Restaurant Industry - QXD - 1336

Restaurant Industry in India - Trends and Opportunities
HVS Inter national (India), Mr. Navjit Ahluwalia, Associate Dir ector and
Mr. Dushyant Singh, Consulting & Valuation Analyst
Research, Report Writing
Mr. Shyam Suri, Secretary General, FHRAI
Editing, Report Fianlisation
Mr. Pooran Chandra Pandey, Assistant Secretary General (Research), FHRAI
Hotel Questionnaire & Co-ordination
Mr. Raj Rajeshwar Sharma, Computer Data Assistant
Design, Graphics, Pre-press & DTP
Printed by :
Published in April 2004 by:
Secretary General, Federation of Hotel & Restaurant Associations of India
B-82, 8th Floor, Himalaya House, 23 Kasturba Gandhi Marg, New Delhi - 110 001
Phones : (011) 23318781, 23318782, 23322634, 23322647, 23323770 Fax : (011) 23322645
E-Mail : fhrai@vsnl.com Website : www.fhrai.com
Federation of Hotel & Restaurant Associations of India (FHRAI), 2004
Price: 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
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Restaurant I ndustry in I ndia - Trendsand Opportunities
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Contents
Table of Contents
1. Executive Summar y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2. Backgr ound Scenar io and Number s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
3. Analysis of Questionnair e Responses
3.1 Gener al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
3.2. Tr ends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
3.3. Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
4. Food Tr ends-At home and abr oad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
5. Inter national Restaur ant Chains & Fr anchise Oppor tunities . . . . . . . . . . . . . . . . . . . . . . . .29
6. What is my Restaur ant Business wor th? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
7. Conducting a Feasibility Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
8. Restaur ant Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
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Foreword
Foreword
FHRAI has been ver y active in our r esear ch studies, but we have done this fir st r esear ch pr oject on
the r estaur ant industr y in India. This pr esent study on Restaur ant Industr y in India - Tr ends &
Oppor tunities has been conducted on our behalf by HVS Inter national (India), which is a r eputed
global consultancy company in the field of hospitality industr y.
Some facts and figur es on the oper ations of r estaur ants in India have been given in this study fr om a
questionnair e r esponse fr om FHRAI hotel and r estaur ant member s. The statistical analysis in the
r epor t has used 165 such r esponses, which r epr esents about 15% of the 1100 questionnair es which
wer e sent to our r estaur ant member s, both independent and in the hotels. Apar t fr om this analysis,
the r esear cher s have also quoted some inter esting demogr aphic & economic data about the
consumer s in India and their expenses on the food ser vices. We ar e all awar e about the boom in the
r estaur ant sector in India, par ticular ly in the metr o cities and other lar ge cities. One anecdotal
evidence suggests that about two new r estaur ants ar e opening in Delhi and Mumbai ever y week
which makes it as 100 new r estaur ants in the year in these cities. These ar e in the or ganised sector,
and a huge gr owth is simultaneously taking place in the unor ganized and infor mal sector also. The
Indian economy is on a high gr owth cur ve and exper ts believe that the economy can gener ate an
aver age 8% gr owth in the GDP on a sustainable basis for the next few year s. This is bound to r esult
in high disposable incomes and higher consumer expenditur e in the food ser vice sector.
The r epor t also gives an insight on how to car r y out valuation of r estaur ants and feasibility studies.
It also gives aver age figur es of oper ations and financial r atios for differ ent types and sizes of
r estaur ants. Ther e is also infor mation on global tr ends in the r estaur ant industr y and names of
multinational br ands which ar e active in India and elsewher e. These facts and estimates should be of
gr eat inter est to new entr epr eneur s as well as oper ator s of existing r estaur ants. The r epor t also has
four case studies, which nar r ate actual exper ience of 2 failed and 2 successful r estaur ants. Analysis
of these cases should help new entr epr eneur s in a better under standing of the factor s, which need to
be examined car efully in a new r estaur ant pr oject.
I expr ess my sincer e thanks to Mr. Manav Thadani, Managing Dir ector, Mr. Navjit Ahluwalia,
Associate Dir ector & Team Leader and Mr. Dushyant Singh, Consulting and Valuation Analyst, HVS
Inter national (India) for their wor k on this study.
I do hope that our hotel and r estaur ant member s will r ead this r esear ch study with inter est and it will
benefit them and the new investor s in the r estaur ant sector in their oper ations and pr ojects.
Vivek Nair ,
Pr esident, FHRAI
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ExecutiveSummary
Purpose of the Study
The Feder ation of Hotel and Restaur ant
I ndustr ies in I ndia (FHRAI ) engaged HVS
I nter national to r esear ch the r estaur ant
industr y in India and identify both global and
domestic food tr ends. 165 questionnair e
r esponses fr om independent and hotel
r estaur ants in India pr ovided the statistical
basis for analysis of oper ations and financials of
the existing r estaur ant industr y in the countr y.
I n addition, a lar ge cr oss section of
pr ofessionals involved in the industr y wer e
consulted for their views. The r epor t pr esents
the r esults of the analysis and includes the
following:
Backgr ound Scenar io and number s which
includes an analysis of the demogr aphic
changes occur r ing in I ndia and their
potential impact on the r estaur ant industr y.
Analysis of r esponses collected via the
questionnair e r epr esenting a snapshot of
tr ends in the Indian r estaur ant industr y.
A summar y of key emer ging global food
tr ends as well as inter national r estaur ant
chains that pr ovide fr anchise oppor tunities
for oper ator s in India.
A guide on how r estaur ants ar e valued and
guidelines for conducting a feasibility study
befor e opening a r estaur ant.
Real life r estaur ant case studies on both
successful and not so successful
r estaur ants.
Conclusions for each of these sections ar e
summar ised below and discussed in gr eater
depth thr oughout the r epor t. The r eader is
advised to r ead the entir e r epor t for a
compr ehensive view.
Background Scenario and Numbers
Based on pr ojections extr apolated fr om the
Thir d Economic Census conducted in 1990, we
estimate that ther e ar e appr oximately 500,000
r estaur ants in India in the or ganized sector. This
figur e is expected to r apidly incr ease as a r esult
of the changes in demogr aphic and economic
factor s which ar e having a significant impact on
the r estaur ant industr y in India. Incr easing
ur banization and r ising disposable incomes ar e
char acter istics that ar e common acr oss sever al
emer ging economies, par ticular ly in Asia.
However, the pace at which this has taken place
in India in the last few year s is likely to continue
over the next decade and will outpace most
other economies in the r egion. In par ticular,
Mer r ill Lynch estimates a gr owth in ur ban
consumption at potentially 20% per annum in
nominal ter ms (16% in r eal ter ms) for at least
the next 5-7 year per iod. In addition, higher
disposable incomes among consumer s
par ticular ly in the top 25 cities and the tr end
towar ds eating out ar e combining with gr owth
in or ganized r etailing to fuel gr owth in the
foodser vice sector.
Ther e ar e 10 million households in India with
aver age household income of Rs 46,000 per
month and 2 million households with a
household income of Rs 115,000 per month.
Eating out has emer ged as a tr end, which is
pr evalent within this elite gr oup. Two of out of
ever y five households in this gr oup eat out at
least once a month. Ther e ar e 100 million 17-21
year olds in India, and six out of ten households
have a child that was bor n in the post-
1. Executive Summary
liber alization er a and has gr own up with no
guilt of consumption.
