inYes 23 %No 77 order of size) -1,2,3,4,5,6,7,8,9- and the middle% of bill amount 10 value, 5, would be the median. 50% of theDo you have a tip pool? 60 % responses received are below the value and 50%Yes 40 are above.NoHow do you dispose off the service charge? Median ** In conjunction with medians, lower quartilesRetained by Management 25 % and upper quartiles are used to give a furtherManagers 15Service Staff 53 description of the sample results. Medians areKitchen Staff 25 used most often as we believe that the medianOthers (e.g. office cashier, security, etc) 10 gives less biased results compared to averagesHow do you dispose off tips pools? Median which are sum of all figures divided by theRetained by Management 10 %Managers 10 number of figures. Medians keep the resultsService staff 97Kitchen staff 29 from being skewed by a few abnormalOthers (e.g. office, cashier, security) 10 respondents with higher or lower figures. For example if a few responding restaurants* 1 is the hightest and 5 lowest incurred very large operating losses, those** Please see definition of median on page losses would be divided equally among all restaurants (when using mean calculations) and would reduce the average net profit of the entire group which, for the most part, may have reported respectable profits. Quartiles divide the responses into four equal parts, with medians still being the middle value. The "lower quartile" is the value that separates the lowest 25% of the respondents from the sample when arranged sequentially, while the 21
  • 21. Restaurant Industry in India - Trends and Opportunitiesupper quartile defines the boundary of the important findings. A total of 69 respondentsupper 25% from the lower 75%. Stated another completed the financial section of theway, 50% of all responses fall between the lower questionnaire.quartile and the upper quartile. For example ifwe receive 99 responses for a specific items and Table 3.3-1 Trends as indicating bythe responses were numbered 1 through 99, the respondents In Rs.median (or middle value) would be 50. The Median Average Check 241lower quartile would be 25 (25% of the Median Total Sales per full time equivalent employee 311,974responses would be below 25) and upper Median Total Sales per Square foot 3,494quartile would be 75 (25% of the responses Median Income before income taxes as % of total Sales 4.51%would be above 75). Fifty percent of the Median Total Cost of Sales 40%responses would fall between the lower andupper quartiles. The median average check for the respondents is Rs 241.It will become evident in reading this report thatcolumns do not always total when medians are The respondents reported income beforeinvolved. The reason behind this is that each taxes of approximately 5% of sales.line item is analysed separately. In Table 3.3-1, Median total sales per full time equivalentwhen all amounts are arranged sequentially, the employee is Rs 311.974.median total sale per seat is Rs 81,638. Thisfigure is based on the 69 restaurants that gave The survey indicated that the median forus information for this specific line item. The the percentage of food sale to total sale wasmedian per seat for total food and beverage 76%. Beverage sale accounted for thesales are Rs57,659 and Rs 18,564, respectively. remainder 24%.These two amounts were analysed on a sample The median cost of sales as percentage ofof 61 and 40 restaurants respectively, which total sale was 40%.gave us separate food and beverage sales.Different sample sizes are one reason why Table 3.3-2 presents the income and expensefigures do not add up to the total shown. statement of the 69 respondents who provided financial data. The data is presented both as aThere is another reason that columns in the percentage of total sales and as amount per seat.table do not total. When using medians, it isimportant to remember that the median food The survey indicated that the median forsales, the median beverage sales and the median the percentage of food sale to total sale istotal sales figures reported probably represent 76%. Beverage sale accounts for thethe results of three different restaurants, even remainder 24%.thought the sample size of each may be equal. The median cost of sales as percentage ofThis also holds true for lower and upper total sale is 40%quartiles. The upper quartile of income beforeHighlights & Characteristics income taxes is 11% and the median is 5%.Table 3.3-1 summarizes the responses to SectionIII of the questionnaire and highlights some 22
  • 22. Analysis of Questionnaire Responses Table 3.3-2 Percentage of Total Sale and Amount per Seat Percentage of Total Sales Amount Per Seat (Rs) Lower Median Upper Lower Median Upper Quartile Quartile Quartile QuartileWhere it Came FromSales Food Sales 78% 76% 75% 42,988 57,659 61,225 Beverage Sales 22% 24% 25% 12,476 18,564 20,268 Total Sales 100% 100% 100% 55,294 81,638 78,040Cost of Sales Food1 44% 43% 40% 18,824 24,646 24,322 Beverage2 37% 32% 38% 4,667 5,903 7,624 Total Cost of Sales 3 47% 40% 40% 25,882 32,515 30,917Operating Expenses Salaries & Wages 12% 12% 15% 6,739 9,619 11,606 Employee Benefits 2% 2% 3% 925 1,354 1,958 Direct operating expense 4% 7% 9% 2,392 5,434 7,099 Music and Entertainment 0% 1% 1% 129 467 1,042 Marketing 1% 1% 1% 425 640 970 Utility Services 2% 2% 3% 1,257 1,607 2,168 Restaurant Occupancy Costs 2% 2% 4% 865 1,731 2,964 Repair and Maintenance 1% 2% 3% 582 1,359 2,217 Depreciation 3% 4% 5% 1,912 3,284 3,625 Other Operating Expenses/ (Income) 1% 2% 4% 291 1,869 3,028Total Restaurant Operating Expenses 37% 30% 35% 20,415 24,506 27,570 General and Administrative Expenses 3% 4% 8% 1,809 3,599 6,408 Corporate overheads 1% 3% 8% 706 2,116 6,235Total Operating expenses 45% 49% 48% 24,994 39,824 37,775Interest Expenses 1% 2% 3% 709 1,453 2,101Other Miscellaneous Expenses 1% 1% 2% 481 780 1,527Income before income tax 2% 5% 11% 1,172 3,679 8,6671 Food Cost as percentage of Food Sale2 Beverage Cost as percentage of Beverage Sale3 Total F&B Cost as Percentage of Total SaleNote: While reviewing Table 3.3-2, it should be borne in mind that for each line item the number ofresponses received varied thereby making it necessary to view data in terms of medians and not asaverages. Also Income before income tax as a percentage can not be derived from simply subtractingtotal expenses from the revenues shown above for exactly the same reason. Each revenue or expenseline item must be viewed in isolation, however the total expenses and income before income tax linesindicate the macro picture as indicated by respondents in the survey. 23
  • 23. Restaurant Industry in India - Trends and Opportunities 24
  • 24. Food Trends-At home & abroad 4. Food Trends-At home & abroadIntroduction Indian, Southwest and Asian. Here are someWhen restaurateurs want to spot emerging trends:culinary trends they go to what they consider CHINO - LATINOthe ultimate source - customers. Anecdotal "Cuisine du Soleil" with Chinese cooking stylesevidence from restaurant customers is only one and some exotic flavours.way to spot trends. The print media andtelevision play a big role in establishing culinary Example: Mezza 9 in Singaporeconcepts and preferences, with food columnists INDO-LATINOand TV chefs endorsing one trend over the other. "Cuisine du Soleil" with strong Indian TandoorHowever, the single-biggest factor influencing preparations and typical herbs and marination.culinary trends is population demographics.Some important demographic changes have Example: Frangipani at The Oberoi in Mumbaiemerged in recent times: increased number of NIPPON - SOUTH AMERICANworking women with little time to cook at home; Lukewarm Sushi, Sashimi with noodles anda population that travels more and is exposed to vegetables marinated in Wasabi-Soy cuisine; a population which is Japanese type salads and Ceviche.more concerned about its health; an increase inexpatriate population; and an increase in Example: à la Nobu in London or Felix in Hongdisposable incomes. And, beyond all these Kongfactors, is an indefinable spark that makes one PACIFIC RIMculinary item succeed and another fail. Chefs "From down under" Australian flavours and foodare always looking for the next big thing, product mixing; Hawaiian and Japanese food;something that will set them apart and put them cooking fusion with lots of seafood and aon the map. Sometimes it succeeds; sometimes Californian doesnt. FRENCH THAIThe following section presents an overview of European ingredients cooked in Thai stylewhat culinary professionals and industryanalysts say are some of todays exciting Example: à la Vong (Jean Georg Vongerichten)international culinary trends. also coming to India soon.East meets West Healthful and FlavorfulWhether it is called fusion or eclecticism, Obesity has become a "four-letter-word" for allblending cuisines is one of todays hottest aspects of the food industry, whether grocery orculinary concepts. Fusion is carefully selecting restaurant-related. Consumers are looking forfoods from parts of the world that are not healthier choices and flocking to flavourfulgeographically close and combining ones that ethnic cuisines such as Asian andgo well together. The combinations are Mediterranean foods. With an emphasis onnumerous-Thai and French, American and ingredients such as vegetables, grains and fish, 25
  • 25. Restaurant Industry in India - Trends and Opportunitiesthese cuisines appeal to the health- minded Back to Basicsconsumer. Accordingly, food businesses are Although fusion food remains hot in manyresponding and reacting in a variety of ways. kitchens, other chefs and industry expertsBelow are some of the current restaurant herald the resurgence of simple foods andconcepts in USA that are addressing health flavours. The trend in foods is going back toissues. basics. People are tired of fusion food because it became confusion food. It became anythingThe most promising concept, mostly because it goes with blending of everything. People arehas the muscle of Darden Restaurants (Red starting to say, "Weve had enough, just give meLobster, Olive Garden, Bahama Breeze, all in a good steak."the United States) behind it, is Seasons52( The test restaurant for An increase in dining out has also spawned thethis casual dining concept is in Orlando, need for restaurants with casual, simple fareFlorida. Its name refers to the fact that every such as brasseries, bistros and trattorias. That isweek of the year different foods reach their peak not to say fine dining is out.of freshness and taste and the restaurants menu "Comfort food" may have become a cliché - as inchanges and adapts accordingly. Calories "comfort food TV" - but the desire to simplifytypically range from 300 to 375 for entrees, and slow down is very real. In difficult times,entrée salads and sandwiches and from 100 to which were witnessed for restaurants in USA200 for appetizers, soups, and desserts. The post 9/11, we strive for something we can relytrick to a 200-calorie dessert? Each is referred on and hold on to, even if its just a really goodto as a "mini indulgence" and each of the eight sandwich from the local deli, a dish of fresh-small selections fits in a tall shot glass. from-the-oven roast chicken, or a wonderfulFounded by an executive from yogurt maker dark chocolate truffle. Food and dining areStonyfield Farms, ONaturals being called upon to be less and do more. The( is true to its name. The eating experience must still be fast, convenient,four Maine and New Hampshire units pride and if at all possible, healthy. Yet it is just asthemselves on offering all-natural and organic important for it to not only be good value butitems ranging from steak and chicken to vegan also provide us with relief and reassurance.options plus childrens choices. Fussy frou-frous and opulence for its own sake are unnecessary. Many of the old French classicsWith three units in the Chicago area, Wheaton, - like coq au vin - are really very simple food.Illinois-based The Fitness Café( positions itself as a Chefs go casual;healthy alternative to fast food. The owners Chains go chicbelieve in lifestyle change, not dieting. All menu Upscale chefs are opening more casualitems list grams of calories, protein, restaurants in New York, like Danny Meyerscarbohydrates, fats, and fiber and sport names Blue Smoke, Michael Lomaneco at Noche, Tomlike The Firm, The Flex, The Crunch, and The Colicchio with Craftbar and Wichcraft, BradleyIronman. In India too, we have a similar trend Ogdens Parcel 104 in California. "Roadsidewith the opening of the health juice café chain cooking being reworked for the Wine Countrymarketed under the brand Amorettos. crowd" is the way San Francisco Magazine (July 26
  • 26. Food Trends-At home & abroad2003) characterizes Market, a St. Helena, Larkspur, California it is the first raw restaurantCalifornia-based restaurant recently opened by to cast raw as haute cuisine dining. Anothera former chef from Jardinère and the ex-wine popular raw dining spot is Quintessence indirector from The French Laundry. They are Manhattan which has 3 up mac n cheese and pairing merlot Clearly, this is a style of eating that will notwith meatloaf and were recently named one of spread to the masses. It will have its day in thethe "Best New Restaurants in America" by press and create interest and conversation. WillEsquires (November 2003). it have a lasting impact on cooking and dining?More chains are bringing classically trained Perhaps. Yes it is extreme, but such movementschefs on board and are adding culinary- can have residual-to-lasting impact. Dontbuzzword ingredients to their menu items like dismiss it in total.sun-dried tomatoes, pesto sauce, bruschetta,focaccia, and baguette. McDonalds, the The Ubiquitous Sandwichgranddaddy of them all, has almost single- Sandwiches are CHIC! From simple tohandedly brought chipotle, barbacoa and decadent, hand-held to knife-and-fork, fromcarnitas into mainstream lingo with their calorie-laden to light and healthy, whether aChipotle Mexican Grill chain. Even in India, Mc snack or a full meal, as a comfort food or as anDonalds Wraps, which are Mexican in origin, adventurous new cuisine experience,are selling in huge numbers. sandwiches fit into every aspect of todays lifestyles and are constantly being reinvented.Even the quick takeout-lunch-at-your-desk has Upscale restaurants are adding lots of newbecome gourmet and somewhat highly-priced. twists to this classic sandwich.Takeout lunch five years ago was a Big Mac andfries; now its roast chicken with mozzarella and .. BLT, GOAT CHEESE, AVOCADO & BASIL,basil on warm focaccia, and the cost has risen TOASTED ONION ROLL - Gustavinos, Newaccordingly, with a price tag for sandwich, soup, Yorkand a soda between USD10 and USD15. .. LOBSTER BLT - SWEET PEA REMOULADE ON COUNTRY WHITE BREAD - ChadwickLiving Raw Restaurant, Beverly Hills, CATodays food news is filled with the new .. TEMPURA BATTERED FISH BLT WITHrestaurants and folks devoted to raw food. A BACON, LETTUCE, TOMATO & MAYO ON Agrowing number of people believe that eating SOFT BUN SERVED WITH JERK FRITIES &"living foods" extends youth and staves off BACON AVOCADO RANCH OR ADD BACONdisease. Heat, they maintain, depletes foods OR AVOCADO - Cuba Libre, Philadelphiaprotein and vitamin content and concentratesany pesticides. More important, it destroys …RAWAS WITH RICADO ROJO, A YUCATANfoods natural enzymes which, enthusiasts RED SPICE MIX WITH TOMATO, BELLclaim, facilitate digestion. The premise is that PEPPER, CUMIN AND GARLIC IN PITA-only humans cook their foods and only humans Basilico, Mumbaisuffer widespread sicknesses and ailments. One …GRILLED ZUCHINI, AUBERGINE, BELLof the restaurants getting the most press PEPPERS AND SMOKED SCAMORZA -Olive,coverage over "raw" is Roxannes. Located in New Delhi 27
