Waiter, There’s an Investor in My Pie

Venture capitalists falling over each other to fund restaurants, bars & pubs

RAHUL SACHITANAND MUMBAI

The Indian food and beverage (F&B) industry is attracting a surge of interest from investors interested in backing companies with scaleable businesses and a robust back end supply chain.
Riding on a growing propensity of eating out and growing disposable income, several businesses have either raised funds or are planning to do so. Investors are jostling with each other to fund these fast-growing enterprises. In mid-January this year, Jubilant Foodworks, the Indian franchisee of Dominos Pizza, was oversubscribed 31 times when it listed on the bourses, and is today quoting 501% higher than the issue price.
Others, including Devyani International, the franchisee for Pizza Hut, KFC and Costa Coffee, and OmPizza, the franchisee for Papa John’s Pizza, raised funds from ICICI Venture and TVS Capital respectively, catalyzing a spike in investor interest in the . 100,000 crore F&B market, which includes quick service restaurants or QSRs, fine dining restaurants, bars and pubs.
However, soaring rentals, questions over scalability of businesses and durability of backend operations could dampen their enthusiasm.
The promoters of BJN Group, which operates restaurants such as Angeethi and Firangi Paani, are set to sell a majority stake to fund ambitious growth plans. Mamta Bhatt, a Mumbai-based director of BJN, says the details have not yet been finalized.
Industry sources say the deal is stuck over valuations with BJN pressing for a higher price, given the potential in the market. “We have 36 restaurants across 14 brands and we want to expand across the board,” Bhatt says.
Ravi Jaipuria, India’s leading beverage bottler and chairman of Devyani International, will use funding from ICICI Ventures to plot expansion of the Pizza Hut chain from 200 stores to around 350 in the next 12 to 18 months.
With cuisine preferences changing rapidly and disposable incomes growing, Jaipuria says people are flocking to restaurants such as Dominos, McDonald’s and even local restaurant chains. “The F&B business is one of the fastest growing industries in India … venture capitalists back growth industries and there will be many more investments in the next couple of years,” predicts Jaipuria. Analysts expect the industry to grow at a cumulative average rate of 20% annually for at least the next five years.
Gaurav Jain, co-founder of Mast Kalandar, a no-frills QSR chain that serves north Indian food in Bangalore, says he will quadruple the number of restaurants he runs from 25 to 100 in the next 18 months. He raised funds from investors including Helion Ventures last October, which will last until he has set up 75 to 80 units; Jain will then raise another round of funding, likely from venture capitalists.
Kanwal Singh, Managing Director, Helion Ventures, reckons that Bangalore itself can absorb 50 to 60 Mast Kalandars.
Deepak Shahdadpuri is one of the older investors in India’s foods business, having made an early investment in Sula Wines back in 2004. Since then he has backed two more companies: Baker’s Circle, a bread maker for top QSRs like Subway) and Impressario Entertainment and Hospitality, which runs the Mocha coffee bars, Smoke House Grill and Salt Water Café fine dining restaurants. Now, Impresario will soon be in the hunt for more funds. “To give you an idea of the potential, I invested in Impressario when it had a dozen Mocha outlets; today it has 34 and will near triple this to 100,” says Shahdadpuri.
Indians, on an average, eat out just 1.2 times a month; in Singapore, the number is 40. “Even if this number goes up to four in India, this will be among the largest opportunities in the market,” says Riyaaz Amlani, CEO and Managing Director of Impresario.”
There is a growing preference for branded eateries and an Indian brand may have the upper hand in terms of local knowledge of cuisine and customs,” he adds.
Analysts think that with the right recipe, the F&B business can be a gold mine. Says Pinakiranjan Mishra, Partner at consulting firm Ernst & Young: “This is a very high-margin business and with people eating out more often and willing to pay for quality, there is plenty of opportunity for growth.”
But not every business will make it. K.P. Balraj, Managing Director of Sequoia Capital, who has seen the rise of Café Coffee Day (CCD) and Jubilant, thinks the success of such businesses will be limited. While CCD had the first-mover advantage in what is now a crowded and competitive business, Jubilant has focused on fine-tuning the supply chain and using a franchiseeheavy structure to k keep costs, especially rentals, relatively low. “Food retail is a tough business to operate in India since realty costs are high and scale of operations has yet not been established by most firms,” says Balraj. And consumers are as yet unwilling to pay a premium for quality,” he adds. Mast Kalandar’s Jain admits to dealing with these concerns. “Rentals alone can be up to 12-15% of your revenue …it’s hard to find good real estate and when you do, its often expensive.” Despite all these concerns, entrepreneurs believe that there’s massive untapped potential in the Indian market. Rustling up the right recipe for their businesses may hold the key to making a success of their enterprises.