Sales by Indian food ser vice companies totalled
Rs 350 billion in 2002. The or ganized sector is
r esponsible for appr oximately Rs 20 billion
wor th of sales. Indian consumer s spend only 2.4
per cent of their food expenditur e in hotels and
r estaur ants (including on pr emises and take-out
sales). Amer ican consumer s, by compar ison
spend 46 per cent of their food expenditur e on
away-fr om-home meals. These demogr aphic
number s r epr esent a young nation which has an
incr eased pr opensity to spend in r estaur ant and
other food ser vice sector s.
Analysis of responses
An analysis of 165 r esponses out of 1100
questionnair e sent nationwide r evealed some
inter esting statistics:
A major ity of r espondents (53%) wer e
r estaur ants that achieved an aver age check
of between Rs 200 and Rs 400.
The total number of employees employed
by 66% of the r estaur ants is under 40 with
only 3% r espondents employing mor e than
100 employees. The sample ther efor e
r epr esented mid-size r estaur ants, which
ar e a major ity in the countr y.
With r egar ds to questions on tip and
shar ing of tips, 83% of the r espondents do
not levy any ser vice char ge on the
r estaur ant bill. In compar ison, 77% of the
r espondents do not char ge a ser vice char ge
in banquets. A major ity of the r espondents
(60%) have tip pools.
Emerging Food and Restaurant Trends
Some of the emer ging culinar y tr ends
inter nationally include the popular ity of health
foods, use of fr esh and authentic ingr edients,
acceptance of new fusion concepts and
establishing of the chef entr epr eneur. In India
multinational r estaur ant chains had to make a
downwar d pr ice r evision and offer mor e
vegetar ian toppings to incr ease sales volume.
This led to a dr amatic impr ovement in their
per for mance. They ar e also adding mor e spicy
items in their menus to satisfy Indian taste buds.
I nter national and domestic multi-unit
r estaur ant gr oups ar e expected to dr ive the
expansion in the r estaur ant industr y in India.
Among the leading tr ends in this r egar d would
be the expansion of quick ser vice Asian
r estaur ants, fusion concepts, r estaur ants with a
focus on enter tainment, and ethnic and r egional
cuisine r estaur ants.
Restaurant Valuations and Feasibility
Studies
Ther e have been ver y few r estaur ant
tr ansactions that have taken place in India till
date, lar gely because the r estaur ant business
has not yet evolved into a matur e business.
However, we for esee a fair bit of activity in this
ar ea in the futur e: changes in mar ket tr ends and
competition, spur r ed by a huge expansion in the
food ser vice industr y in all major metr o cities,
would cause many r estaur ants to change hands
fr om one oper ator to the other. Restaur ant
valuation is a specialised ar t and appr aiser s of
r estaur ant r eal estate nor mally consider thr ee
appr oaches to value: the cost appr oach, the
sales compar ison appr oach, and the income
appr oach. Each appr oach has its own str engths
and weaknesses, depending on the age and
condition of the impr ovements and whether the
building is occupied by an oper ating r estaur ant
or is vacant. The cost appr oach is used to
estimate the cost of pur chasing a site suitable
for r estaur ant development and building a
r estaur ant on the site, including the cost of
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ExecutiveSummary
landscaping the site. The sales compar ison
appr oach consider s r ecent sales of r estaur ant
pr oper ties that ar e compar able to the subject
r estaur ant pr oper ty in location, size, and br and
affiliation (if the r estaur ant was in oper ation at
the time of sale). The income appr oach
consider s the actual or pr ojected r ental income
that could be gener ated by a r estaur ant business
occupying the building.
A feasibility study is much mor e than a site-
location study - this appr oach involves
gather ing and analysing a gr eat deal of
infor mation, fr om demogr aphics to design,
which helps the oper ator s make a better
infor med decision about the potential success of
a specific concept at a cer tain location. In or der
to establish the feasibility of the pr oposed
r estaur ant, one must fir st estimate the
development costs of the pr oject. By analysing
both development cost figur es and cur r ent
mar ket conditions, and by making adjustments
for the specific char acter istics attr ibuted to the
pr oposed r estaur ant (such as location, size,
facilities, class and so for th), one will be able to
der ive an appr opr iate constr uction cost
estimate for the r estaur ant. This investment has
to be compar ed with the r etur ns being indicated
by the income and expense statement to
evaluate whether or not the r estaur ant
envisaged is financially feasible.
Restaurant Case Studies
Four r eal life case studies ar e pr esented with the
attempt to highlight cr itical factor s that
deter mine the success or failur e of a r estaur ant.
For each case study, we inter viewed the
entr epr eneur and asked him/her to identify the
key lessons lear nt in r unning a r estaur ant. We
descr ibe the exper ience of each entr epr eneur,
together with their per ceptions of wher e they
wer e r ight, or wher e they went wr ong. Two case
studies r epr esent entr epr eneur s who believed
they had the r ight idea as well as the r esour ces
to make a success in the r estaur ant business,
and they succeeded The other two cases
highlight some of the factor s that did not allow
the r estaur ant to succeed and both of them had
to close down. The studies give the factor s,
which led to the success of these enter pr ises.
A
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Significant economic & demographic facts
India has ar r ived on the global r oadmap. It is
the only countr y that has exper ienced
acceler ation in gr owth r ates of per capita
income over the past decade. Almost all other
economies have shown gr owth r ates lower than
India's thr ough the decade. Also, India's per
capita income gr owth over the past five year s
(1997-2002) has outper for med that of other
developed and major Asian economies, save
China.
India's per capita income gr ew by about 19% in
1997-2002, second only to China, whose per
capita income gr ew by 39% dur ing this per iod.
The only other emer ging Asian countr y that
compar es with India's gr owth r ates is Kor ea,
which has gr own ar ound the same r ate as India.
Taiwan comes four th with a gr owth r ate of 13%
dur ing the per iod.
Dur ing 1992-2002, India's per capita income
gr ew by 46% - a r ise of 980 basis points (9.8%)
fr om the 36.5% gr owth r ate obser ved dur ing
1982-92. On the other hand, China has shown a
decline in gr owth r ate over the decade by as
much as 700 basis points (7%). And countr ies
such as Thailand and Hong Kong have seen a
fall in gr owth r ates by as high as 6,200 basis
points (62%) and 5,100 basis points (51%)
r espectively.
Incr easing ur banization and r ising disposable
incomes ar e char acter istics that ar e common
acr oss sever al emer ging economies, par ticular ly
in Asia. However, the pace at which this has
taken place in India in the last few year s is likely
to continue over the next decade and will
outpace most other economies in the r egion. In
par ticular, Mer r ill Lynch estimates gr owth in
ur ban consumption at potentially 20% per
annum in nominal ter ms (16% in r eal ter ms) for
at least the next 5-7 year per iod. What explains
this phenomenon? The answer lies in the
demogr aphic shift that is taking place in India.
To put it simply, India is pr oducing a much
lar ger number of young people enter ing the job
mar ket compar ed to other Asian economies. The
number of wor king-age adults in the countr y is
r ising at a fast pace. While this is tr ue of China
as well, the pace of incr ease is faster in India
than in China. Thus, even with China's vigor ous
population policies, its per capita income
gr owth is not r ising as fast as India.
The r estaur ant industr y is an impor tant
component of our nation's economy, and
employment oppor tunities in this sector should
continue to gr ow in the futur e as a dir ect r esult
of the demogr aphic changes taking place.