  • 27. Restaurant Industry in India - Trends and OpportunitiesIndia is also seeing the spread of sandwiches Fast food is finally here to stay. There havewith the opening of Subway and the Irish chain been some failures but the success of McOBrien. Donalds, Pizza Hut and Dominos Pizza have caused some people to eat theirChef-driven Cuisine words. It is, however, important to noteWith such diversity in culinary trends, there is that the Indian consumer wantssomething for every chef to add to his or her "international desi" and that the Indianmenu. But the real trend may be for chefs to palate is indeed addicted to a certain levelexpand beyond what analysts have defined as of spice. Any new international entrants"whats hot and whats not" and to explore their would ignore this fact at their peril.own culinary creativity. A few who have become There is a tremendous future for regionalinternational legends are Daniel Boulud, Alan Indian cuisine restaurants. There are veryDucasse, Jean Georges Vongerichten, Rick few authentic restaurants offering regionalBayless, Thomas Keller, Nobu Matsuhisa, Indian cuisine and that is an area thatCharlie Trotter, Alan Wong, Douglas Rodriguez, could witness significant growth over theJerry Traunfeld, Floyd Cardoz and Arun next few years.Sampanthavivat. An increasing trend of freestandingBetter Ingredients international cuisine restaurants servingSavvy chefs have come to the conclusion that Italian, Mediterranean, Thai, Spanish,theyre not going to come up with some brilliant Korean, and other exotic methods. Instead they are The spread of Indian fast food asconcentrating on using better ingredients. popularised by Haldirams, Nathu Sweets and others continues and remains a veryFood Trends specific to India large market.Although all the above trends being witnessed inUSA are applicable to India, some specifics Pizzas, Burgers, Indian Tandoori, Chinese,attributable to restaurants here are: South Indian & Thai continue to dominate the take away business and is growing at An increasing trend toward vegetarian food double digit annual rates. and an increasing trend of reduction in red meats 28
  • 28. International Chain Restaurants & Franchise Opportunities 5. International Chain Restaurants & Franchise OpportunitiesIntroduction Middle East in their first exploration outsideThe last few years have seen significant increase U.S. borders. Today, not counting Canada,in the number of new restaurants opening in Subway has close to 800 internationalmost major Indian cities. This has, in many franchises. If we were to include Canada, theways, coincided with the revolution that has number skyrockets to 2,000. The companys sizetaken place in the retail space, which has has helped them export their conceptspawned new locations for restaurants in the successfully.malls which have developed. KFC began venturing overseas in the 1960s, andTwo types of developments have clearly was the pioneer in doing business throughemerged: one, the growth of multinational international franchises. McDonalds thenrestaurant chains and two, the birth of home started developing aggressively, followed bygrown brands like Barista, Café Coffee Day, Subway. Now Subway uses a pioneer programMainland China and many others. where they encourage American franchisees toInternationally, large chains dominate the find a partner in another country and work torestaurant business and stand-alone outlets are take the Subway experience there.a small percentage. As the restaurant industry inIndia grows, more and more international Whether sandwiches in the Middle East orchains will attempt to establish franchise upscale dining uptown, the outlook for foodnetworks, while domestic entrepreneurs will try franchising in the next decade continues to lookand establish new restaurants under an strong for savvy restaurant chains, according toestablished brand name. This will not only be a The Entrepreneurs Source. We have, in thistrend prevalent in independent restaurants but section, listed some prominent trends andwill also apply to hotel restaurants. Many hotels popular brands within those trends. This sectionthat need a "prestige" label are turning to third is not an exhaustive list of franchiseparties with the right credentials and we will see opportunities but has been provided as a readyincreased activity in this area in India as well. reckoner for potential investors looking to invest in a restaurant franchise. The list also does notFranchising, which is very popular in the United include the more traditional franchiseStates, is spreading fast to developing nations. opportunities but is an attempt to highlight theThis is partly aided by the strategy that some latest emerging companies and trends.franchisors are adopting. While some Moreover, this is the list of franchising brandsfranchisors grow in their own country and working in the international market andregions, others take their concepts overseas in particularly the USA. Many of them may notsearch of new customers. Subway looked to have a presence in India as yet.Bahrain, a small, oil-producing country in the 29
  • 29. Restaurant Industry in India - Trends and Opportunities11 Trends & 101 brands… the new neighborhood coffee shops. They areIt is important to remember that almost all the place to meet after jogging, to get togetherchains started as stand alone outlets before while the kids are at pre-school, to relaxbecoming multi unit ventures. Below, we outline between sales calls, to treat an aunt or grandmasome of the significant international trends and to a meal out, or to bring a son or daughter forbrands. a special lunch. What sets these properties apart fromNoodles, wok, sushi & Co … competition is an eating area that is similar to aTasty and healthy, pan-Asian food has never "sit-down" restaurant combined with good-been more popular. Wok and noodle bars are value, high quality menu items. Freshness andpopping up all over the world be it, often, with a quality are the mantras of these menus. Boldvery modest roll-out strategy. Some of the Asian flavors are another distinguishingchains that have gained much popularity are: characteristic. Robust profiles continue to be aBig Bowl, Stir Crazy Café, Wok Wok, Wok Away, main feature in new menu offerings, taking cuesFlat Top Grill, Noodles & Co, Mark Pi, Sushi from ethnic pantries. Italian, Asian,Samba, Sushi Doraku, Haru Sushi, Chowking, Southwestern, Caribbean cuisine and heat fromCafé de Coral, Azie, Asia Noria, Wagamama, chilies and peppers dominate. Some of theNobu, Quiet Revolution, Yo Sushi, Lo Sushi, chains that have acquired prominence are:New Culture Revolution, Blue Elephant, Busaba Corner Bakery, La Madeleine, Panera Bread, AuEathaï, Roys, Itsu, Sushi Map, Matsuri, Sumo, Bon Pain,Cosi/Xando, La Ferme, Cojean, LeAmoÿ, Nudelland, Sushi & Soul, Thara Thaï, Pain Quotidien, Partie De Campagne, Gust,Zao Noodle Bar, Dragon Inn, Pei Wei Asian Berts, Atlanta Bread Company, Piadina, GreatDiner, Pick Up Stix, Mongolian Barbecue,Dim Harvest Bread, Bread Shop, Briazz, House ofSum Court, Cool Basil, Elephant Jump, Golden Bread, Noodles & Co., Garland, Rubios BajaLeaf, P Changs, Chilli Club, etc. … Our own .F. Grill, Baja Fresh Mexican Grill, Qdoba,China White, Mainland China, Oriental Bloom, Chipotle, New West Ranch House, Fazolis, ViaYo China, Stir fry, Noodle bar….. Gio,, Wingstop, Exki, Enorm, Itsu,La Table dOliviers & Co, Oh !… Poivrier !, etc. …Quick / Fast CasualThe fastest growing segment of the restaurant Bio / Organic/Freshindustry is the fast casual dining concept. A growing number of consumers want foodsRestaurants in this segment borrow some of that are good for them - high in nutrition, yettheir concepts from counter service fast food low in fat and cholesterol. Many are shopping atrestaurants like Burger King and Taco Bell and stores that stock organic and natural foods.still provide an atmosphere and menu more the There are therefore a number of restaurants thatlikes of casual dining at Chilis or Bahama serve healthy, nutritious meals in a fast-casualBreeze. format. Some of the chains that have made theirAmong the fastest growing chains in this mark in this segment are:category are Panera Bread, Corner Bakery, Healthy Bites, Heartwise Express, Evos, Topz,Chipotle, Culvers, Cosi, and Potbelly Sandwich,La Ferme, Cojean, Berts, Heartbeat, Oh!Works. These restaurants are quickly becoming Bio Mio, Cranks, Fresh & Wild, Jamba Juice, 30
  • 30. International Chain Restaurants & Franchise OpportunitiesFresh Choice Express, Sweet Tomato, Barista pioneered the café culture in India andSouplantation, Soup C°, Soup Opera, rapidly spread nationwide with its EspressoSoupworks, Soup + Salad, The Quiet Bars, with 65 outlets already in operation. CaféRevolution, Itsu, Pixx, Cocos (Italie), Exki, Coffee Day is another name that has made itsetc.… presence felt, with existing 30 outlets in 6 cities. It plans for 200 cafés, 400 coffee stores andBlack Gold 3,000 coffee vending machines to post aThe Starbucks story epitomizes "imagine that" in turnover of Rs. 6.5 billion by 2004. Craze, thatevery sense. When the company went public 11 just opened its first outlet in Delhi, plans 5 moreyears ago, it had just 165 stores clustered soon, carrying a by-line not just coffee. Qwikys,around Seattle and in neighboring states. At the a concept originally conceptualised for the UStime coffee was a 50-cent morning habit, and urban locations by two young Indianyour local diner was the pusher of choice. entrepreneurs, Sashi and Syam of SiliconSkeptics ridiculed the idea of $3 coffee as a West Valley, is yet another name that tasted instantCoast yuppie fad. success when its cafes opened in India. With an investment of Rs 70 million, the chain hasToday the company, which does not franchise, already made its presence in 6 cities with 20has over 6,000 stores in more than 30 countries, self-owned outlets. Its product/service basketwith three new stores opening every day. The not only offers coffee and light snacks but alsostrategy is simple: Blanket an area completely, includes lifestyle merchandise like T-shirts,even if the stores cannibalize one anothers books, magazines, greeting cards, coffee mugsbusiness. A new store will often capture about and home espresso machines. Some of the30% of the sales of a nearby Starbucks, but the chains that have established themselvescompany considers that a good thing: the internationally as well are:Starbucks-everywhere approach cuts down ondelivery and management costs, shortens Starbucks, Caribou Coffee, Diedrich Coffee,customer lines at individual stores, and Seattle Best Coffee, Mc Café, Columbus Café,increases foot traffic for all the stores in an area. Scapucci, Café Nescafé, Malongo, Costa Coffee,Every week 20 million people buy a cup of Coffee Republic, Caffe Nero, Puccinos, BBscoffee at a Starbucks. A typical customer stops Coffee & Muffins, Madisons, Caffe Ritazza, Viva,by 18 times a month; no American retailer has a Aroma,Jamaica, Il Caffe Di Roma, Cafe & Te,higher frequency of customer visits. Sales have Expresso Illycafe, Plantaciones de Origen,climbed an average of 20% a year since the Segafredo Boutique, Il Caffe Di Fiori, Lavazza,company went public. Even in a down economy, World Coffee, Café Einstein, Wieners Kaffeebar,when other retailers have taken a beating, Cafeterio, Balzac Coffee, San Francisco CoffeeStarbucks store traffic has risen between 6% Company,Testa Rossa Caffébar, Woyton Coffee,and 8% a year. Perhaps even more notable is the Java Java, etc. …fact that Starbucks has managed to generatethose kinds of numbers with virtually no Italian …marketing, spending just 1% of its annual Italian food has been the flavor of the momentrevenues on advertising. (Retailers usually for a good few years now, but it wasnt so longspend 10% or so of revenues on ads.) ago that the only types of pasta available in 31
  • 31. Restaurant Industry in India - Trends and Opportunitiessupermarkets were spaghetti and macaroni. and the United States. Some of the chains thatPasta consumption has doubled since the 1980s, have acquired prominence are:and it is now considered to be American food, Bahama Breeze, Sushi Samba, Samba Room,eaten 1 to 3 times per week. Indian Pipa Tapas y Mas, Suva, Bongos Cuban Café,supermarkets like Crossroads, Food World, Kuhunaville, Fogo De Chao, Zozas, BlueNilgiri and all major neighborhood grocers now Elephant, Little Buddha Café, Bodegonstock Italian pasta brands. At least three new Colonial, Planet Thaï, Compagnie DesItalian restaurants have opened in the capital in Comptoirs, Ô Québec, Mundaka, etc. …the last one year and we are aware of at leasttwo new freestanding restaurants which are Eat-tertainment…planned for opening by early next year. Some of Customers have more choices than ever, higherthe international chains that have gained much expectations than ever, and more marketerspopularity are: competing for their attention than ever. So howMaggianos, Buca Di Beppo, Vinny Testas, do you break through all of the clutter andRomanos Macaroni Grill, Cosi, Carluccios, capture the attention of customers sufferingFuzio Universal Pasta, Johnny Carinos, from sensory overload? By creating experincesItalianis, Timpano Italian Chophouse, that are so distinctive, so compelling, that theyPepperoni Grill, Pasta Pomodoro, Pasta Basta, stand out in a crowded landscape. Some of theCafé Di Fiore, Il Fornaio, Bice Ristorante, Zios chains that one should watch out for are:Italian Kitchen, Bravo ! Cucina Italiano, Piatti, Hooters, Bubba Gump, Mars 2112, MargaritaCucina ! Cucina ! Italian Café, Pizza Magia, Ville,Dave & Busters, House Of Blues, ESPNPalomino Euro Bistro, Strada, Est Est Est, Del Zone, Gameworks,Buddha Bar, Barrio Latino,Arte, BistroRomain, etc. … Club Med World, Nirvana Lounge, La Bodéga Fait Son Cirque, etc...French....Brasseries and bistros offering traditional, Take Awaysimple, French food are in vogue. This is a trend The term Home Meal Replacement may notthat has not caught on in India so far, but we always accurately describe todays takeoutbelieve that in the next few years there will be at scenario. Although its true that manyleast half a dozen restaurants serving bistro food consumers want home cooked food, there arein the country. Some of the chains that one many, especially the high-spending customersshould watch out for are: who are looking for restaurant food. They justMon Ami Gaby, Balthazar, LAdresse, Café want it at home. People dont want, and cannotRouge, Au Pied De Cochon, Fouquets, Mimis afford, to eat out on every dining occasion, butCafé, La Madeleine, Mignon, Chez Gérard, Le they want--and have become accustomed to--Colonial, Oh!..Poivrier !, Spoon Food & Wine, restaurant-caliber meals. The real action inetc. … restaurant convenience meals may come from the specialty market arena. The Brennan familyFusion or Mix & Match … spent three years developing Foodies Kitchen,Restaurant concepts based on fusion of two which debuted in Metairie, Los Angeles in Julycultures or cuisines are very popular in Europe 2003. Customers can select some signature 32
