The business of quick service restaurants

The business of quick service restaurants

The Indian restaurant industry is one of the Indian economy’s best kept secrets says a white paper titled ‘Indian Restaurant Industry 2010’ presented by the National Restaurant Association of India. The paper goes on to add that current revenues are close to Rs. 43,000 crore and the organised segment of the industry is estimated to be between Rs. 7,000 crore and Rs. 8,500 crore with an annual growth rate of over 25 per cent. This organised segment comprises traditional fine-dining restaurants and recently popular quick service restaurants (QSR). While fine-dining restaurants are more complex in nature operationally, QSR’s business format help them create repeat usage and leverage on India’s growing numbers that are eager to experiment with their dining choices. The interest shown in the QSR business is evident with the increasing number of investments in this space. Agreeing with the growth prospects, Prashanth Prakash of venture capital firm, Accel Partners India, who is also on the board of wrap specialists, Kaati Zone, shares another aspect that works in favour of QSR. “Going by the past track record, fine-dining restaurants have been unable to scale in really large numbers. There are many parameters that make scaling up in fine-dining more complex namely real estate, economies of scale, standardisation of process and more. However, in the QSR space, we believe expansion can certainly be achieved as the complexities of scale are much lower,” says Prakash.

“Your price point has to be in the middle of the pyramid to address an extremely large urban/semi-urban population. You should be able to cater to someone who wants to have a meal for Rs 100” – Prashanth Prakash of  Accel Partners India

Kiran Nadkarni, founder-chief-executive officer, Kaati Zone, has experimented with both the restaurant and the kiosk formats, which plays to the strengths of a QSR. And he believes that the growth story for his own brand lies in the latter as it increases margins by keeping overhead costs to a minimum. This is just one example of an Indian entrepreneur who is looking to make the most of the opportunity in the QSR segment. As Amnish Aggarwal, research analyst, Motilal Oswal Securities Ltd. says, “The QSR segment is just blossoming in India and I foresee the growth of the category itself at about 20 per cent to 25 per cent CAGR (compound annual growth rate).”

The numbers look encouraging for a new entrant but for an entrepreneur eyeing this space there are multiple options to choose from, and the task that lies ahead can be confusing to say the least.

Franchising for an international brand versus establishing a home-grown brand, choosing a restaurant format or a kiosk format, sticking to an Indian menu or experimenting with international cuisine – these are just some of the questions that need answering before one decides to open a QSR. As Kanwal Singh, managing director at venture capital firm, Helion Venture Partners (Helion), cautions, “In this segment, in order to build a business you have to do it brick-by-brick. It is a slow build where you learn on a daily basis.”  Furthering that thought, the key to building a successful QSR in India is laying down a strong foundation. And as recent investment stories suggest, people are willing to back a strong foundation with capital.

 “In this segment, in order to build a business you have to do it brick-by-brick. It is a slow build where you learn on a daily basis” – Kanwal Singh, MD at venture capital firm, Helion Venture Partners

In 2010, Helion alongside Footprint Ventures and Salarpuria Group made a Series-B investment in Mast Kalandar, a Bengaluru-based QSR that specialises in North Indian fare. This followed Helion’s 2009 investment of U.S $1.9 million in Brand Calculus Franchising India Pvt. Ltd., master franchise of international brands such as Jus Booster Juice and Kiwi Kiss Frozen Yogurt. Other venture arms such as Matrix Partners India and Accel Partners India have invested in Yo! China and Kaati Zone respectively. The biggest industry story for 2010 was the successful completion of an initial public offering by Jubilant Foodworks Ltd., master franchise for Dominos Pizza and Dunkin’ Donuts in India. These investment deals do not come as a surprise for an industry touted to be growing at nearly 30 per cent, and with an increasing disposable income amongst Indians, the ball lies in the court of Indian QSR brands to make or break the given opportunity.

Laying the foundation

One of the fundamentals of an Indian QSR brand is to create an offering that is acceptable to a cross-section of the Indian audience, accounting for varying cultural and taste preferences. If the brand’s offering holds mass appeal across the nation, it makes replication of a business model easier at different geographies. The good news is that in India, being Indian works. “Nine out of 10 times, Indian food will work and the market size for Indian food is also large,” says Singh. This taste preference is reiterated by international brands such as McDonalds, KFC, Dominos Pizza and others incorporating Indian flavours and ingredients into their product mix. This is not to say that international flavours have no takers – Indo-Chinese food has risen in popularity to almost become a staple cuisine across the nation, and Indians seem to be discovering newer favourites such as Mexican, Italian, Thai and Japanese food. Importantly, the price of the offering needs to be attractive. “Your price point has to be in the middle of the pyramid to address an extremely large urban/semi-urban population. You should be able to cater to someone who wants to have a meal for Rs 100 (per meal),” says Prakash. Singh concurs and attributes a significant part of Mast Kalandar’s success so far to its competitive pricing. “If you are looking to target the mass market, then repeat usage must be high and a meal must be priced between Rs. 80 to Rs. 100 for that to happen,” he says.