Indian consumer s spend only 2.4 per cent of
their food expenditur e in hotels and r estaur ants.
Amer ican and Br itish consumer s, by
compar ison, spend 46 per cent and 29 per cent
r espectively, of their food expenditur e on away-
fr om-home meals. This indicates that ther e is
significant scope for the gr owth of food ser vice
sector in India in the year s to come.
A number of factor s ar e dr iving incr eased
foodser vice sales in India:
Gr owth in per sonal income- The incr ease in
buying power of Indian consumer s is dr iving the
gr owth in the foodser vice sector. Apar t fr om the
gr owth in per capital income, as per figur es
given above, ther e ar e other impor tant factor s
also contr ibuting to this kind of consumption.
Just 2.4 per cent of Indian households ear n 50%
of India's GDP. The top 3.9 million households
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2. Background Scenario and Numbers
have an aver age household income of
appr oximately $35,000 per annum. Accor ding
to the National Council for Applied Economic
Resear ch (NCAER), as indicated in Table 2-1,
high income households in ur ban India gr ew at
over 21.5% on a compounded annual gr owth
basis between 1995-96 and 1998-99.
Tabl e 2-1 gr ow t h i n per c api t a i nc ome
by i nc ome cl asses
Income Class* Average Annual Growth in per
capita income (CAGR in %),
1995-96 to 1998-99
Urban Rural Total
Lower -10.8 -4.5 -5.5
Lower-middle 0.9 7.7 5.6
Middle 5.3 7.8 6.6
Upper-middle 9.9 8.6 9.3
High 21.5 14.3 18.6
* inflation adjusted, comparable over time
Source: NCAER
The consuming classes consist of 40 million
income-ear ner s with a per capita income of
$4,000 (Rs. 1.8 lakhs) and 10 million with a per
capita income of $12,000 (Rs. 5.4 lakhs).
Consumer s ar e also migr ating up the income
chain - fr om the "have nothing" to the "have
some" to the "have mor e" to the "have lots" and,
finally, "have all". These number s for differ ent
income gr oups ar e given in Table 2-2.
Tabl e 2-2 No of Househol ds by i nc ome
cl asses
No of Category Anuual Monthly
Households Income USD Income Rs
2 Million Have All 30,000 115,000
10 Million Have Lots 12,000 46,000
40 Million Have More 4,000 16,000
100 Million Have Some 1,500 6,000
30 Million Have Nothing 200 700
Source: IMA Research
Conversion rate of 1 USD = Rs 46 was used for this table.
Shr inking household size- The size of the Indian
household has declined over the last few year s
(fr om 5.9 people per household in 1990 to 5.5
people in 1998). The total number of households
in India has incr eased by less than 3 per cent per
year fr om 1990 to 1998; however, the number of
households in middle, upper and high-income
segments has gr own by 12% annually.
Appr oximately 23.6 million households have
been added to the high, upper and middle
income segments of Indian consumer s fr om
1990 to 1998. These households have higher
disposable income per member and have a
gr eater pr opensity to spend on food.
Ur banisat ion- Most high income I ndian
consumer s live in ur ban India. Appr oximately
50 per cent of households in the high, upper and
middle income gr oups r eside in ur ban ar eas.
Over one-thir d of ur ban Indian consumer s
r eside in less than one per cent of the total
number of cities in India. The per centage of
Indians living in cities has incr eased fr om 19.9
per cent in 1980 to 30.5 per cent in 2000.
Gr owing number of women in the wor kfor ce-
The number of dual income households wher e
both husband and wife wor k is incr easing. Over
16 per cent of the population of Indian women
wor k full-time and spend most of their time
away fr om home; this has been an impor tant
factor influencing the tr end towar ds mor e meals
away fr om home.
Emer gence of t he Liber alisat ion Childr en-
Ther e ar e a 100 million, 17-21 year olds in
India, and six out of ten households have a
"liber alisation child" (Post 1991). This is a
gener ation that was bor n in the post-
liber alisation er a and has gr own up with no
guilt about consumption.
The r ise of the self employed- The pr opor tion of
self employed in ur ban India has r isen to above
40%, r eplacing the employed salar y ear ner as
the new "mainstr eam mar ket". A Hansa
Resear ch Gr oup study shows the even in the
'cr eamy layer ', compr ising the top two social
classes in towns having a population of 10 lakh
plus, in ur ban India, 40% of chief wage ear ner s
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in households ar e shopowner s, petty tr ader s,
businessman and self employed pr ofessionals.
Unlike the salar y ear ner, the self employed use
pr oducts much mor e to signal success.
Menu diver sificat ion- High-income I ndian
consumer s ar e seeking var iety in their choice of
food. Ur ban Indian consumer s ar e awar e of
var ious inter national cuisines (Continental,
Chinese, Mexican, Italian, Thai and Japanese)
and an incr easing number ar e willing to tr y new
foods.
Super Rich Defined
The Media Resear ch User s Council (MRUC)
under took a study of the incomes and spending
patter ns of households and called it The IRS
Platinum. The data collected was then analysed
by the Communication Channel Planning (CCP)
division of Initiative Media.
I RS Platinum defines super r ich as any
household that has a colour television,
r efr iger ator, washing machine and a car. The
study was r estr icted to Mumbai, Delhi,
Ahmedabad, Bangalor e, Chennai, and Pune -
the cities having a high pr opor tion of
households that satisfied the above cr iter ia.
These towns account for 39 per cent of all the
super r ich households that r eside in ur ban India
today.
It is inter esting to note that metr os such as
Calcutta and Hyder abad ar e missing fr om the
list. These cities would have definitely qualified
by the nor mal demogr aphic par ameter s. They
missed out since the penetr ation of one or mor e
of the listed dur ables was low in these other wise
lar ge metr os.
A sample of 5,226 households was sur veyed by
ORG-MARG on behalf of MRUC to under stand
the lifestyles of the affluent, with media and
consumer habits of such individuals and their
households. Only 3.4 per cent of the households
in those six metr os qualified to be included in
the Platinum categor y.
The aver age monthly household income (MHI)
of a Platinum household is Rs 23,000. And,
inter estingly enough, ever y month, 60 per cent
of this amount is spent to maintain the life and
style of the household.
Well-heeled Capital of India
As per the study, ever y second Platinum
household is in Delhi. Mumbai comes next, but
the pr obability dr ops down to one out of five. It
is tr ue that today, Delhi is, by far, the city of the
super r ich of I ndia. The city's Platinum
households have an aver age income of Rs
24,450. Mumbai ear ns the highest (Rs 31,970)
and Bangalor e ear ns the least (Rs 20,180). The
chief wage ear ner of the family is highly
educated. I n ter ms of occupation, he is
pr edominantly a businessman in Mumbai,
Chennai and Ahmedabad. In the other cities he
is either an officer or an executive at a senior
level. Mor eover, eighty-eight per cent of
Platinum households' adult member s have a
college-level degr ee.
In these households the housewife is also highly
educated (68 per cent ar e at least gr aduates).
However, in spite of their high education, only
17 per cent ar e wor king, either full-time or par t-
time. The aver age household size is 4.5, which
r eflects the nuclear str uctur e of the families. 85
per cent of this elite gr oup has its own house and
is gr adually going in to buy its second TV set.
Almost all the households in this gr oup have a
cable and satellite connection.