  • 32. International Chain Restaurants & Franchise Opportunitiesdishes from Commanders Palace, like Turtle The Big brands are coming !Soup, as well as gourmet grocery items and Des Comptoirs,etc...wines. Some of the chains that are very active in The big brands like Haagen -Dazs, Ben & Jerrythe take out arena are: etc are all expanding both at home and inBennigans, Buca di Beppos, Chilis, Foodies international markets. Most large brands areMeal Market, Famous Daves, Mövenpick looking at India with keen interest and it is onlyMarché, Mon Ami Gabi,Outback a matter of time before some more big brands enter the domestic market. Some of the chainsMediterranean to watch out for are:Resturants focusing on Mediterranean cuisineare in fashion for their flavorful and healthy Häagen-Dazs Café, Ben & Jerry, Chesterfieldcooking. Chains that have established Café,MCM Café, Latina Café, Eurosport Café,themselves well are : Fosters Australian restaurant, Segafredo Boutique, Expresso Illycafé, Tchibo, Romboust,Medi (NY : Vergé), Olives, Le Sud,La Maison de Malongo café, Café Nescafé etc…Charly, Casa Sud, Villazur, La Table dOliviers&Co, La Cigale Orientale, La Compagnie 33
  • 33. Restaurant Industry in India - Trends and Opportunities 34
  • 34. What is my Restaurant Worth? 6. What is my Restaurant Worth?This section examines how to value a restaurant Restaurant value can be separated into at leastbusiness including its real estate and personal three components, which include the value ofproperty. It may be noted that few restaurant the business (business enterprise value), thetransactions have taken place in India till date, value of the personal property (furniture,largely because the restaurant business has not fixtures, and equipment), and the value of theyet evolved into a mature business. However, we real estate. Real estate value can be brokenforesee a fair bit of activity in this area in the down further to leased fee value (value to thefuture: changes in market trends and landlord of the lease encumbering the property),competition, spurred by a huge expansion in the leasehold value (the value of the tenants interestfood service industry in all major metro cities, in the lease), and the value of the simplewould cause many restaurants to change hands ownership interest in the real estate. In thefrom one operator to the other. United States, approximately one-half of the restaurants occupy a leased building and land,Another important factor affecting real estate and slightly less than one-half own the buildingand restaurant valuation in most developed and land. In India, the historical trend was thatcountries is the presence of large, well- the majority of restaurants owned the buildingestablished chains whose financial statements and land, but with the advent of large number ofand restaurant sales are accessible and shopping malls in metro cities, this is fasttherefore aid the valuation process immensely. changing.We believe that the need for valuations will alsobe driven to a large extent by real estate Business Value of a Restaurantinvestment trusts as and when they begin The table below shows a statement of incomeoperating in the country, and a small percentage and expenses for a hypothetical restaurant. Inof their holding could be restaurant real estate. this example, the value of the leasehold interest in the real estate has been removed byRestaurant Valuation subtracting rent paid to the landlord fromRestaurant operators often need to know the income. The remaining earnings - beforeapproximate value of their restaurant business income taxes, depreciation and amortizationand/or real estate and personal property, even if (EBITDA) - equal Rs 1,930,000. This is the cashthey are not currently contemplating sale of the flow available to cover a return of and on thebusiness. Knowledge of value becomes investment in personal property, and a return toimportant for a variety of reasons. Some of the the business component of the going concernreasons include refinancing of the real estate; value of the restaurant. The return requirementsdissolution of a partnership or sale of stock for the non-real property components arerepresenting a majority or minority interest in typically significantly higher than the return tothe business; insurance settlement after a fire or the land and building. As the net incomenatural disaster; and settlement of an estate allocated to the personal property and businessupon the death of an owner. is received by the business owner after all 35
  • 35. Restaurant Industry in India - Trends and Opportunitiesoccupancy costs have been paid, including rate is determined by evaluating the financialrental income attributable to the land and data of similar properties which have recentlyimprovements, the risk of the operator is sold in a specific market. Capitalization rates forsignificantly higher than that of the landlord. a restaurant operators invested capital typically fall into one of three ranges: for an efficient, Table 6-1 Statement of Income & profitable operation with new equipment, good Expense location, and expectations of strong annual My Restaurant growth in revenue, a capitalization rate of 13%SALES: Ammount % of Gross to 19% is appropriate. Stable, mature Food 10,000,000 74% restaurants with a track record of steady cash Beverage (alcoholic) 3,500,000 26% flows, but annual growth in sales attributable to Total Sales 13,500,000Sales per day 36,986 inflationary menu price increases, may use capCovers Per Day 125APC 296 rates ranging from 15% to 25%. Capitalization rates for restaurant businesses with decliningCOST OF SALES: Food 3,500,000 35% revenue may range from 20% to 30% in order to Beverage (alcoholic) 1,050,000 30% cover the increased risk. The following table Total Cost of Sales 4,550,000 34% indicates the value range for the hypotheticalGROSS PROFIT 8,950,000(Total Sale minus Cost of Sale) restaurant business based on the three scenarios listed above. The values shown include theOPERATING EXPENSES:Salaries and Wages 2,025,000 15% depreciated value of personal property, whichDirect Operating Expenses 1,080,000 8%Music and Entertainment must be subtracted from the total capitalizedAdvertising & Promotion 270,000 2% value to isolate the business value.Utility Services 540,000 4%Repairs and Maintenance 270,000 2%Administrative & General 540,000 4% Table 6-2 Statement of Income &Total Restaurant Operating ExpenseExpenses 4,725,000 35% EBIDTA = Value Capitalization RateFranchise/Management Fee 0 0%Licenses 270,000 2% Optimistic Scenario 1,930,000 = 12,062,500Insurance 0 0.0% (Growing) 16%Income before Occupancy Median Scenario 1,930,000 = 9,190,476Costs 3,955,000 29% (Stable) 21%Occupancy Costs 2,025,000 15% Pessimistic Scenario 1,930,000 = 7,148,148 (Declining) 27%Earnings before Taxes,Depreciation & Interest 1,930,000 14% The personal property within a restaurant consists of its furniture, fixtures, and equipmentThe Capitalization Rate or Cap Rate is a ratio (FF&E). On average, restaurant equipment hasused to estimate the value of income producing a useful life of ten years. In the example above,properties. Put simply, it is the net operating we will assume that the original value of theincome divided by the sales price or value of a furniture, fixtures, and equipment was Rsproperty expressed as a percentage. Investors, 20,00,000 and it is now seven years old, or 70%lenders and appraisers use capitalization rates depreciated. On a straight-line basis, the valueto estimate the purchase price for different type in use of this personal property would be:of income producing properties. A market cap 36
  • 36. What is my Restaurant Worth?Rs20,00,000 x 70% = Rs 14,00,000, the income approach. Each approach has itsRs12,062,500 - Rs14,00,000= Rs10,662,500 own strengths and weaknesses, depending ondepreciated value in use the age and condition of the improvements and whether the building is occupied by anSubtracting the depreciated value in use of the operating restaurant or is vacant. The costfurniture, fixtures, and equipment from the approach is used to estimate the cost ofthree values indicated in the table above, the purchasing a site suitable for restaurantvalue of the business ranges from Rs 5,748,148 development and building a restaurant on theto Rs 10,662,500. site, including the cost of landscaping the site.There are other variables to consider in the The sales comparison approach considersvaluation of the restaurant business, such as the recent sales of restaurant properties that areimmediate need for capital improvements, comparable to the subject restaurant property inwhich may also need to be deducted from the location, size, and brand affiliation (if thecapitalized value of the business and personal restaurant was in operation at the time of sale).property. This approach uses only one year of Adjustments are made to the sales prices of thecash flow, which does not account for future comparables to account for differences betweenvariation in cash flow. However, the above the comparables and the subject property. Themethod of valuing a restaurant business will income approach considers the actual orgive a "ball park" indication of value. projected rental income that could be generated by a restaurant business occupying the building.Estimating the Value Of Land AndImprovements Cost ApproachIt is also important to value a restaurants real The first method of valuing restaurant realestate and improvements, i.e., the building, estate presented is the cost approach. Newlandscaping, and parking lot. Restaurant restaurant buildings and the underlying land areimprovements are typically designed to often purchased by individual investors oraccommodate a specific concept or type of REITs (Real Estate Investment Trusts) at a pricerestaurant, and may require extensive that reflects the cost of purchasing a vacantremodeling to suit the needs of a different owner parcel of land and constructing, and equipping,or tenant if the original restaurant operator a chain-affiliated restaurant on the site.vacates the property, even if the improvements Investors often prefer chain-affiliatedcontinue to be used as a restaurant. The value of restaurants because chains have a track recordthe improved site and restaurant building of past success and ample financial data uponcomponents may be higher or lower than the which the investor can base the decision tooriginal cost to purchase and prepare the site purchase. Typically, investors purchaseand build a restaurant building, depending on restaurants in order to lease them to operators.the age of the improvements and whether the These sale/leaseback transactions arebuilding is occupied by an operating restaurant considered financing vehicles, as opposed tobusiness. "arms-length" real estate sales transactions. The purchase price is negotiated based on the rate ofAppraisers of restaurant real estate normally return required by the investor and the amountconsider three approaches to value: the cost of rent the operator of the restaurant businessapproach, the sales comparison approach, and 37
  • 37. Restaurant Industry in India - Trends and Opportunitiescan afford to pay, based on the sales expected to the selling prices of similar properties. Thisbe generated by the restaurant business approach is the least reliable of the threeoperation. The price paid is an "investment valuation approaches when applied tovalue" rather than a "market value" because the restaurant real estate, because it is almostterms of the purchase are tailored to meet the impossible to find a sale of a restaurant propertyrequirements of an individual investor, and are that is truly comparable to a subject property.not necessarily a reflection of what a "willing This is true even if the comparables concept andbuyer and willing seller" would agree to in an chain-affiliation are the same as the subjectopen market. property and the comparable is in the same geographical area as the subject property. ManyBecause a new restaurant building is usually subjective adjustments must be made to the saledesigned with a specific concept in mind, it is prices of the comparable restaurants to arrive atappraised as a "going concern." The appraiser of an indication of value for the subject real estate most often will provide the Typically, the appraiser makes adjustments toclient with an opinion of the "value in use" of the comparable sale prices for differences inproperty operating as a specific brand or conditions of sale, location, access, visibility,concept. "Value in use" for a restaurant is based and volume of business generated by theon the premise that the value of restaurant real restaurant compared to the subject is dependent on the restaurant business However, it is very difficult, if not impossible,producing a revenue stream great enough to for the appraiser to truly identify the reasons,cover the return on capital invested in the land concerns or attractions that motivated the buyerand improvements. Until such time that the and seller to make their purchase and salerestaurant operation reaches a stabilized level of decisions. This is the greatest weakness of therevenue, the highest value indication, when a sales comparison approach.building is new, is often derived using the costapproach, and is identified in the industry as the In addition, allocating the sale price between"full value" of the land and building. real estate, personal property, and business value is always problematic. Nevertheless, theAfter a restaurant property is four years old, the sales comparison approach is used bycost approach begins to lose its validity. appraisers to derive capitalization rates to beRestaurant properties are purchased in the re- applied in the income approach to value, and tosale market for two main reasons including provide a range of values for the subjectanticipation of rental income in the future to the property that can be used as a test ofowner of the property (rent to the landlord), and reasonableness for the values indicated in theoccupancy by an owner/operator of the cost approach and the income The income approach carries moreweight than the cost approach for these Allocations of sale prices are problematicproperties. because business value can make a significant difference in the sale price of an operatingSales Comparison Approach restaurant. For example, say that two identicalA second method, the sales comparison fast food restaurant buildings (same squareapproach, or market approach, attempts to footage and seating capacity) are situated onvalue the subject restaurant real estate based on plots of similar size in a city in USA in front of a 38
