India's restaurant and food service sector is heating up.
Fast-paced growth, world-class processes and high hygiene standards are fast changing what once used to be an unorganised industry that rarely attracted investment.
The size of the sector is huge.
According to Samir Kuckreja, president of the National Restaurant Association of India (NRAI), "Overall the food service industry has grown significantly to $12bn. The food service sector today contributes seven times more than the hotel sector to the country's GDP and is the top third largest contributor after retail and insurance in the service segment."
In terms of market segment, Quick Service Restaurants (QSR) and Casual Dine-in formats account for 74 percent of the total chain market, while Cafe's make up for 12 percent with Fine Dining and Pub Bars Club & Lounges (PBCL) comprising the rest.
In the last few years, venture capitalists have invested in restaurants as diverse as Rajdhani, a vegetarian thali (plate) restaurant with 30 plus branches owned by Mirah Hospitality; Mast Kalandar, a quick service North Indian restaurant with 50 branches; Kaatizone and Faasos, which sell wraps through kiosks; Goli Vada Pav, which has set up 250 stores selling humble street food that is quintessentially associated with India's commercial hub Mumbai; Sagar Ratna chain of South Indian food in Delhi; and Adiga's in South India - to mention a few.
The changes in the sector can be traced back to the late 1990s when global food giants such as McDonalds, KFC, and Dominos made their India entry.
Indians for the first time reached global standards of hygiene and service in the sector. The next decade saw the MNCs tuning in to India - introducing more vegetarian options, setting up vegetarian-only outlets and spicing up their menu. About 2004 is when Indians tried to set up indigenous food service chains, and by 2008 venture capital started flowing in.
Rajesh Mohta, CFO of Specialty Restaurants, explained: "There is a big transformation in terms of processes and hygiene standards in the sector with MNCs coming in. It is getting more organised and the investors are attracted by the huge growth potential and the consumption story of our country."
Venture capital activity
According to Venture Intelligence data, the sector has seen much venture capital activity since 2005 when the first funding was made in restaurants. In the last three years, venture capital interest in the sector has been steady. In 2011, nearly seven deals were struck worth $83.7m. This went up to $118.8m and $86.1m in 2012 and 2013, respectively, with eight deals being struck each year.
Investments to the tune of around $150m could take place annually in the next two years. The sectors would include quick service restaurants, online ordering companies, fine dining restaurants, food service companies and others.
India has always had a rich food culture. Add to that global standards of hygiene and pocket-friendly prices, the potential for a winning combination can be huge across Indian cities and smaller towns.
Arvind Mathur of the Venture Capital Association of India estimated that "investments to the tune of around $150m could take place annually in the next two years. The sectors would include quick service restaurants, online ordering companies, fine dining restaurants, food service companies and others. If the IPO market picks up, then larger investments could occur".
The optimism is not misplaced when one looks at the success stories. Specialty Restaurants - 105 restaurants and confectionaries that include 52 Mainland China and 9 Oh!Calcutta restaurants - raised 176 crore rupees ($28.63m) through an IPO in 2012. The listing followed two rounds of private equity funding. Mainland China restaurants have grown from numbering 11 in 2008-2009 to 52.
In the casual dining space as well, growth has been phenomenal. Mast Kalandar aims to end 2014 with 120 restaurants across the cities of Bangalore, Pune, Hyderabad and Chennai. The venture has received three rounds of funding so far.
Pallavi Gupta, the founder, said, "Funding is not the only benefit of going to venture capitalists. The VC firms help us with the strategic growth of the firm. Their inputs with developing market strategies and developing functions within the company are very helpful."
Similarly, take the case of Goli Vada Pav, which was set up in 2004 and today sells 75,000 to 100,000 vada pavs every day through its 250 outlets.
"The real growth happened when we stepped out of Mumbai and received our first round of funding - Rs4 crore ($650,080) in 2007," said Venkatesh Iyer, also known as "Venky", one of the founders.
The next round was in 2011 when they received Rs21 crore ($3.4m). Today, the company has a turnover of Rs40 crore ($6.5m).
Venky explained, "From Day 1 we have followed an outsourced model taking care of only brand and consumer. As such, the funding we get is more to prove as security for our vendors. We have Rs15 crore ($2.4 million) as reserves in the bank today. But going forward, as we reach the 1,000 store mark with our turnover touching around Rs250 crore ($40 million), we will look at an IPO since we will need funds to put in place company-owned stores to increase controls and spend much more on marketing and brand building."
Goli Vada Pav is currently in talks with entrepreneurs in Dubai to set up Goli International, said Venky.
There are reasons for such confidence. Rising income levels, larger middle class, double income families with more spending power, hectic lifestyles, larger rates of migration to urban centres, rising aspirations and exposure to different cuisine all make for the right ingredients for a thriving business environment.
Challenges and risks
Risks and challenges are, of course, present in such green field investments.
Food price inflation, economic slowdown, unfavourable demand-supply conditions, lack of trained manpower, high attrition rates of 20 to 25 percent, rising real estate costs, lack of established supply chain and cold storage facilities, wastage of 30 to 40 percent of the food, large number of licensing and clearances required along with multiple taxes that add up to 20 to 25 per cent of the bill value have been listed by the NRAI in its recent Food Service report.
The evaluations are on and investor interest is firming up.
The coming months are likely to see large investments. Wipro's founder, Azim Premiji is reportedly investing INR 150 crore ($24m) in JSM Corp, which runs Hard Rock Café and California Pizza Kitchen in India through PremjiInvest, a family office that specialises in private equity investments.
Harvard-educated former Microsoft employee Amuleek Singh has big plans for ChaiPoint, a venture that offers seven flavours of tea from its 30 outlets in Bangalore and Delhi. Singh's venture has so far received two rounds of funding. If Venky's dreams for Goli Vada Pav do materialise, one would even see the listing of a vada pav company on the bourses in the coming years.
The action lines are really being drawn up.