If you have it then spend it
The inter esting par t is the infor mation that IRS
Platinum pr ovides on the monthly family
expenditur es. The patter ns ar e indeed ver y
13
r evealing. On an aver age 61 per cent of MHI is
spent to maintain the life and style of these elite
households. It r ises to 69 per cent in Ahmedabad
and dr ops to 56 per cent in Chennai. The
expenditur e is tr acked acr oss 20 heads r anging
fr om the monthly electr icity bill to the amount
spent on last eating out. On an aver age, each
head accounts for about 5 per cent of the total
expenditur e. The highest amount goes for
monthly pr ovisions accounting for almost 17
per cent of the total spend.
Chennai is the surprise package
At city level cer tain inter esting patter ns
emer ged. Chennai had the highest aver age
monthly telephone bill. Its r esidents spend the
maximum on per sonal car e pr oducts as well as
on cosmetics. Likewise, they spend the
maximum while eating out, on alcohol and
bever ages, on buying gifts and also on char ity
and donations. Bangalor e pays the highest
monthly r ents, and spends the highest among all
cities on maintenance and on tr avelling and
conveyance.
In ter ms of occupation, it is the r eflection of the
Indian economy with 44 per cent focussing on
the manufactur ing sector. Within this,
engineer ing goods alone account for 8 per cent
of them. This is the lar gest skew acr oss all the
thr ee sector s put together. Financial ser vices
including banks (5.5 per cent) and the cur r ent
favor ite, IT and softwar e (4.2 per cent) stand out
amongst the r est.
In ter ms of their media habits, as expected,
almost all the Platinum households can be easily
r eached thr ough either the pr int or the
television. Radio has lost out (25 per cent), but of
those tuning in, almost 90 per cent ar e tuning
into FM. However, unlike the West,
pr edominantly they tune in at home. But the
sur pr ise package is Inter net. It has alr eady
over taken Radio (30 per cent). Platinum
households ar e spending mor e time on the
Inter net than on r eading.
Number of Restaurants in India
It is difficult to assess the number of r estaur ants
in India. They r eceive their licenses fr om the
local municipal author ity, which is mainly a
licence fr om the point of view of health and
hygiene. In cer tain bigger cities, ther e is also a
r equir ement of a license fr om the local police
for star ting oper ations. Restaur ant
establishments in semi-ur ban and r ur al ar eas,
which may also include r oad-side r estaur ants
and dhabas on inter-city r oads and highways,
may not be possessing any license, fr om any
author ity. It is, ther efor e, difficult for anyone to
compile statistics of all the r estaur ants in India.
We believe that the best effor t in this r egar d has
been made in the gover nment census. We have
figur es available fr om The Thir d Economic
Census which was conducted in all cities/union
ter r itor ies except Jammu and Kashmir dur ing
1990, along with the house listing oper ations of
the 1991 population census. We have not been
able to access the economic census which may
have been done in 2000, as par t of the
population census of 2001.
The economic census of 1990 divided hotel and
r estaur ant enter pr ises in two categor ies, Own
Account Enter pr ises (OAE) and Establishments
(Estt). The figur es of the two categor ies have
been separ ately given for r ur al and ur ban ar eas.
Table 2-3 r eflects the br eak-up of hotel and
r estaur ant establishments for r ur al and ur ban
India. Table 2-4 r eflects data r elating to the
state-wise distr ibution of hotel and r estaur ant
enter pr ises in the countr y.
14
Tabl e 2-3 No of Hot el and Rest aur ant
Ent er pr i ses i n I ndi a
Location OAE % Estt % Total %
Rural 459,134 42.6 133,240 12.4 592,374 55.0
Urban 243,044 22.5 242,888 22.5 485,932 45.0
Total 702,178 65.0 376,128 34.9 1,078,306 100.0
Source: The Economic Census of India, 1990
If we assume that ther e may have been a gr owth
of 6% annually in hotels and r estaur ant
establishments after 1990, the number of
establishments would have doubled in the 12
year s upto 2002. We ther efor e estimate that
ther e ar e appr oximately 2.2 million or 22 Lakh
hotel and r estaur ant establishments in India in
the year 2002. We fur ther estimate that of the
total figur e, appr oximately 500,000 r estaur ants
qualify as establishments in the or ganized sector
with mor e than 20 seats, an entr ance door, a
menu car d and waiter ser vice. As the number of
lodging or hotel units in these figur es would not
be mor e than 20,000 or 30,000, we can pr esume
that the entir e figur e of 22 lakhs can apply to the
r estaur ant sector. For r estaur ants, the gr owth
patter ns would be differ ent for differ ent cities,
with metr o cities achieving about 15-20%
gr owth and smaller cites about 5%.
The eating out culture
Eating out has evolved into a popular tr end
among Platinum households. Two out of five
such households eat out at least once a month.
This is highest in Bangalor e (43 per cent) and
lowest in Pune (33 per cent). It is estimated that
Indians spend Rs 350 billion annually on eating
out. Mor oever, of this Rs 350 billion, the
or ganised sector accounts for only Rs 20 billion,
suggesting a tr emendous potential for gr owth in
this ar ea.
An analysis of National Accounts Statistics data
with r egar ds to pr ivate final consumption
figur es (PFCE) r eveals inter esting insights as
well. The national accounts pr ovide
disaggr egated data for 37 consumption
categor ies. Although the over all PFCE is
available for 2001-02, the disaggr egate data is
available up to 2000-01. Ther e wer e only nine
PFCE segments that have r ecor ded continuous
high gr owth per for mance and include hotels
and r estaur ants.
Another sur vey that captur es eating out habits is
the Reader ship Sur vey. Table 2-5 and Table 2-6
illustr ate the eating out habits of the sample by
city and for the countr y as a whole. The sur vey
helps in identifying cer tain tr ends as r egar ds the
use of r estaur ants and fr equency of their use.
The r esults indicated that Bangalor e scor ed the
highest in ter ms of the per centage of
r espondents eating out mor e than once a week
followed by Kolkata and Chennai. On a br oader
level the all India aver age of r espondents r ar ely
eating out was 70%, once again indicating the
potential that exists for the food ser vice sector in
the countr y in the year s to come.
Tabl e 2-4 Geogr aphi c al Di st r i but i on of
Hot el and Rest aur ant Ent er pr i ses
Own Account
State/UT Enterprises Establishments All
Andhra Pradesh 69,979 26,504 96,483
Arunachal Pradesh 446 1,029 1,475
Assam 12,005 14,713 26,718
Bihar 39,822 21,599 61,421
Delhi 10,917 10,642 21,559
Goa 1,740 1,189 2,929
Gujarat 14,759 12,945 27,704
Haryana 11,971 5,426 17,397
Himachal Pradesh 7,931 3,214 11,145
Karnataka 60,093 34,429 94,522
Kerala 71,472 27,483 98,955
Madhya Pradesh 39,248 24,412 63,660
Maharashtra 47,828 52,237 100,065
Manipur 2,174 794 2,968
Meghalaya 2,222 3,100 5,322
Mizoram 1,010 619 1,629
Nagaland 589 949 1,538
Orissa 34,811 18,007 52,818
Punjab 10,006 6,694 16,700
Rajasthan 29,426 14,820 44,246
Sikkim 261 398 659
Tamil Nadu 85,563 36,637 122,200
Tripura 4,096 1,254 5,350
Uttar Pradesh 73,911 28,760 102,671
West Bengal 68,179 26,508 94,687
Others 1,719 1,766 3,485
Total 702,178 376,128 1,078,306
15
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A nalysisof QuestionnaireResponses
3.1 GENERAL
This study of Restaur ant Industr y in India-
Tr ends & Oppor tunities is based on data and
comments pr ovided by member s of the
Feder ation of Hotel and Restaur ants Association
of India. In or der to r eflect a compr ehensive
view of the r estaur ant industr y, we have
included comments and data fr om both chain
affiliated and independent r estaur ants.