  • 38. What is my Restaurant Worth?neighborhood shopping center. One of the Typically, rent on the land and building rangesrestaurant buildings is occupied by a from 7% to 10% of the gross sales of theMcDonalds restaurant, and the other building is restaurant for fast food or quick serviceowned by an independent restaurant operator restaurants. It could be slightly higher at 10% toand is called "Smoking Pizza." The McDonalds 12% for more upmarket restaurants. There mayproperty sells for $1,800,000 and the other be different variations but overall rent should beproperty sells for $750,000. Assuming both in this range if the restaurant operation is to berestaurants are in operation at the time of sale, successful over the long term. There arethe sale price represents a "value in use," which exceptions to this range, as in the case of a foodmay be higher or lower than the "market value" court in a retail mall. Percentage rent in a foodof the real estate if it were to become vacant. court can be as high as 10%-15%, but this isThe difference in sale price may be attributed to mitigated by the large volume of customersbusiness value over and above the value of the generated by the mall retailers and the fact thatland, improvements, and FF&E (furniture, the restaurant operates in a small space andfixture and equipments). This is an important shares a large dining area with the otherconsideration in valuing restaurant property for operators in the food valorem property tax purposes. An assessor Valuing the land and building in use as ais typically instructed to exclude business value restaurant requires knowledge of market rentso that only the value of the real estate, and in for similar type properties in the restaurantssome states personal property, is taxed. neighbourhood. If there is no lease encumbering the property, the appraiserIncome Approach assumes that the restaurant is leased at a marketA third approach to valuing restaurant real rent. If the property is encumbered by a longestate is the income approach. In this approach, term lease at below market rent, with nothe appraiser assumes that the property is additional rent based on a percentage of therented to the restaurant operator at market rent, restaurants sales, the value of the land andeven if the property is owned by the operator building may be negatively impacted.and no rent is paid. This assumption is made inorder to isolate the income to the land and If the operating restaurant is paying rent basedbuilding from income attributable to the on a minimum rent plus a percentage of grossinvestment in furniture, fixtures and equipment sales, the income approach to value may(personal property), and the return to the indicate a value for the subject real estate,restaurant operator for taking the risk of which is higher than the cost to buy the land andrunning a business (business value). The build a restaurant on it. On the other hand, if theeconomics of the restaurant business dictate restaurant has ceased operation and is nothat an operator cannot pay more than 8% of longer a going concern, the "going dark" value ofgross revenue in occupancy costs and still have the vacant restaurant building may be far loweran adequate return of and on the investment in than the "value in use" when the restaurant wasFF&E, and an equitable return on the capital in operation.invested in the operation of a restaurant When the income approach is used to value thebusiness. land and improvements of a proposed 39
  • 39. Restaurant Industry in India - Trends and Opportunitiesrestaurant, the value derived depends heavily on Net Rental Income Rs 9,26,000the projection of the restaurants stabilized gross Net Rental Income ÷ Capitalization Rate =revenue estimated by the appraiser. Because the Value of the Land & Buildingreal estates "value in use" is directly related tothe potential revenue generated by the Rs9,26,000 ÷ 9.5% = Rs 9,747,368restaurant, the indication of value is only as Rs9,26,000 ÷ 10.0% = Rs 9,260,000reliable as the projected restaurants food andbeverage sales. The projection of stabilized Rs9,26,000 ÷ 10.5% = Rs 8,819,048gross sales can be estimated with relative As shown in this example, a one-percentageconfidence in the case of a chain-affiliated point difference in the capitalization rate resultsrestaurant with a past operating history in in a difference in value of approximately Rsmultiple locations. However, projecting revenue 9,28,321. This emphasizes the importance offor a new restaurant concept requires choosing a capitalization rate that is derivedexperience in the restaurant business supported from the market by analyzing comparable salesby market research in the area where the and interviewing buyers and sellers who arerestaurant is to be built. actively involved in the market for restaurantThe combined "value in use" of the land and real estate building can be approximated bycapitalizing the net income stream that would Complex Valuationflow to a hypothetical landlord, after the After each of the three approaches to value hasdeduction of vacancy and credit loss, and been considered, the appraiser reconciles themanagement expenses, assuming the building three indications of value, or range of values, toand land is leased to the restaurant operator at reach a conclusion of value for the subjectmarket rent. The key determinant in calculating property. The weight given to each approach tothe value of the subject property is the selection value may vary depending on many factorsof an appropriate capitalization rate. For including the age of the improvements, whetherexample: the property is vacant or occupied, the length of time the restaurant has been in operation, theAnnual food and beverage sales Rs 13,500,000 creditworthiness of the restaurant operator, andMultiplied by rent percentage 7.0% the availability of comparable sales of similar restaurant properties. In conclusion, theAnnual rent valuation of restaurant real estate and business(Potential Gross Income) Rs 9,45,000 value is complex and dependent on many variables.Less: Management Expense @ 2% Rs 18,900 Courtesy: Richard D. Williams, HVS International 40
  • 40. Conducting a Feasibility Study 7. Conducting a Feasibility StudyAs the costs of opening a restaurant and running I make a great profitably continue to climb, restaurateurs My parents always wanted me to be a greatneed to be as certain as possible that the kind of chef.operation they envision has a very good My spouse is a great cook and will be thepotential for success at a particular site. One chef.way to find out is to conduct a feasibility study. I know someone named Querishi who willA feasibility study is much more than a site- be my chef.location study - this approach involves I have this secret recipé I got from agathering and analysing a great deal of restaurant in Europe.information, from demographics to design, I know why other restaurants didnt makewhich helps the operator make a better it.informed decision about the potential success of Theres this restaurant down the street thata specific concept at a certain location. went broke and the rent is only…. Most restaurants dont open for breakfast.To guide operators through this analysis, we I will specialize in …. (fill in the emptyhave put together this section which offers a space).step-by-step process for market research Everybody likes Mughlai (or insert yourtechniques to determine whether a proposed own cuisine choice) is suitable for a restaurant and, if so, which I will beat the competition with lowercombination of restaurant characteristics offer prices.the best chance for success. Running a restaurant is no different fromObtaining the information is relatively easy, but any other business.turning it into conclusions about the site and I grow special herbs in my concept is a much more difficult task. I will not allow tipping.A restaurateurs judgement, personality and I was successful in an export business.standards of excellence can make an enormous I took a Cordon Bleu course bydifference in whether a restaurant sinks or correspondence.swims, and all of those qualities are difficult to If even a single one of the above reasons is yourmeasure. prime motivation for going into the restaurant business, you may be in trouble from the start.Reasons for going into the restaurantbusiness In a free enterprise society, it is anyones right toPlease tick off whichever of the following are the go into business just as it is often their privilegereasons you know will make you successful in to close up shop - sometimes in bankruptcy.the restaurant business. One business where going broke is easier than any other is the restaurant business. Walk down I like food. any block in any reasonably large town in the I often eat in restaurants and know good United States or in Europe where the restaurant food. 41
  • 41. Restaurant Industry in India - Trends and Opportunitiesmarket is mature and where restaurants are money in the bank. And money in the banklikely to be and you will probably see one or requires no hard work, long hours, or high risk.more buildings with signs in the windowproclaiming "Opening soon under new High riskmanagement" or "Closed for renovations". The The risk in the restaurant business is high. Inchances are that, before those signs appeared, a North America, about one-third of allrestaurant operated unsuccessfully, and another restaurants in business today will turn overone is going to open there soon. within a year. Within three years, 50% of them will be out of business. Only 20% will survive toThe restaurant business in most cities is spread their fifth thinly that for any new restaurant to open,another one must have gone broke. However, In India we are not so thinly spread at this pointthere always seems to be another entrepreneur in time and there are a lot of opportunities forto take over and risk life savings in the well-researched business. The independent restaurant operator has even more of a struggle than the operator who is partInvestment cost of a chain or franchise. Also if you have a dreamTo put up a restaurant building on owned land of owning your own restaurant and lettingcan cost anywhere from Rs 1,00,00,000 to Rs someone else run it for you, beware! More than5,00,00,000. Even taking over leased premises, one absentee owner has gone broke because hepurchasing necessary restaurant equipment and or she has allowed the manager to lose (FF&E), and making leaseholdimprovements can require as much as Rs Other absentee owners think that the restaurant10,00,000 to 10,000,000. In our survey, the makes money out of liquor so the food operationmedian amount spent of FF&E was Rs doesnt matter. A liquor license is not a right to20,00,000 with the median for total restaurant print money. For example, "salting the bar" is ainvestment being Rs 45,00,000. If you have to classic rip-off by bartenders who bring in theirfinance 70% to 75% of that, the debt service own bottles of liquor, sell the contents, make nocharges (interest and repayment of principal) record of the sales, and pocket the cash. Youmay put you in the poorhouse before you can will never know the difference if you are notstart making a reasonable return on your own around to see whats happening.investment. What kind of restaurant is for you?Return on investment One of the earliest decisions you are going toSuccessful restaurants, very successful ones, have to make is the type of restaurant you wishmight make as much as 20 paise profit on each to of one Rupee. A reasonably successful one 1. Family or Commercialmight make 10 paise. The average restaurant Family restaurants in India are generallythat manages to survive might make 3 to 5 multicuisine type with a medium price range. Ifpaise; but when that 3 to 5 paise is related to the they have a liquor license, it is usually restrictedamount of money the owner invested, it might to beer and wine. Décor is bright. Parking is aend up being less than the amount that could now a necessity since customers (the familyhave been earned in interest by leaving the 42
  • 42. Conducting a Feasibility Studyunit) generally arrive by car. Price range of the where the emphasis is placed, with leisurelymenu items has to appeal to the average family dining an advertising feature.income. Location is important as it should have 4. Ethnicproximity to a residential area or shopping Ethnic restaurants feature the foods of a specificcomplex. region or country. Ethnic restaurants can runOperating hours are generally from noon to the gamut from family restaurants (e.g.,midnight. Staff are generally friendly and Chinese) to gourmet (e.g., classical French)efficient, but not necessarily highly trained. cuisine. Décor fitting the ethnic motif isInvestment is medium to high. important, as is menu design, staff uniforms, and training.2. CafeteriaCafeterias require large traffic volumes. To be successful, ethnic restaurants must serveLocation is critical to encourage this volume. authentic food, which means food preparationShopping centers and office buildings are good staff must be well trained and knowledgeable.locations. Self-service is typical in cafeterias Price range can be from budget to elevated.with menus somewhat limited but covering Beer, wine, and liquor may or may not besoups, entrees, desserts, and beverages. served. Investment may be high because of décor and trained staff.Cafeterias often require large preparation areas.Staff are minimally trained. Beer and wine may Location can be variable, and the emphasis is onbe offered. Speed of service is essential to evening meals, although luncheon business withhandle the traffic volume. Hours will depend on lower prices is not precluded.the location (for example, school, office 5. Fast Foodbuilding). There are some examples of these in In India, fast food restaurants haveMumbai and Bangalore. mushroomed in the past 20 years, in keeping3. Gourmet with the greater mobility and changing lifestylesGourmet restaurants generally require a higher of the urban consumer. Franchising is prevalentinvestment than the others discussed so far. in this type of restaurant. These restaurants canThey require an ambience and décor that costs be eat-in or take-out, or a combination of This type of restaurant caters to those The menu is limited, and prices are relativelywho require a higher standard and are willing low. You can choose one particular kind of foodto pay for it. Success depends on establishing a to feature. For example, ethnic food of one typereputation that will attract repeat business. or another can be sold in a fast food format.Prices are higher because of the investment Because of low prices, a high traffic volumerequired and because of the reduced seat (pedestrian and / or automobile) is critical.turnover. Food and beverage offerings must be A fast food restaurant has to stay open longcarefully selected because of the clientele. A hours, and generally seven days a week.good variety of wines is essential. Staff must be Alcoholic beverages are not usually offered.highly trained. Staff training may not be highly critical unless itEven though the lunch trade is important to is a franchise operation where the franchisorsuch restaurants, the evening period is often generally sets standards of service and food 43