Apart from menu choices and price points, the basis of a sound QSR business model is supply chain management. And this is one of the tougher aspects of the business. Each entrepreneur has to find the right approach to a back-end that works for the business. Singh draws the example of how Mast Kalandar turned its sourcing process into a marketable feature. “The founders spent a considerable amount of personal time in sourcing ingredients (masalas, chutneys) from quaint, small places across India. Not only did that allow them to negotiate pricing, the authenticity of ingredients used became a feature to market as well,” he says. Singh adds that centralising purchases, creating a standard recipe bank and establishing a central kitchen for each city are a few means by which standardisation of process can be achieved. Standardisation goes a long way not just in helping create scale, but also in ensuring quality as this is an industry that is extremely sensitive.

Another parameter that needs to be addressed is hiring and retention of people. Typically, human resources at a QSR can be divided into production crew (including the kitchen), front-house staff and management staff. The first two categories usually comprise of those who are less-educated and earning lower salaries. To the entrepreneur, this presents the challenge of retention, which can be overcome by assuring employees the growth opportunities that lie within the organisation. As Singh suggests, demonstration is always better than talk.  “Organisations could also tie up with local institutes to look at imparting soft skills training, in turn, they can create job assurances,” he adds.

“While hiring, retention and back-end are in your control but real estate prices are not so,” says Prakash. Nevertheless, it pays to be disciplined in the approach to a location. The toughest call an entrepreneur must be willing to make is that of shutting down an unprofitable location in order not to bleed. Also, unlike in the West where a brand such as McDonalds is aggressive when it comes to buying locations, venture capitalists feel this approach is too capital intensive for India. “If your pockets are that deep, you might as well use the money to establish ten more locations. Also, every location has a certain expiry date so there is no point in holding on to a location that is past its date,” says Singh.

Establishing scale

Leveraging on stable foundation, entrepreneurs must look to translate the success of one restaurant to multiple ones. One of the quickest, most efficient ways to scale up is to opt for franchises as it reduces capital burden. “Franchisees do a good job when they see profitability from day one. The shortcuts are employed only when they see no money,” says Nadkarni. Further alleviating concerns on brand dilution with franchising, Singh says that dilution occurs only when the founding team do not have the right business model. In addition to presenting franchisees with a profitable business model, providing them with a strict guideline of brand practices will ensure that there are no violations. While scaling up, entrepreneurs must also choose a format that best suits them. Kaati Zone has a total of 15 outlets across Bengaluru, Chennai and Hyderabad of which six are restaurants and the remaining are kiosks. “With the kiosk format, I have eliminated a majority of my real estate costs, and overheads are low as two people are sufficient to manage a kiosk,” he says.

For those entrepreneurs who believe a dine-in format is best suited to their business, one way to enhance the profitability of a location is to introduce an efficient home delivery system. In India, Jubilant Foodworks with the Dominos Pizza brand holds a 65 per cent market share in home delivery. While it is difficult to compete with such an established player, this is an area which creates customer loyalty. “How you deliver is equally important and presentation of food counts. At Mast Kalandar, they use plastic trays with compartments, this ensures neatness in presentation. You have to continuously innovate to keep customers satisfied,” says Singh.

Managing growth in itself is by no means an easy task and most entrepreneurs struggle to comprehend the complexities of scale. This is where domain experts recommend the incorporation of professional management teams in the business. “If you have reached a stage where your per unit economics works in more than one city and you are at 50 to 100 stores then it is time to bring in professional talent,” opines Prakash. This is also an area where the investing partners can add value. “At Mast Kalandar, we helped in the areas of organisation building, setting up of systems and business expansion. Since the business is extremely reliant on execution and operations, it is critical for the company to keep bringing in new and relevant talent to manage the growth, and we are closely engaged in that exercise,” shares Singh.

Having spoken in detail about managing growth, it is an area that even well-established businesses struggle with. Aggarwal, who holds a ‘Neutral’ rating on Jubilant Foodworks stock, anticipates a dip in pace of store increase for Dominos Pizza as it ventures deeper into India’s Tier-II and Tier-III towns. “The economies of scale between Tier-I and the rest will be quite different and what Jubilant Foodworks makes in, say a two-three kilometre (km) stretch in Mumbai, it will take them over 10 km to make the same in a location like Lucknow,” he says. Interestingly, Aggarwal also notes that the brand’s home delivery promise of ‘30-minutes or less’ will be much more difficult to execute in these towns. Perhaps, an indicator of difficulty is the fact that for a business that holds leading market share with Dominos Pizza, Jubilant Foodworks is likely to struggle to create a similar impact with its second brand, Dunkin’ Donuts. “With Dunkin’ Donuts, they do not have the first mover advantage that they had with Dominos Pizza and it is going to be difficult to create a habit,” says Aggarwal.

Talking at a broad level, entrepreneurs, venture capitalists and domain experts are in unison when it comes to the QSR segment in India – this is just the beginning, the best is yet to come. VCs are certainly interested in the sector but private equity players are playing the waiting game. The Jubilant IPO might just turn out to be the inflection point. Prakash agrees, “In general, I think IPOs are very important events for newer sectors. It gives more investors confidence and that is when the sector becomes private equity fundable.”  The success and growth of players like Kaati Zone and Mast Kalandar is crucial for the sector.  It will attract many more investors and entrepreneurs alongside the Indian consumer, who is certainly ready for more variety.