About 1,100 questionnair es wer e sent out
nationwide to independent r estaur ants and
hotels. A total of 165 r estaur ants r esponded, of
which 90 r esponses wer e fr om the metr o cities
of New Delhi (18), Mumbai (43), Kolkata (2),
Chennai (6) and Bangalor e (10). The r emaining
75 r esponses r eflected a homogenous mix fr om
44 cities in India with the maximum r esponses
fr om Pune (11), followed by Agr a (8) and Jaipur
(5). However, it is impor tant to note that
r esponses for the financial data wer e not as
complete when compar ed to the gener al
questions. This factor combined with our
str ingent cr iter ia to accept only validated
financial data r esulted in fewer r esponses,
pr oviding us a total of 72 usable r esponses. As
the data in the following par agr aphs shows, the
r espondents belong to the upper end segment of
r estaur ants in India. They ar e the ones who ar e
mor e or ganized to r espond to questionnair es.
This may not be a negative factor for this study,
as they ar e usually tr end setter s which other s
follow.
Composition of Participating Restaurants
The sur vey indicated that 40% of the
r espondents wer e r estaur ants located within a
hotel. A slightly lar ger pr opor tion (41%) wer e
independent r estaur ants oper ating a single unit
and 19% wer e multi-unit r estaur ants oper ating
two or mor e units. Mor eover, 40% of the
r estaur ants that par ticipated in the sur vey wer e
owned by sole pr opr ietor ships, 15% wer e
thr ough par tner ships and 40% wer e pr ivate
limited companies. Lar ge hotel and r estaur ant
companies wer e conspicuous by their absence
and contr ibuted only 1% of the total r esponses.
This can also be explained by the fact that lar ge
hotels do not maintain detailed/accur ate
financial br eak-up of costs by r estaur ant, as they
use a number of centr al ser vices like a common
laundr y, housekeeping and secur ity and, in most
cases, a centr al kitchen.
Highlights & Characteristics
Table 3.1-1 on page 18 summar izes the
r esponses to Section I of the questionnair e and
pr ovides a view to some impor tant
char acter istics r epr esentative of r estaur ants in
India.
The major ity of r espondents (53%) wer e
r estaur ants that achieved an aver age check
between Rs 200 and Rs 400. The second-
lar gest gr oup, compr ising 36% of the
r espondents, had an aver age check of
between Rs 400 and Rs 650. A much
smaller per centage of r estaur ants, 5% and
6%, had an aver age check of either over Rs
650 or below Rs 200, r espectively.
60% of the r espondents indicated full liquor
ser vice and 5% indicated a license for only
wine and beer. 35% of the r espondents
ser ved no alcoholic bever ages.
Multicuisine r estaur ants, ser ving a var iety
of cuisine including Indian, Continental
17
3. Analysis of Questionnaire Responses
and Chinese, constituted a fair ly lar ge
segment (17%) of the r espondents to the
sur vey.
Recor ded music (62%) is the most widely
used enter tainment in the r estaur ants. A
number of r espondents (17%) use live
bands.
The r esponse with r egar ds to the site and
building on which r estaur ants ar e located
dr ew an almost equal r esponse between
owned and leased. This is also indicative of
the fact that a major ity of r estaur ants
r esponding to the sur vey (63%) have been
in the business for over ten year s and only
6% of the r espondents have been in
business for under two year s. As leasing
r estaur ant buildings is a fair ly r ecent tr end,
we assume that, had the r espondents been
skewed towar ds mor e r ecent entr ants, the
per centage of sites leased as opposed to
owned would have been higher.
Almost all r espondents ar e open for lunch
and dinner. 44% of the r espondents ar e
open for br eakfast and 13% r esponded as
being open for near ly 24 hour s. Most of the
last two categor ies must be hotel
r estaur ant.
The sur vey indicated that the major ity of
r estaur ants (38%) ar e between 50 and 100
seats.
The total number of employees employed
by 66% of the r estaur ants is under 40 with
only 3% r espondents r esponsible for
employing mor e than 100 employees.
Over one-thir d of the r estaur ants
r esponded to having r enovated their
r estaur ant in the last one year but an equal
number also had not r enovated for over
thr ee year s. The aver age amount spent per
r estaur ant on r enovations was Rs 9 lakh.
A major ity of r estaur ants (73%) r esponded
that they did not have a loyalty pr ogr am. In
fact, we believe a much lar ger per centage
of r estaur ants do not have any loyalty
pr ogr ams, but some hotel r espondents may
have confused r estaur ant loyalty pr ogr am
with the hotel loyalty pr ogr am.
Tabl e 3.1-1 Composi t i on of Par t i c i pat i ng
Rest aur ant s
Type of Ownership
Sole Proprietorship 19 %
Partnership 40
Government Owned -
Private Company 40
Public Limited Company. 1
Type of Organisation
Independent (operates one unit) 41 %
Multi-Unit (operates two or more units) 19
Hotel restaurants 39
Others 1
Primary Type of Business
Fine dining (average check over Rs. 650) 5 %
Fine dining (average check over Rs. 400) 36
Fine dining (average check over Rs. 200) 53
Any Other (Average check below Rs. 200) 6
Limited service (only quick service / fast food) 0
Liquor Service
Full liqour Service 60 %
Only Wine and Beer 5
No alcholic beverages 35
Primary Menu Theme
Indian Mughlai 22 %
Indian Fast Food 10
French / Continental 9
Western Fast Food 4
Regional (eg. South Indian etc) 12
Coffee Bar 4
Asian (chinese, Indonesian, Japanese, Korean) 15
Mexican 2
Italian 4
Multicuisine 17
Any other
Entertainment in Restaurant
Live band / Show 17 %
Television Monitor 18
Recorded Music 62
All the above mentioned entertainment 2
Any other 1
Site on which restaurant is located
Land owned 30 %
land leased 11
18
Building owned 31
Building leased 27
Number of Years in Business
under 2 years 6 %
2 to 5 years 14
5 to 10 years 17
over 10 years 63
Restaurant's best estimate of sales if offered in %
Take out 5 %
Outside Catering
Banquet Services
Restaurant Opened for
Breakfast 44 %
Lunch 96
Dinner 100
24 hours (nearly) 13
Number of Seats
Under 50 4 %
5o to 100 38
100 to 150 31
150 to 200 14
200 to 250 7
250 to 300 3
Above 300 3
Total Square Footage
Under 1,000 6 %
1,000 to 2,000 21
2,000 to 3,000 14
3,000 to 4,000 18
4,000 to 5,000 17
Above 5,000 24
Total no of employees
Under 20 25 %
20 to 40 41
40 to 60 13
60 to 80 12
80 to 100 6
Above 100 3
Last renovation carried out
Under 1years 34 %
1 to 3 years 30
Over 3 years 36
Total cost of renovating (Lakhs) 9
What services do you outsource/contract ?
Cleaning 20 %
Payroll and Accounting 9
Laundry 52
Marketing 9
Repair and Maintenance 38
Food production 7
Any other 7
Do you have Loyalty program ?