  • 43. Restaurant Industry in India - Trends and Opportunitiesquality that must be maintained at all times. design, printing type, size, and colours. You want a menu that reflects the style and theme ofYour menu your restaurant. For example, some smallerThe type of restaurant you plan to operate can restaurants with menu items limited by season,dictate in part the type of menu you must have. availability, etc., find it easier to write the dailyThis is particularly true of ethnic restaurants menu on a blackboard. This way, customers arewhere the people you serve expect to see certain not irritated by being told that an item they wantfamiliar items on the menu. is not available that day.Commercial and family restaurants also tend to 3. Effect of menu on pre-opening decisionsoffer common items that customers expect. Your menu will affect a number of your majorHowever, even in cases where your restaurant pre-opening decisions. Some of the moretype dictates certain menu items, you still have important ones are listed here.flexibility in other menu items. For example, 1. Locationeven a seafood restaurant has to offer Your menu can dictate your location, and vicealternatives such as chicken for those who are versa. For example, if you are going to open anot seafood eaters. Mediterranean restaurant, it might not work too1. General menu requirements well on a busy road. You might be wiser toIn general terms, your menu needs to be consider locating it in an area where there is abalanced, nutritious, and varied. This balance large upwardly mobile population to draw on.must also consider what your customers are 2. Buildinglikely to want, and not just what you think they Your menu can affect the size of building youshould have. require. A short-order take-out restaurant willImportant aspects of menu composition are the require considerably less space than a sit-downtexture, flavor, and color of food, restaurant. But even sit-down restaurantscomplementary food items (potatos, vegetables, require different amounts of space.salad), garnishes, aroma, taste, and appearance. A cafeteria that has a limited menu may requireThe way you put together all these tangible and less food preparation area than a gourmetintangible ingredients is going to decide, in restaurant with an extensive menu. This, inlarge part, whether or not you will have turn, affects seating area. A cafeteria may onlycustomers. require 10 to 12 square feet of seating area per2. Menu presentation customer, whereas a fancy dining room mayYour written or printed menu creates the first require 15 to 20 square feet.impression about what you offer, your range of 3. Equipmentofferings, and your selling prices. This may well Your menu directly affects your equipmentattract customers into your restaurant; but it is needs and thus the investment required.the sense of satisfaction, of having received Generally, the more extensive the menu, thevalue for money from your food offerings, as more varied your equipment will need to be. Ifwell as the service received, that is going to all you are selling is burgers, hot dogs, fries, andbring customers back. soft drinks, your equipment requirements areKeep this in mind when you choose your menu minimal compared to a restaurant with 20 or 30 44
  • 44. Conducting a Feasibility Studymenu items requiring a variety of different 7. Alcoholic beveragescooking methods and possibly even some Finally, depending on the laws in your area andspecialized equipment. for your type of restaurant, your menu is going to dictate the kind of alcoholic beverages youIf your investment budget is limited, you will serve. For some restaurants, this is not aprobably have to simplify your menu to fit what problem. People do not generally expect to buyyou can afford to invest in equipment, alcoholic beverages in a fast food, or deli, orfurnishings, décor, and table settings. limited menu restaurant. A fine dining4. Service restaurant on the other hand may require a fairYour menu, combined with the type of variety of you plan to run, usually dictates thelevel of service you will offer. In a cafeteria, or Finding a Sitefast food take-out restaurant, the customers Once you have settled on the type of restaurantexpect to provide their own pick-up service. you wish to have, the organizational form it will have, and the advisers you need, you need toThus, your menu has a direct impact on your seek out a suitable site. It is assumed that thelabor cost. For example, fast food restaurants general location of your restaurant has beenhave menus that allow them to employ lower- selected. In other words, you have made askilled employees who are often hired at decision about the general area in which youminimum wage, whereas a gourmet restaurants wish to do business, and you are now down tomenu will require employees who have more the choice of a specific site within that location.experience, knowledge, and skills in foodpreparation and table service and who expect to You have two choices. You can find a goodbe compensated with higher pay. existing site and plan your restaurants décor, menu, and prices to fit that site. The other5. Purchasing methods alternative is to know in advance exactly whatYour menu has a direct impact on your type of restaurant you want and find a site thatpurchasing requirements and practices. For fits.example, if you plan to serve seafood, you mustconsider how each type of seafood is to be a. Importance of siteordered. In other words what grade, size, and Site selection can be critical. The objective inspecific cut is needed? How will seafood be site selection is to find a spot that will bring inpurchased (fresh or frozen), and how will they the greatest number of customers at the lowestbe stored before using? cost to you. Sites are often selected because of their proximity to where the restaurant owner6. Food cost lives or because the premises happens to beThe largest single cost for a restaurant is the vacant or the price attractive. Do not fall intofood. Your menu reflects directly on this cost. this trap unless you have subjected the site toFood cost is the price you pay for food in some suitability tests.relation to the price you sell it for. The ratio offood cost to retail sales is expressed as a 1. General suitabilitypercentage. A practical general rule is to select a site that suits the needs of the customers who are the 45
  • 45. Restaurant Industry in India - Trends and Opportunitiesmarket for your restaurant. You need to be sure space for parking. The space required forof the specifics of the restaurant you are parking is usually greater than that required forinterested in to understand its particular site the building.and market requirements. c. Downtown and shopping centres2. Site specialists You might also want to compare the pros andIf you are unfamiliar with the market cons of a downtown location or a shoppingrequirements of your particular restaurant, you centre or mall in the suburbs.may want to use a site specialist. The services of 1. Central Business District (CBD)site selection companies include analysis of In a Central Business District there arepopulation density, customer profiles, access generally more potential customers than in aand traffic flows, the drawing power of other suburban area. However, what is critical isrestaurants in the area, visibility of restaurant whether or not these potential customers can beand signs, the average sale you should have per part of your market. If not, then your marketsquare foot or seat, and the effect of any nearby must be from people outside the area, in whichcompetitors or potential new competitors. case traffic and parking considerations areNote, though, that assessing a commercial site is critical. Also, in a downtown area you canboth complex and tricky. It is more art than expect higher rent and operating, and even the specialists can go wrong. 2. Major shopping mallsb. Visibility, Accessibility and Suitability Major shopping malls are distinguished fromThree extremely important aspects of a good site neighbourhood markets. Shopping malls serveare visibility, accessibility, and suitability. Each communities of 50,000 to 500,000 people, andof these will be briefly discussed. are generally between a 10-minute and 40-1. Visibility minute drive from residential areas.Visibility of the restaurant may be more 3. Neighbourhood Marketimportant to the customer who arrives at your Neighbourhood shopping centres serve localfront door by automobile than it is for the populations from 50,000 to 200,000 people andpedestrian, but even for the pedestrian it is are either within walking distance, or a fewimportant. minutes drive, from the majority of the2. Accessibility population. Your market is generally limited toA second factor in site location is accessibility, those living in the immediate area and becauseagain particularly for those arriving by parking is often a problem you may have to relyautomobile. An ideal situation is where flow in on the walk-in trade. Not all restaurants aretraffic and around the site reduces the effects of suited to that.such things as right turn restrictions thatprevent the motorist from easily approaching Renting premises and equipmentthe restaurant. As a restaurateur, chances are you will start your new business in leased or rented premises.3. Suitability The last thing you should consider doing whenEven with good visibility and easy access, the starting a new restaurant (unless you have a lotsuitability of the site is a critical factor. For of money to invest) is buying land and/or anmany restaurants, the greatest site limitation is 46
  • 46. Conducting a Feasibility Studyexisting building. In fact, some money lenders Disadvantages of leasingwill not lend to new restaurateurs for the Some disadvantages of leasing are:purchase of such assets. a. In a lease arrangement, any capital gain inGenerally, most first-time business owners the assets accrues to the landlord and not toinvest far too much money in bricks and mortar you. In a similar way, at the expiry of the(the building) when they should be leasing that lease, the value of the future profit of theasset, particularly in the early days. To a lesser business that you have worked hard todegree the same is true of equipment and build up does not benefit you unless thefixtures. lease is renewed.It is in these early years that the risk is often the b. The cost of a lease may be higher than somegreatest, and you may not be able to afford the other form of financing.heavy debt load that owning land and / or a c. It may also be more difficult for you tobuilding and expensive equipment obliges. borrow money with leased premises if thereEven if you are investing your own money, you are no assets (other than a lease agreement)may want to keep some of it in reserve for to pledge as collateral.meeting the losses in the first few months.Advantages of leasing Market analysisSome advantages of leasing are: Every restaurant must be concerned with its market. The word "market" is defined in termsa. Under a lease arrangement you have the of people, their money, and their desire to obvious advantage of not having to provide exchange it for your food and service. capital to buy the property. Any capital that you might have is then available for A restaurants market is generally limited to a investment elsewhere. particular area (e.g., an area or a city), and it may be further limited by such things asb. Your borrowing power is freed up to raise competition and customers preferences. money, if required, for more critical areas Market analysis is based on the assumption that of the business. your restaurant must be developed around thec. Lease payments on a building are generally customers wants and needs in order to satisfy fully tax deductible. those customers. Customers are, therefore, the reason for being in business.d. Owned land is not depreciable for tax purposes, but the cost of leasing land is tax a. Market Analysis deductible. Before you open a new restaurant, have a survey done. This survey will ultimately serve toe. Any leasehold improvements that you make determine if your sales goal can be met, and it to the building are generally amortized will aid in your financial planning. For a large over the life of the lease rather than over restaurant, you may need to use a specialist in the life of the building. The lease period is market research to provide you with pertinent normally less than the building life, thereby market information and to develop a specific providing a tax saving. 47
  • 47. Restaurant Industry in India - Trends and Opportunitiesmarket forecast and action plan to serve that annual spending on dining If your restaurant is going to cater to theb. Market Research business clientale, then your demographicIn other cases, in-depth market research may be research must investigate such things asnecessary to support your sales projections, to business hours, number of employees workingdemonstrate that there is a large enough market in the area, and the dining pattern of thoseto provide you with sufficient customers, and to employees. For example, do they bring theirshow potential lenders that your sales own meals with them, eat at companyprojections are realistic. cafeterias, or patronize local restaurants?1. Identify your trading area 4. Find a gapIn market research, you need to define your If you find that you are going to be competing inrestaurants trading area. The definition of your a market that is successfully filled by othertrading area will show you how many people restaurants, you may have a problem. It is bestlive and / or work within it. That does not mean if you can find a gap that is not being filled bythese people will all be customers of your others. Ask yourself what unique menu items orrestaurant. Only a certain proportion of them services you can offer that differ from whatare potential restaurant customers, and because others are offering.of competition from other restaurants in your c. Market Segmenttrading area you can only expect to obtain a These questions are very broad in nature andshare of that market. need to be refined to produce more specific2. Analyse the competition information that allows market segmentation.For example, if a trading area with a target In other words, it is unlikely an individualpopulation of 50,000 can only support two restaurant will sell to a broad range of possiblerestaurants of your kind, and there are already users or customers.two in the business, you would have to seriously The product that you sell has a major impact inconsider whether a third could survive. determining who your customers will be. ForAlternatively, if the two already there are example, a gourmet restaurant will besurviving only marginally because of poor patronized by a narrower segment of the marketmanagement or other reasons, you could than a fast food restaurant.possibly move in and take away sufficientbusiness to thrive. 1. Quality Quality of food plays an important role. A3. Research the demographics standard commercial or family restaurant willIn addition to knowing the boundaries of your cater to a different segment of the populationnormal trading area, you also need to know as than a restaurant appealing to a specific ethnicmuch as possible about the demographics of the group or a health-conscious clientele.people living and / or working there.Demographics are statistical information about 2. Pricepeople such as their age, sex, marital status, Price is also a factor in market segmentationaverage family size, average household income, and can, to a degree, dictate the market segmenteducation levels, ethnic origin, and average you are dealing with. But price alone may not 48
  • 48. Conducting a Feasibility Studybe the only significant factor. A special segment anticipated supply of competitive restaurantof the market will pay a higher price for similar facilities. To evaluate an areas competitivemenu items if the service in the restaurant is environment, the following steps should bebetter or if it comes with a reputed brand name. taken:Sometimes if a hype is created, the same results Identify the areas restaurant facilities andcan also be achieved. On the other hand, determine which are directly and indirectlyanother segment of the market looks first for competitive with your restaurant.low prices and is less concerned about quality. Determine whether additional restaurants3. Competition (net of attrition) will enter the market in theThe existing competition may also dictate the foreseeable segment that you must concentrate on.For example, if your choice of location for a Quantify the number of existing andMexican food restaurant is an area already well proposed restaurants available in theserved by firmly established Mexican food market.restaurants, you may have to change your Review the average per cover, number ofthinking. covers, market orientation, facilities andd. Potential sales volume amenities of each competitor.The main purpose of this market analysis is to This analysis will help calculate the total currentestablish your potential sales volume. This will market size in terms of number of people eatingbecome the forecast for your initial income out in the area at each price point. As yourstatements. restaurant is expected to compete with them forOne way to do this is to convert a percent of market share, based on your unique featuresyour traffic count or trading area population and competitive strength, you need to calculateinto potential sales. For example, if 2,600 your restaurants penetration over its fair marketshoppers visit your planned location in the mall share in order to arrive at the possible salesyou might estimate that 5% of them could be volume for the restaurant.customers for your restaurant and 5% x 2,600 =130. Financial plan Before you venture into the restaurant business,Your projected sale will have to be above your you need a financial plan. You use a financialprojected break-even sale point, which will be plan just like a map when travelling by car; itdependent on your investment and your helps you get where you want to go. A properlymonthly fixed and variable costs. If it is not, you prepared plan will guide you in operating yourmay have to do your sums all over again. Or in restaurant and help you allocate your resourcessome cases change your concept or drop the effectively and profitably; moreover it will allowproject altogeather. you to raise the necessary funds to operate your restaurant successfully.The Competitive MarketAn integral component of a market areas supply A combined market and financial plan (oftenand demand relationship that has a direct referred to as a feasibility study or a projectimpact on the performance is the current and report by professionals who prepare them) is an 49
  • 49. Restaurant Industry in India - Trends and Opportunitiesin-depth analysis of the operational and the first year and for as far ahead as fivefinancial feasibility of a new restaurant, rather yearsthan an entrepreneurs guess that a new d. An evaluation of the financial projectionsrestaurant will be economically viable. and the economic viability of the newA feasibility study, or plan, is not designed to restaurant.prove that a new venture will be profitable. An Since the preparation of the financial analysisindependent plan professionally prepared by an can be a fairly complex matter that requires theimpartial third party could result in either a expertise of someone with an accountingpositive or a negative recommendation. If you background, it is recommended that you use aprepare your own plan, you should take the professional consultant or accountant. Also,same hard approach. If the forecast results are lenders from whom you wish to borrow moneynegative, both you and any potential lenders of are more likely to be convinced to part with thatfunds for your new restaurant should be happy money if the feasibility study is professionallythe idea goes no further. prepared.However, even if the forecast is positive, it is not Finally, if the financial projections made by ana guarantee of success. A plan can only impartial third party appear to be negative, it isconsider what is known at present and what better that you know this now rather than twomay happen in the future. Since the future is or three years down the road after yourimpossible to forecast with absolute accuracy, restaurant is bankrupt.and since so many unforeseen factors can comeinto play, there can be no guarantees. Forecast of Income and ExpenseIn other words, a plan may reduce the risk of a In forecasting revenues and expenses for theparticular new venture, but it does not eliminate restaurant, you need to identify your fixed andthat risk. Your completed market research variable costs. The fixed component is adjustedresults will form the foundation for your only for inflation, while the variable componentfinancial plan. is also adjusted for the percentage change between the facility usage that produced theFinancial Analysis known level of revenue or expense.In a formal feasibility study for a majorrestaurant, you might need much more detail Food & Beverage Revenuethan has been suggested so far. In fact, the Food and beverage revenue is generated by thefinancial analysis section of a feasibility study is restaurant and bar. Food sales also include theusually broken down into the following sale of coffee, tea, milk and fruit juices, whichsubsections: usually are served as part of a meal. If there is no service of liquor, beer or wines, the soft drinka. Capital investment required and tentative sales also would be included in this category. A financing plan beverage sale includes revenue from the sale ofb. Projected income statements for at least the wine, spirits, liqueurs, and beer. These sales do first year and for as far ahead as five years not include coffee, tea, milk, or fruit juices, which normally are served with meals and,c. Projected cash flow statement for at least therefore, are considered food. 50
  • 50. Conducting a Feasibility StudyIn order to forecast the projected guest count the first few months may seldom work out as pervisiting the restaurant you need to divide the the plan.week into weekdays, which include Monday toThursday and weekend, which comprises of ExpensesFriday, Saturday and Sunday. Your interviews You will then need to estimate your operatingwith existing restaurant owners in the area will expenses. Table 7-1 outlines fixed and variableindicate the trends and the busiest days in the components along with industry benchmarks ofweek. The guest count in restaurant parlance is all expense items expressed as operating ratios.called covers and the average per cover (APC) is These figures represent typical ranges as asimply the total sales divided by the number of broad benchmark for operating ratios inguests. It is different from the number of seats freestanding restaurants in India. Please notein the restaurant. If the restaurant has 50 seats that wages and all the other staff related costsand serves 100 guests at lunch time because on as well as utilities are fixed costs. On the otherthe average every seat is used twice over, then it hand, food and beverage costs, which depend onwould have had 100 covers for lunch. daily turnover of guests are considered variable costs.The sales forecast for the first few months mayfluctuate either because it takes time for people Cost of Salesto realise that the restaurant is open or because Cost of sales is the total of cost of food anda large number of people are attracted to a new beverage sold. This is generally calculated in therestaurant. It can be low because a new facility following way:may take time to pick up or it may be high in thebeginning because of the novelty factor and the Opening inventory + Purchases - Closinginitial curiosity of customers. The forecasts for Inventory = Cost of Sales Table 7-1 Industry Benchmarks of Operating Ratios Percent Percent Index of Industry Category Fixed Variable Variability Benchmarks Sales 100% Cost of Sales 100 No of Covers 33%-43% Gross Profit 57%-67% Controllable Expenses Payroll 60 - 80 20 - 40 No of Covers 15%-20% Employee Benefits 100 No of Employees 3%-5% Direct Operating Expenses 100 No of Covers 3.5%-9.0% Music & Entertainment 60-80 20-40 Total Revenue 0.1%-1.3% Advertising and Promotion 60-80 20-40 Total Revenue 0.8%-3.0% Utilitities 80-100 0-20 No of Covers 3.0%-5.0% Administrative & General 100 Total Revenue 3.0%-6.0% Repairs & Maintaince 60-80 20-40 No of Covers 1.0%-2.0% Occupation Expenses Rent, Property tax, and insurance 100 Total Revenue 8.0%-13.0% Interest 100 Total Revenue 0.3%-1.0% Franchise Royalties 100 Total Revenue 3.0%-7.0% Income before Depreciation 12.0%-19.0% Depreciation 100 Total Revenue 0.7%-5.0% Net Profit before Income Tax 100 Total Revenue 5.0%-15.0% 51
  • 51. Restaurant Industry in India - Trends and OpportunitiesSalaries and wages commissions to advertising or promotionalThis category includes the regular salaries and agencies) and royalties are included in thiswages, extra wages, overtime, vacation pay and category.any commission or bonus payments made toemployees. The entire restaurant payroll Utility servicesgenerally is included under this category. This section is composed of the costs of all fuel except that charged to direct operating expensesEmployee benefits in the account "kitchen fuel." Water, ice andThis category includes retirement and health refrigeration supplies, and the removal of wasteinsurance. Other items considered to be are also included. The cost of oils, boilerbenefits are welfare plan payments, pension, compound, fuses, grease and other supplies,accident and health insurance premiums, plus any small tools used in the operation orhospitalisation and group insurance premiums. maintenance of the mechanical and electricalAlso listed under employee benefits are equipment, should also be charged to thiseducation expenses, employee parties, employee account.sports activities, awards and prizes, andtransportation and housing. We have assumed Repairs and maintenanceall employee benefits to be covered under The following items constitute repair andSalaries and Wages. The employee benefit costs maintenance expenses: painting and decorating;may also be greater for larger chain restaurants plastering; upholstering; m e n d i n gas they tend to have more rules abiding and curtains; and maintenance contracts ongenerous HR practices. elevators, signs and office machinery. Repairs to dining room furniture, refrigeration, airDirect operating expenses conditioning, building, floors, plumbing andExpenses directly involved in providing service heating are charged to this category as the customer, such as uniforms, laundry, Repairs to dishwashing and sanitationlinen, china, and cleaning and paper supplies, equipment, kitchen equipment and officeare considered operating expenses. Also equipment are also included here.included are utensils, kitchen fuel, menus anddrink lists, flowers and decorations, contract Administrative and General expensescleaning, auto or truck expense, parking, and This group of expenses is commonly consideredlicenses and permits. as overhead and includes items that are necessary to the operation of the business ratherAdvertising & Promotion than those connected directly with the serviceThis group of expenses includes selling and and comfort of the customer. This accountpromotion expenses, such as direct mail and should be charged with the cost of all printedentertainment costs in promotion of business matter not devoted to advertising and(including gratis meals to customers). Also, the promotion, such as accounting forms, accountcost of advertising through newspapers, books, restaurant checks, office supplies, cashmagazines or trade journals, outdoor signs, and register and other checking supplies,radio and television is included. Public letterheads, bills and envelopes. All postage,relations and publicity (including fees and except amounts applicable to advertising, 52
  • 52. Conducting a Feasibility Studyshould be charged here. The cost of telephone restaurant and usually not by the trend of itsequipment rental, local and long-distance calls business.should be charged to this account, with theexception of calls chargeable to marketing. Feasibility AnalysisOther items charged to this account are data In order to establish the feasibility of theprocessing costs, dues and subscriptions and proposed restaurant, you first must estimate theinsurance costs (other than those included as development costs of the project. By analysingemployee benefits or fire and extended coverage both development cost figures and currenton the premises and contents). Commissions on market conditions, and by making adjustmentscredit card charges collection fees, cash for the specific characteristics attributed to theshortages, professional dues and protective proposed restaurant (such as location, size,services are also considered general and facilities, and class and so forth), you will beadministrative expenses. able to derive an appropriate construction or setting up cost estimate for the restaurant. ThisRestaurant occupancy costs investment has to be compared with the returnsRent, taxes and property insurance are being indicated by the income and expenseoccupancy costs. These are sometimes called statement to evaluate whether or not the"fixed charges", since they usually are restaurant envisaged is financially feasible.determined by the financial set-up of the 53
  • 53. Restaurant Industry in India - Trends and Opportunities 54