Yes 27 %
No 73
3.2 TRENDS
Section II of the questionnair e was designed to
highlight emer ging tr ends within the r estaur ant
industr y in India. The questions cover ed a wide
ar ea r anging fr om employee hir ing and
motivation to locations and menu themes for
new r estaur ants.
Below, we highlight some of the impor tant
tr ends that emer ged fr om the analysis of the
r esponses r eceived.
Refer r als wer e r anked as the fir st choice as
an avenue to r ecr uit staff, followed by
adver tising, placement agencies and
inter net sites. Some r espondents indicated
campus r ecr uitments, walk ins and dir ect
applications as other avenues used by them
in this r egar d.
Higher Salar y, followed closely by Gr owth
Pr ospects, wer e the leading motivation
factor s indicated by r espondents.
Respondents chose business people as their
most impor tant customer gr oup. This is
per haps in line with the char acter istics of
the major ity of r estaur ants par ticipating in
the sur vey
Mor e than 80% of the r espondents felt that
the cultur e of eating out has incr eased over
the last thr ee year s.
With r egar ds to what would be their
success for mula for a new r estaur ant in
ter ms of menu theme, 28% of the
r espondents chose Multicuisine, 17% chose
Indian Mughlai, 16% chose Asian and 10%
pointed to r egional Indian.
Almost half the r espondents pr efer r ed their
r estaur ants to be located in a commer cial
19
mar ket, while 26% pr efer r ed to be located
in a hotel.
The sur vey indicated that the major ity of
r estaur ants (38%) would pr ice a new
r estaur ant they opened between an aver age
per cover of Rs 200 and Rs 400.
Over one-thir d of the r estaur ants use
impor ted r aw food mater ials and 44% stock
impor ted alcoholic bever ages.
A major ity of r estaur ants (59%) r esponded
that they did not impor t or use impor ted
kitchen or r estaur ant equipment. However
a significant 41% did.
With r egar ds to questions on tip and
shar ing of tips, 83% of the r espondents do
not levy any ser vice char ge on the
r estaur ant bill. Among the 17% who do levy
a ser vice char ge, the median with r egar ds
to the per centage char ged is 8%.
In compar ison, 77% of the r espondents do
not levy a ser vice char ge in banquets.
Banquets is mostly a hotel activity and it is
possible that those who said yes, wer e hotel
r estaur ants. However, the 23% that do,
have a median char ge of 10%. A major ity
of the r espondents (60%) have tip pools.
I nter estingly, wher e r estaur ants levy
ser vice char ge as par t of the bill, the
median per centage r etained by
management is 25% as compar ed to 10% in
case of tip pools. Also, the median
per centage r etained by ser vice staff is much
higher in the case of tip pools (97%), as
compar ed to a situation wher e ser vice is
char ged and the money distr ibuted mor e
equitably among all staff with the ser vice
staff r etaining a lower figur e (53%).
Table 3.2-1, summar izes the r esponses to
Section II of the questionnair e on the tr ends.
Tabl e 3.2-1 Tr ends as i ndi c at ed by
r espondent s
What avenues do you use to recruit staff Rank *
Advertisements 2
Internet Sites 4
Placement Agencies 3
Refferals 1
Any Other 5
What do you consider the most
important ways to motivate staff Rank
Higher salary 1
Flexible working hours 4
Increased training 3
Modern restaurant/ kitchen equipment 5
Growth prospects 2
Any other
Who is your most important customer group? Rank
Business People 1
Tourists (out of town) 3
Families/housewives 2
Parties for children 4
Young people (15 to 30 age group) 5
Any other
Which success factors are most important
to you? Rank
Quality of food 1
Entertainment 5
Quality of service 2
Promotion/ Marketing 4
Restaurant seting/dcor 3
Do you feel in the last three years the
culture of eating out has
Increased a lot 58 %
Remained the same 6
Increased marginally 29
Decreased 6
If you were to build another restaurant
today(what in your view will be a success
formula) ?
What would be your Menu theme
Indian Mughlai 17.4 %
Indian fast food 15
French/ Continental 1
Western Fast Food 5
Regional (eg. South Indian etc) 10
Coffee Bar 5.16
Asian (Chinese/Indonesian/Japanese/Korean) 16.1
Mexican 0
Italian 1
Multi Cuisine 28
Would you prefer to be located in/attached to
A hotel 26 %
In a commercial Market 48
Residential Area 14
A transportation center(airport, railway station) 13
What kind of Restaurant would it be?
Fine dining (average check over Rs. 650) 11 %
20
Fine dining(average check over Rs. 400) 33
Fine dining(average check over Rs. 200) 38
Limited Service (all quick service/ fast food) 19
Do you use imported materials?
Food and non alcoholic beverages
Yes 37 %
No 63
Alcoholic spirits
Yes 44 %
No 56
Kitchen or restaurant equipment
Yes 41 %
No 59
What is your policy on tips?
Do you levy service charge in Rest. Bills
Yes 17 %
No 83
% of bill amount 8
Do you levy service charge on banquets?
Yes 23 %
No 77
% of bill amount 10
Do you have a tip pool? 60 %
Yes 40
No
How do you dispose off the service charge? Median **
Retained by Management 25 %
Managers 15
Service Staff 53
Kitchen Staff 25
Others (e.g. office cashier, security, etc) 10
How do you dispose off tips pools? Median
Retained by Management 10 %
Managers 10
Service staff 97
Kitchen staff 29
Others (e.g. office, cashier, security) 10
* 1 is the hightest and 5 lowest
** Please see definition of median on page
3.3 FINANCIALS
Section III of the questionnair e was designed to
captur e the financial str uctur e of the
r estaur ants in India. The questions cover ed the
pr ofit and loss account. The section below
highlights some of the impor tant tr ends that
emer ged fr om the analysis of the r esponses.
Understanding Medians & Means
This section utilizes medians for r epor ting
r esults. A median is defined as the middle value
of all amounts r epor ted for a specific line item.
For example if we r eceived nine r esponses for
number of employees-8,4,2,6,9,7,5,1,3- these
number s would be ar r anged sequentially (in
or der of size) -1,2,3,4,5,6,7,8,9- and the middle
value, 5, would be the median. 50% of the
r esponses r eceived ar e below the value and 50%
ar e above.
In conjunction with medians, lower quar tiles
and upper quar tiles ar e used to give a fur ther
descr iption of the sample r esults. Medians ar e
used most often as we believe that the median
gives less biased r esults compar ed to aver ages
which ar e sum of all figur es divided by the
number of figur es. Medians keep the r esults
fr om being skewed by a few abnor mal
r espondents with higher or lower figur es. For
example if a few r esponding r estaur ants
incur r ed ver y lar ge oper ating losses, those
losses would be divided equally among all
r estaur ants (when using mean calculations) and
would r educe the aver age net pr ofit of the entir e
gr oup which, for the most par t, may have
r epor ted r espectable pr ofits.
Quar tiles divide the r esponses into four equal
par ts, with medians still being the middle value.
The "lower quar tile" is the value that separ ates
the lowest 25% of the r espondents fr om the
sample when ar r anged sequentially, while the
21
upper quar tile defines the boundar y of the
upper 25% fr om the lower 75%. Stated another
way, 50% of all r esponses fall between the lower
quar tile and the upper quar tile. For example if
we r eceive 99 r esponses for a specific items and
the r esponses wer e number ed 1 thr ough 99, the
median (or middle value) would be 50. The
lower quar tile would be 25 (25% of the
r esponses would be below 25) and upper
quar tile would be 75 (25% of the r esponses
would be above 75). Fifty per cent of the
r esponses would fall between the lower and
upper quar tiles.