  • 54. Restaurant Case Studies 8. Restaurant Case StudiesIntroduction area. The restaurant had 120 seats andIn this section we present four real life case provided a mixed cuisine including Indian,studies in an attempt to highlight critical factors Chinese and Continental. It was targeted at anthat determine the success or failure of a upmarket clientele, served lunch and dinner,restaurant. For each case study, we interviewed and had average cover revenues of Rs 120. Thethe entrepreneur and asked him/her to identify restaurant did not have a bar license and did notthe key lessons learnt in running the restaurant. acquire one before the restaurant closed down. Apart from rent, there were fixed monthlyBelow, we describe the experience of each expenses of about Rs 1.5 lakh on items likeentrepreneur, together with their perceptions of wages, electricity, water, telephone and so forth.where they were right, or where they went Taking into account all variable expenses, thewrong. break-even point was determined at a sales volume of Rs 12,750 per day. The restaurant started well and achieved CASE STUDY 1 average daily sales of about Rs 15,000 during A restaurant which closed down the period between November 2002 and February 2003. However, sales soon started to decline, reducing to an average daily figure RsThis restaurant was opened in Delhi by an 5,000 in the months May-July 2003. Theentrepreneur who is about 50 years old. He entrepreneur had the operation evaluated by aworked in the hospitality industry for 25 years, financial consultant and, based on thehis entire working career. Initially, he worked in consultants advice and own judgement, closeda few family-owned restaurants based in the restaurant in August 2003, 10 months afterLebanon, Cyprus and England for about 8 - 10 opening. He has not considered re-opening it atyears. After returning to India, he worked in the any other location, and has returned to being afive-star hotel segment, both at the hotel and consultant.corporate level, reaching senior-level positions,and as a consultant in between some of his jobs. The restaurant had initial investments of Rs 40As he had a long-standing wish to have his own lakh in décor, equipment and so forth. Thebusiness, he took the plunge and opened a entrepreneur also had a partner, a muchrestaurant of his own in November 2002. younger person, who contributed Rs 5 lakh as equity. Both persons worked full-time on theRestaurant and Facilities venture, and were on the job from 7 a.m. to 11The restaurant was located in Connaught Place p.m. Taking into account the pre-openingin New Delhi, the oldest and most prominent expenses and financial considerations (bribes)commercial area in the capital city. He rented and recurring losses to different governmentthe ground floor premises of a building, paying authorities, the two partners lost about Rs 60Rs 2 lakh as monthly rent for 2700 square feet of lakh in their venture. 55
  • 55. Restaurant Industry in India - Trends and OpportunitiesReasons for failure obviously low spenders. Their average spendMentioned below are reasons why the tends to range between Rs 35 to Rs 50 per cover,restaurant failed, based on the version provided and hence they often prefer snacks over fullby the main entrepreneur and our own analysis. meals. It is known that fast food restaurants and ice-cream parlours are doing very well in1. Soon after the restaurant opened, the Delhi the CP area, compared to fine diningMetro project was commenced in Connaught restaurants.Place (CP), resulting in a lot of digging anddisruption. The project forced traffic diversion 3. We also feel that the entrepreneur shouldwithin the CP area, and restricted the space have, or could have, studied his market better. Aavailable for parking. Lack of parking space survey of existing establishments should havearound the restaurant became a very severe been done, as also a detailed study of theconstraint. This prevented upmarket customers customer profile. Having been in the industryfrom coming to the restaurant by car. We feel for a number of years and with wide contacts,that the entrepreneur could have known this in he could have had access to restaurant ownersadvance. The plan for the Delhi Metro was and managers in the CP area. He mainly wentknown before he opened the restaurant, and it by his own view that CP is a large commercialwas also known that the project would affect the area and is visited by a large number ofCP area sooner or later. upmarket shoppers. He should have commissioned a professional feasibility studyMoreover, the CP area has suffered traffic for his project.congestion and parking-related problems formany years now, and these problems are known 4. The entrepreneur himself says that he couldto the public. It is also known that some of the have, instead, taken up space in a residentialother traditional restaurants in this area have shopping center in Delhi, or in one of thebeen losing sales over the last few years and shopping malls or multiplexes in neighbouringsome have closed down recently. Also, there are Gurgaon or Noida. He also feels that he paida large number of restaurants in CP and many too much rent and could have taken a muchoffer cuisine similar to that offered by the cheaper place at another location. The highsubject restaurant. At the same time, it is also fixed cost led to early failure and closing of thetrue that new food outlets continue to open in restaurant.the area, but many of recent entrants are 5. Considering his costs and other factors, thebranded restaurants, and mostly in fast food. entrepreneur believes the main reason for his2. The entrepreneur feels that, because of failure to be poor location. Although CP mayparking problems and other factors, CP has not be a poor location for some other kind ofbecome downmarket as a location for outlets but it was for him. This was particularlyrestaurants. Although there are upmarket so after the commencement of the Delhi Metro-customers at lunch time, these are few in related work. The entrepreneurs experiencenumber; the majority of persons lunching in CP brings to mind a saying oft-repeated byare middle to junior-level professionals. Also, teachers, trainers and consultants to themany of the customers that visit CPs restaurants hospitality/foodservice industry: the first threefrom elsewhere come by buses, and are requirements for the success of a hospitality 56
  • 56. Restaurant Case Studiesenterprise are location, location and location. CASE STUDY 26. He is bitter about having to bribe The restaurant that failed twicegovernment departments, saying that he paidabout Rs 4 lakh through various channels to get The entrepreneur is 55 years old, and holds astarted. He would have had to pay another graduate degree. During the early days of hisheavy amount, had he gone ahead with his plans career, he managed an agency for two-wheelersfor a liquor license. These expenses should have and four-wheeler commercial vehicles inbeen budgeted for in advance. This is the way of Jallandhar. Presently, he produces bakery andlife in India and all entrepreneurs know about confectionery products in his factory in Okhla,it. New Delhi, something he has been doing for the7. The entrepreneur also feels that he spent last 15 years He supplies to the retail market, toextra on everything: the décor need not have hotels and restaurants, has a wide range ofbeen so fancy; he need not have hired such products and a good reputation. He also runsexpensive, qualified staff, but should have an agency for some machinery as a sidesettled for lower wages at all levels. His head business, from the same premises.chef came from a five-star deluxe hotel. Havingbeen used to five-star set ups in his career, his First Restaurant Projectideas of suitable salary for the manager and staff Being in the bakery business, the entrepreneurwere also inflated. Moreover, he feels that he was very keen to have a retail confectionerybought too much inventory rather than buying counter-cum-restaurant of his own. Havingfor the shortest time period possible. He was travelled to Europe several times to acquireleft with a lot of inventory of dry items after he bakery machinery, he discovered that the newclosed. trend at bakery eat-ins was to make the confectionary behind the retail counter. Its8. He also did not have enough or perhaps no fresh-from-the-oven appeal created a salesfinancial backup; having spent the money he attraction for take-home purchases bycould afford in the first instance. Whatever customers. The entrepreneur thought that thebackup he had was put into the enterprise when same concept would do very well in a majorlosses started. He reached a stage where he Indian metro - customers would like to visit andcould not fund the losses and was forced to close buy from a confectionery outlet where productsdown. are being made fresh, partly within their visibleWhat are the lessons to be learnt from this case range. The success of outlets such as Hotstudy? It is the usual scenario of going by hype Breads, which work on the same concept,and being convinced that "I know best". There reinforced the entrepreneurs confidence in thiswas lack of study and market research. It was particular foodservice idea.also a classical case of spending too much and The entrepreneur also had access to thebeing confident of success. The entrepreneur machinery which had been sent by his England-did not imagine that sales would go down so based collaborator to India for an exhibition. Insoon after opening and he would need to put in fact, the collaborator was willing to give themore money, which he eventually did not have. machinery to him without cash payment, and 57
  • 57. Restaurant Industry in India - Trends and Opportunitiesjoin him as a partner in the new restaurant restaurant also included pizza, soups andventure, his share being the cost of the sandwiches in the menu.machinery. The two partners selected a site in The restaurant did not do well from the verythe shopping centre in East Patel Nagar in New beginning. The break-even sales of Rs 12,500Delhi and hired a space of 1800 square feet. was not reached on any single day. MostThere was a Dominos Pizza outlet next door. customers were from nearby residential homesThe total capital investment was Rs 75 lakh: Rs and there were no walk-in or transit customers30 lakh from the English partner and Rs 45 lakh who usually come to the shopping centres fromfrom the Indian entrepreneur. This was entirely other areas. The highest sale was Rs 10,000 forspent on décor, equipment and some pre- a few days, but it eventually trickled down to Rsopening expenses. 5,000 per day. The entrepreneur closed theOperational costs included Rs 65,000 per month restaurant exactly 12 months after it wasas rent, which was to be increased to Rs 85,000 opened.after six months. The entrepreneur employed20 persons on a monthly wage bill of about Rs Second restaurant project65,000. Accounting for another Rs 25,000 for The entrepreneur was still convinced about hiselectricity, the total operational costs came to Rs concept of bakery-cum- restaurant. He thought90,000 per month, which was, of course, in that the location in East Patel Nagar was notaddition to the food cost. Break-even sales were suitable and the concept would succeed in acalculated at Rs 12,500 per day. The better locality in Delhi. He hired a place in theentrepreneur hired a manager at Rs 12,000 per East of Kailash Community Centre, opposite amonth; he had earlier worked in Wimpys and cinema hall. There was a Nirulas across theHot Breads. The manager created a team of his street. One again, he rented out 1800 squareown choice. Since the entrepreneur had other feet of space, and opened a similar restaurantbusinesses as well, he visited the restaurant for with another name, five months after he closedabout 2 hours every day and trusted the the first restaurant.manager to run the shop professionally. All machinery and equipment were transferredThe restaurant remained open from 8.30 a.m. to from the earlier restaurant to the new one. The10.30 p.m. It had a comprehensive range of Englishman remained his partner and theyabout 125 products and apart from counter spent another Rs 15 lakh on interiors. The rentsales, it also had a restaurant with 25 seats. was Rs 75,000 per month on a graded scale, toBeing a bakery and confectionery there was go upto Rs 1 lakh per month after six monthsmuch emphasis on breakfast-time sales. A and Rs 1.25 lakh per month after 12 months.baker was sent by the English partner from Other operational costs remained more or lessEngland to stay for the first 20 days and he the same as in the first restaurant, with slighttrained the staff in the craft. Since the increases. The breakeven sale was calculated atentrepreneur himself is a strict vegetarian, he Rs 16,000 per day. The product range wasordered that all products must be strictly extended and he included non-vegetarianvegetarian and even the cakes were made products along with the strictly vegetarianwithout eggs. Apart from the wide range of items. Cakes and pastries made with eggs werebakery and confectionery products, the sold. Buffet lunch and dinner, at a reasonable 58
  • 58. Restaurant Case Studiesprice of Rs 65 per head, were also on offer. bakery manufacturing experience, and was convinced of his concept. Moreover, he couldIn addition to the cinema, Lady Shri Ram not wait to get started with is restaurant project.College, a well-established girls college, was He did not make a project report, or even takeclose, at a walking distance. The college also the help of a chartered accountant or financialhad a hostel. Moreover, with the restaurant consultant, for expense and earning projections.being situated in a community center having alarge commercial area, and some residential He now says that the location of the firstcolonies nearby, there seemed, from the restaurant was not appropriate. This kind ofentrepreneurs viewpoint, a large and varied product range will succeed best in a place whichenough target market to tap into. has good retail shops in close proximity, which are visited by more upmarket customers. SomeHaving learnt from his previous experience, the such customers could walk in for snacks andentrepreneur tried to do things better this time. drinks and take away some fresh bakery andHe made some pre-opening advertisements and confectionery. There were no such retail outletshis market research team visited nearby houses around the restaurant in East Patel Nagar. Hotand shops. He also devoted more of his time to Breads in G.K. II has an upmarket fabric shopthe project. next door, which regularly receives a largeHowever, the restaurant did not succeed. In the number of relatively higher-income customersfirst month, the sales were Rs 20,000 per day including diplomats. There are other upmarketmainly because there was a good Hrithik retail shops in close proximity to Hot Breads,Roshan movie playing at the cinema. However, which are also well-frequented. Moreover, Hotsales started to drop off from second month and Breads, which also has outlets in Chennai, haswere down to an average of Rs 7000 per day acquired a brand image.during the summer of 2001. The entrepreneur 2. Unlike Greater Kailash-II, which is arealised that he would have to spend more prosperous south Delhi locality, East Patelmoney in advertisements and also put in place Nagar is mostly middle-income. East Patelstaff, equipment and two-wheelers for home Nagars residents are not used to Western-styledelivery. He had, by this time run out of money, confectionery and are usually not willing to payas the little reserve funds that he had were used a price for it. They are more the type to go in forup to cover the losses of the past few months. Indian fast food. The entrepreneur thought heHe had no other sources of funds. He, would be able to generate their interest in a newtherefore, had to close the restaurant 14 months product range. Not only this, he felt hisafter it opened. restaurant would even transform eating-out behaviour in this locality. This failed to happen.Reasons for failure1. The entrepreneur did not engage anyone 3. The entrepreneur realised that hisfor a feasibility study or a market survey to insistence on totally vegetarian items in the firstassess the restaurant concept i.e. the right restaurant was wrong. Although there may be alocation for the concept, the potential clientele, small percentage of people who may insist onthe product range for that location and that vegetarian confectionery, a large number ofcustomer profile, and so forth. He believed that people want proper cakes and pastries with ahe knew this business very well, because of his 59
  • 59. Restaurant Industry in India - Trends and Opportunitiesproper recipe which may include use of eggs. retained the balance 50% as reserves.He lost a number of customers on this account. 7. Moreover, his concept should have been4. In the new location, he did get the either a confectionery store, or a restaurant. Itadvantage of the cinema, but it was an average, was a poor mix of the two. As he had expertiseeven below-average cinema which did not get in making bakery items, he should have just hadthe better movies. Its visitors were typically a small counter-based store, in an area of 300 tofrom the middle and lower income groups, who 500 square feet, with limited staff. The numberwere not inclined to spending money at a of such small stores could have been increasedrestaurant after having bought movie tickets, in the city, based on the success rate. Trying toand preferred to return home. Also, most of the run a 25-cover restaurant with a confectionerycinema-goers were not attracted by western- shop involved too much space and operationalstyle confectionary and food items. expenses, and did not have the USP of either aFurthermore, because of conflicts among the good confectionery counter or a goodcinemas owners, very little was being spent on restaurant. The entrepreneurs view that theits upkeep, which adversely affected the European style bakery and restaurant willcinemas market perception. attract customers did not work well in his chosen locations.5. Moreover, there were no retail shops in thelocality, and the banks and offices that exist 8. He is also bitter about having to pay bribes tothere did not provide him any significant Government officials. He goes to the extent ofbusiness. Another target market- college-goers proving that many of these good lookingfrom LSR, also failed to appear. In both regulations are not for health and safety ofrestaurant projects, he was wrong on the choice consumers, but for the benefit of officials. Afterof location. The entrepreneur says that in East he paid the required ‘fees’ to the MCD healthPatel Nagar he would have done better with an officer, he never even came to visit the premisesIndian fast food restaurant. The second and sent the certificate from his was also in an unsuitable location,according to his post-closure analysis. Hewould have been better off at a shopping mall. CASE STUDY 3At the locations chosen by him, he was ahead ofhis time for his product range. No Shortcuts to Success6. He feels his biggest mistake was to spendall his funds on equipment and interiors and not The entrepreneur is 30 years old, is well-retain funds for operational losses and educated, affluent and well traveled. She has aadditional expenses. He ran out of funds within passion for food and the restaurant business buta few months. In the second restaurant, he was does not have formal culinary education.keen to spend money on advertisements and a Hailing from Kolkata, she moved to Delhi whenhome delivery system but did not have any very young. At the age of 16, she joined thefunds left with him. The entrepreneur now feels family business of exporting marble. Thisthat he should have only spent 50% of his funds provided her with the opportunity of travellingon capital expenditure and expenses and to Europe; her sojourns saw her trudging across Europe with a bunch of cross-cultural 60
  • 60. Restaurant Case Studiescompanions, predominantly Italians. During breakeven point came to sale of Rs 15,000 perthis time, she stayed with her Italian friends in day.their homes and got a peek into their lifestyle, At the time, first boom of freestandingculture and traditional cuisine. restaurants had just begun and, although HauzDuring the entrepreneurs many business trips Khaz Village was considered a trendy place, theto Italy to test samples of granite and buy approach to its eateries and shops was throughmachinery, she developed a liking for Italian dung-splattered by-lanes. The entrepreneurcuisine. Soon, this liking turned into a passion, discovered that the small clientele which sheand she learnt the art of Sicilian cooking from had developed wasnt enough to make endsMarchessa Anna Tasca Lanza, owner of one of meet. After suffering losses for 29 months,Italys finest vineyards, who bartered her secret Mezzaluna was sold to a keen buyer. Therecipes in exchange for recipes for Indian entrepreneurs reasons as to why she believescuisine. Her mastering the fine art of Italian the restaurant did not work are:cooking coincided with the complete boredom 1. "I misjudged the Indian palate. Back then,that was creeping in as far as the marble Indians had not been fully exposed tobusiness was concerned. At 22, the entrepreneur international cuisine and wanted the triedquit her family business and came to Delhi. and tested fare."The first Restaurant 2. The restaurants location proved aIn 1994, influenced by and at the same time hindrance in the restaurant attracting itsfired by her experience in Italy, she, then 21, target market - high-spending customers.returned to Delhi to start what was then possibly 3. The excise laws did not permit giving athe citys first Italian eatery, Mezzaluna (Italian liquor license to free standing restaurantsfor a crescent-shaped knife with a handle on in that location.either end) in Hauz Khas Village. The restaurantoffered a Mediterranean platter, but the focus 4. Independent restaurants could not importwas on Italian food. ingredients and food products.The total capital investment in the restaurant, Second Restaurant: Vama in Londonwhich was located on a 1300 square feet site In 1996 armed with the wisdom of hindsight, awas Rs 10 lakh. This amount was entirely spent battalion of seven chefs, and an ardent foodieon décor, equipment and some pre-opening friend, she opened a restaurant in London. Theexpenses. The monthly rent paid was Rs 20,000. restaurant, serving northwest frontier cuisine,The restaurant, with 35 seats, was targeted at an crawled into the crowded eatery space ofupmarket clientele, served lunch and dinner, Londons hot, happening, hyped Chelseaand had a per cover average revenue of Rs 700. district. The cost to set up Vama was very high,It did not have a bar for liquor and did not close to about 400 thousand pounds sterling andacquire one before the restaurant closed down. it took about two years to break even. The 90-Apart from rent, there were fixed monthly cover restaurant, having an average spend of 40expenses of about Rs 1.8 lakh on other items, pounds per person, was a true learninglike wages, electricity, water and telephone. experience. London has on an average, 70Accounting for the variable expenses, the restaurants opening every year, and 135 61
  • 61. Restaurant Industry in India - Trends and Opportunitiesshutting down. Good publicity and a celebrity food costs are very high as most ingredients areclientele helped Vama turn into a sensation. imported and work out to be approx 40%. TodaySome of the key success factors were: quality she has a large clientele that simply laps up theproduct, focused market, and a location to suit Italian food served at the restaurant and isthe restaurant. After 40 months and having counted among the best restaurants in India.ensured that the restaurant was up and running She changes the restaurant menu every twowith the best team possible, the entrepreneur months and is behind the kitchen range everyreturned to India. night. Some of the reasons she attributes to the successFinally…..Stupendous Success of the restaurant that others should learn are:In 2000, she once again decided to open anItalian restaurant in New Delhi. This time 1. Right location for the conceptaround she was determined to steer clear of the 2. Involvement in everything about themistakes during her Mezzaluna experience. restaurantRunning Vama in London had taught her bothgood hospitality and how to manage restaurant 3. Curtail capital costs-spend on theoperations; this learning came in very handy for important things-ingredients, staff, trainingher new restaurant venture, in Greater Kailash- etc.II (GK-II). 4. Research your market and yourThe entrepreneur was very certain she wanted competitionto select the right location. She knew that in 5. Keep up with the standardsorder to get a liquor license she would have tobe in a commercial area. She chose GK-II, 6. Innovation of menu, every few weeks tobecause despite being a central location in keep the interest of regular clienteleaffluent south Delhi, it was relatively peaceful. 7. Most important: heart-felt hospitalityThe 3000-square foot taken up was decorated to towards every clientcreate the right ambience. It has off-white walls, Although she claims it to be fun, there are noItalian marble flooring, an anytime coffee bar, expansion plans in other parts of the country.table top games (chess, backgammon) and One of the reasons is that she does not want toample `food for thought - books from the spread it too thin so that it becomes out of herentrepreneurs personal collection. The total reach to control it. Moreover, “its tough to run acapital costs associated with the 80 cover restaurant business in India," she was 80 lakh. Initially the monthlyfixed operational costs were about 5 lacs per Ask her the secret of being a successfulmonth, however very soon as business started entrepreneur and she says, "Learn everythingpicking up, more staff resulted in additional about the business you are doing and then givecosts. A rent review took place this year, and it your best shot. You cant go wrong then!"now the restaurant operates on a fixedoperational cost of approx 6.5 lacs per month.This would work out to approximately 30% ofthe total revenues, but there is one catch, the 62
  • 62. Restaurant Case Studies CASE STUDY 4 over the world received a serious review in the wake of security, and in most cases, a severe cut- First Fine Dining Five Star back on existing trends was the outcome. India Restaurant was amongst the worst hit by this recession and its magnitude encompassed the entire serviceIt takes a lot of courage and conviction to open industry as a whole, with the fall-outs affectinga new restaurant in an area that has suddenly related peripheral services also.been flooded with a large number of restaurants The travel management companys bold andand bars of all kinds, especially one that aggressive outlook, however, escalated theirrequires a large investment. A major travel entry into a new business that would help themmanagement company sought to diversify its diversify, yet remain within the folds of theirportfolio to include the hospitality industry and core competence of the service industry.embarked on its plan by opening its first outlet Starting a restaurant fit nicely into their largerin the form of a Chinese (Szechwan) restaurant objective of the setting up of a hospitalityin July 2003. It is probably NCR Delhis first division, and the Chinese restaurant took shape.large fine dining restaurant outside of a Hotel, They already owned the real estate where thelocated in Gurgaon. The 150 seater restaurant, restaurant was to be located but being a Gradekitchen and other support areas occupy "A" commercial building, they were alert to theapproximately 8000 sq.ft. of space. The aspect of not wanting the restaurant to be anrestaurant alone is approximately 5600 sq.ft. irritation to the other occupants of the building,The travel company owns the building where or the complex as a whole. The restaurant,the restaurant is located, a factor that mitigated therefore, was conceptualized with very highsome of the risks. No costs, however, were hygiene and design standards that sought tospared in retaining the best talent to design the totally eliminate any smoke or food odor whichoutlet, and a renowned Hong-Kong based firm might have an adverse impact. Some of thewas hired to design the interiors, kitchen and elements inducted to realize this objective, suchlighting. The restaurant houses a 116-seater as a Reverse Osmosis (RO) Plant, an Effluentdining area inclusive of Two Private Dining Treatment Plant (ETP) to complement theRooms accommodating 12 persons each, and a Grease Traps, a Gas Bank complying with everyLounge Bar to accommodate 33 persons. A rule in the book, did increase the developmentstate-of-the-art open kitchen forms a unique cost of the project immensely, but formed ansalient feature of this restaurant. A team of integral part of the Business Plan. It further,specialist Chefs from the Szechwan province of emphasized the owning companysChina, have been flown in and they provide the uncompromising eye for detail and commitmentkey element in churning out authentic towards safeguarding the environment aroundSzechwan cuisine which the restaurant claims its project.its specialty. The total project cost of setting up of theConception restaurant, not including cost of real estate, wasInterestingly, the idea to diversify into the in excess of Rs. 2.85 crores. This amount washospitality industry traces its roots to the events spent entirely on design-décor, equipment, back-of 9/11 following which the travel business all end development and some pre-opening 63
  • 63. Restaurant Industry in India - Trends and Opportunitiesexpenses. A monthly rental on prevailing costs Service and Ambience, in that order.per sq.ft. was sought to be incorporated on the Be selective in the choice of cuisine andP&L, even though the estate was owned by the ensure versatility in the style of cooking,parent company. The restaurant was targeted at within the given framework. This willthe up-market clientele populating its ensure your weaning the clientele towardssurrounding areas, and its revenue streams your core competence in the authentic styleinclude lunch, dinner, snacks, and corporate of cooking.take-aways. An average meal cover chequebetween Rs.550 - 650 was envisaged. Apart from No compromise in the quality ofrental, there were fixed monthly expenses on ingredients, and to ensure consistency anditems such as wages, electricity, water, repair & authenticity in the quality of food everymaintenance. Keeping in mind the same, the time.break even works out in excess of six figures per Listen to your clientele. Ensure theirday, but the restaurant has managed admirably comments are acknowledged in every way,on the same so far. even the critical ones. Build clientSome of the reasons the entrepreneur’s attribute relationships/loyalty and increase hightowards the success of the restaurant that others recall and mind share.could bear in mind are: However, the restaurant is still in its first nine Be a long term player. months of working and all keen observers, and of course the management, will be keenly Provide a value for money experience watching its progress over the next 2 years. incorporating a combination of Food, 64