It will become evident in r eading this r epor t that
columns do not always total when medians ar e
involved. The r eason behind this is that each
line item is analysed separ ately. In Table 3.3-1,
when all amounts ar e ar r anged sequentially, the
median total sale per seat is Rs 81,638. This
figur e is based on the 69 r estaur ants that gave
us infor mation for this specific line item. The
median per seat for total food and bever age
sales ar e Rs57,659 and Rs 18,564, r espectively.
These two amounts wer e analysed on a sample
of 61 and 40 r estaur ants r espectively, which
gave us separ ate food and bever age sales.
Differ ent sample sizes ar e one r eason why
figur es do not add up to the total shown.
Ther e is another r eason that columns in the
table do not total. When using medians, it is
impor tant to r emember that the median food
sales, the median bever age sales and the median
total sales figur es r epor ted pr obably r epr esent
the r esults of thr ee differ ent r estaur ants, even
thought the sample size of each may be equal.
This also holds tr ue for lower and upper
quar tiles.
Table 3.3-1 summar izes the r esponses to Section
III of the questionnair e and highlights some
impor tant findings. A total of 69 r espondents
completed the financial section of the
questionnair e.
Tabl e 3.3-1 Tr ends as i ndi c at i ng by
r espondent s
In Rs.
Median Average Check 241
Median Total Sales per full time equivalent
employee 311,974
Median Total Sales per Square foot 3,494
Median Income before income taxes
as % of total Sales 4.51%
Median Total Cost of Sales 40%
The median aver age check for the
r espondents is Rs 241.
The r espondents r epor ted income befor e
taxes of appr oximately 5% of sales.
Median total sales per full time equivalent
employee is Rs 311.974.
The sur vey indicated that the median for
the per centage of food sale to total sale was
76%. Bever age sale accounted for the
r emainder 24%.
The median cost of sales as per centage of
total sale was 40%.
Table 3.3-2 pr esents the income and expense
statement of the 69 r espondents who pr ovided
financial data. The data is pr esented both as a
per centage of total sales and as amount per seat.
The sur vey indicated that the median for
the per centage of food sale to total sale is
76%. Bever age sale accounts for the
r emainder 24%.
The median cost of sales as per centage of
total sale is 40%
The upper quar tile of income befor e
income taxes is 11% and the median is 5%.
22
23
Tabl e 3.3-2 Per c ent age of Tot al Sal e and Amount per Seat
Percentage of Total Sales Amount Per Seat (Rs)
Lower Median Upper Lower Median Upper
Quartile Quartile Quartile Quartile
Where it Came From
Sales
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 78,040
Cost of Sales
Food
1
44% 43% 40% 18,824 24,646 24,322
Beverage
2
37% 32% 38% 4,667 5,903 7,624
Total Cost of Sales
3
47% 40% 40% 25,882 32,515 30,917
Operating 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 3,028
Total 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 6,235
Total Operating expenses 45% 49% 48% 24,994 39,824 37,775
Interest Expenses 1% 2% 3% 709 1,453 2,101
Other Miscellaneous Expenses 1% 1% 2% 481 780 1,527
Income before income tax 2% 5% 11% 1,172 3,679 8,667
1
Food Cost as percentage of Food Sale
2
Beverage Cost as percentage of Beverage Sale
3
Total F&B Cost as Percentage of Total Sale
Note: While r eviewing Table 3.3-2, it should be bor ne in mind that for each line item the number of
r esponses r eceived var ied ther eby making it necessar y to view data in ter ms of medians and not as
aver ages. Also Income befor e income tax as a per centage can not be der ived fr om simply subtr acting
total expenses fr om the r evenues shown above for exactly the same r eason. Each r evenue or expense
line item must be viewed in isolation, however the total expenses and income befor e income tax lines
indicate the macr o pictur e as indicated by r espondents in the sur vey.
A
24
Food Trends-A t home& abroad
Introduction
When r estaur ateur s want to spot emer ging
culinar y tr ends they go to what they consider
the ultimate sour ce - customer s. Anecdotal
evidence fr om r estaur ant customer s is only one
way to spot tr ends. The pr int media and
television play a big r ole in establishing culinar y
concepts and pr efer ences, with food columnists
and TV chefs endor sing one tr end over the other.
However, the single-biggest factor influencing
culinar y tr ends is population demogr aphics.
Some impor tant demogr aphic changes have
emer ged in r ecent times: incr eased number of
wor king women with little time to cook at home;
a population that tr avels mor e and is exposed to
inter national cuisine; a population which is
mor e concer ned about its health; an incr ease in
expatr iate population; and an incr ease in
disposable incomes. And, beyond all these
factor s, is an indefinable spar k that makes one
culinar y item succeed and another fail. Chefs
ar e always looking for the next big thing,
something that will set them apar t and put them
on the map. Sometimes it succeeds; sometimes
it doesn't.
The following section pr esents an over view of
what culinar y pr ofessionals and industr y
analysts say ar e some of today's exciting
inter national culinar y tr ends.
East meets West
Whether it is called fusion or eclecticism,
blending cuisines is one of today's hottest
culinar y concepts. Fusion is car efully selecting
foods fr om par ts of the wor ld that ar e not
geogr aphically close and combining ones that
go well together. The combinations ar e
numer ous-Thai and Fr ench, Amer ican and
Indian, Southwest and Asian. Her e ar e some
tr ends:
CHINO - LATINO
"Cuisine du Soleil" with Chinese cooking styles
and some exotic flavour s.
Example: Mezza 9 in Singapor e
INDO-LATINO
"Cuisine du Soleil" with str ong Indian Tandoor
pr epar ations and typical her bs and mar ination.
Example: Fr angipani at The Ober oi in Mumbai
NIPPON - SOUTH AMERICAN
Lukewar m Sushi, Sashimi with noodles and
vegetables mar inated in Wasabi-Soy dr essing.
Japanese type salads and Ceviche.
Example: la Nobu in London or Felix in Hong
Kong
PACIFIC RIM
"Fr om down under " Austr alian flavour s and food
pr oduct mixing; Hawaiian and Japanese food;
cooking fusion with lots of seafood and a
Califor nian spir it.
FRENCH THAI
Eur opean ingr edients cooked in Thai style
Example: la Vong (Jean Geor g Vonger ichten)
also coming to India soon.
Healthful and Flavorful
Obesity has become a "four-letter-wor d" for all
aspects of the food industr y, whether gr ocer y or
r estaur ant-r elated. Consumer s ar e looking for
healthier choices and flocking to flavour ful
ethnic cuisines such as Asian and
Mediter r anean foods. With an emphasis on
ingr edients such as vegetables, gr ains and fish,
25
4. Food Trends-At home & abroad
these cuisines appeal to the health- minded
consumer. Accor dingly, food businesses ar e
r esponding and r eacting in a var iety of ways.
Below ar e some of the cur r ent r estaur ant
concepts in USA that ar e addr essing health
issues.
The most pr omising concept, mostly because it
has the muscle of Dar den Restaur ants (Red
Lobster, Olive Gar den, Bahama Br eeze, all in
the United States) behind it, is Seasons52
(www.seasons52.com). The test r estaur ant for
this casual dining concept is in Or lando,
Flor ida. Its name r efer s to the fact that ever y
week of the year differ ent foods r each their peak
of fr eshness and taste and the r estaur ant's menu
changes and adapts accor dingly. Calor ies
typically r ange fr om 300 to 375 for entr ees,
entr e salads and sandwiches and fr om 100 to
200 for appetizer s, soups, and desser ts. The
tr ick to a 200-calor ie desser t? Each is r efer r ed
to as a "mini indulgence" and each of the eight
small selections fits in a tall shot glass.
Founded by an executive fr om yogur t maker
Stonyfield Far ms, O'Natur als
(www.onatur als.com) is tr ue to its name. The
four Maine and New Hampshir e units pr ide
themselves on offer ing all-natur al and or ganic
items r anging fr om steak and chicken to vegan
options plus childr ens' choices.
With thr ee units in the Chicago ar ea, Wheaton,
I llinois-based The Fitness Caf
(www.fitnesscafe.net) positions itself as a
healthy alter native to fast food. The owner s
believe in lifestyle change, not dieting. All menu
items list gr ams of calor ies, pr otein,
car bohydr ates, fats, and fiber and spor t names
like The Fir m, The Flex, The Cr unch, and The
Ir onman. In India too, we have a similar tr end
with the opening of the health juice caf chain
mar keted under the br and Amor etto's.
Back to Basics
Although fusion food r emains hot in many
kitchens, other chefs and industr y exper ts
her ald the r esur gence of simple foods and
flavour s. The tr end in foods is going back to
basics. People ar e tir ed of fusion food because it
became confusion food. It became anything
goes with blending of ever ything. People ar e
star ting to say, "We've had enough, just give me
a good steak."
An incr ease in dining out has also spawned the
need for r estaur ants with casual, simple far e
such as br asser ies, bistr os and tr attor ias. That is
not to say fine dining is out.
"Comfor t food" may have become a clich - as in
"comfor t food TV" - but the desir e to simplify
and slow down is ver y r eal. In difficult times,
which wer e witnessed for r estaur ants in USA
post 9/11, we str ive for something we can r ely
on and hold on to, even if it's just a r eally good
sandwich fr om the local deli, a dish of fr esh-
fr om-the-oven r oast chicken, or a wonder ful
dar k chocolate tr uffle. Food and dining ar e
being called upon to be less and do mor e. The
eating exper ience must still be fast, convenient,
and if at all possible, healthy. Yet it is just as
impor tant for it to not only be good value but
also pr ovide us with r elief and r eassur ance.
Fussy fr ou-fr ous and opulence for its own sake
ar e unnecessar y. Many of the old Fr ench classics
- like coq au vin - ar e r eally ver y simple food.
Chefs go casual;
Chains go chic
Upscale chefs ar e opening mor e casual
r estaur ants in New Yor k, like Danny Meyer 's
Blue Smoke, Michael Lomaneco at Noche, Tom
Colicchio with Cr aftbar and Wichcr aft, Br adley
Ogden's Par cel 104 in Califor nia. "Roadside
cooking being r ewor ked for the Wine Countr y
cr owd" is the way San Fr ancisco Magazine (July
26
Food Trends-A t home& abroad
2003) char acter izes Mar ket, a St. Helena,
Califor nia-based r estaur ant r ecently opened by
a for mer chef fr om Jar dinr e and the ex-wine
dir ector fr om The Fr ench Laundr y. They ar e
cooking up mac 'n' cheese and pair ing mer lot
with meatloaf and wer e r ecently named one of
the "Best New Restaur ants in Amer ica" by
Esquir e's (November 2003).
Mor e chains ar e br inging classically tr ained
chefs on boar d and ar e adding culinar y-
buzzwor d ingr edients to their menu items like
sun-dr ied tomatoes, pesto sauce, br uschetta,
focaccia, and baguette. McDonald's, the
gr anddaddy of them all, has almost single-
handedly br ought chipotle, bar bacoa and
car nitas into mainstr eam lingo with their
Chipotle Mexican Gr ill chain. Even in India, Mc
Donald's Wr aps, which ar e Mexican in or igin,
ar e selling in huge number s.
Even the quick takeout-lunch-at-your-desk has
become gour met and somewhat highly-pr iced.
Takeout lunch five year s ago was a Big Mac and
fr ies; now it's r oast chicken with mozzar ella and
basil on war m focaccia, and the cost has r isen
accor dingly, with a pr ice tag for sandwich, soup,
and a soda between USD10 and USD15.
Living Raw
Today's food news is filled with the new
r estaur ants and folks devoted to r aw food. A
gr owing number of people believe that eating
"living foods" extends youth and staves off
disease. Heat, they maintain, depletes food's
pr otein and vitamin content and concentr ates
any pesticides. Mor e impor tant, it destr oys
food's natur al enzymes which, enthusiasts
claim, facilitate digestion. The pr emise is that
only humans cook their foods and only humans
suffer widespr ead sicknesses and ailments. One
of the r estaur ants getting the most pr ess
cover age over "r aw" is Roxanne's. Located in
Lar kspur, Califor nia it is the fir st r aw r estaur ant
to cast r aw as haute cuisine dining. Another
popular r aw dining spot is Quintessence in
Manhattan which has 3 locations.
Clear ly, this is a style of eating that will not
spr ead to the masses. It will have its day in the
pr ess and cr eate inter est and conver sation. Will
it have a lasting impact on cooking and dining?
Per haps. Yes it is extr eme, but such movements
can have r esidual-to-lasting impact. Don't
dismiss it in total.
The Ubiquitous Sandwich
Sandwiches ar e CHI C! Fr om simple to
decadent, hand-held to knife-and-for k, fr om
calor ie-laden to light and healthy, whether a
snack or a full meal, as a comfor t food or as an
adventur ous new cuisine exper ience,
sandwiches fit into ever y aspect of today's
lifestyles and ar e constantly being r einvented.
Upscale r estaur ants ar e adding lots of new
twists to this classic sandwich.
.. BLT, GOAT CHEESE, AVOCADO & BASIL,
TOASTED ONION ROLL - Gustavino's, New
Yor k
.. LOBSTER BLT - SWEET PEA REMOULADE
ON COUNTRY WHITE BREAD - Chadwick
Restaur ant, Bever ly Hills, CA
.. TEMPURA BATTERED FISH BLT WITH
BACON, LETTUCE, TOMATO & MAYO ON A
SOFT BUN SERVED WITH JERK FRITIES &
BACON AVOCADO RANCH OR ADD BACON
OR AVOCADO - Cuba Libr e, Philadelphia
RAWAS WITH RICADO ROJO, A YUCATAN
RED SPI CE MI X WI TH TOMATO, BELL
PEPPER, CUMI N AND GARLI C I N PI TA-
Basilico, Mumbai
GRILLED ZUCHINI, AUBERGINE, BELL
PEPPERS AND SMOKED SCAMORZA -Olive,
New Delhi
27
India is also seeing the spr ead of sandwiches
with the opening of Subway and the Ir ish chain
O'Br ien.
Chef-driven Cuisine
With such diver sity in culinar y tr ends, ther e is
something for ever y chef to add to his or her
menu. But the r eal tr end may be for chefs to
expand beyond what analysts have defined as
"what's hot and what's not" and to explor e their
own culinar y cr eativity. A few who have become
inter national legends ar e Daniel Boulud, Alan
Ducasse, Jean Geor ges Vonger ichten, Rick
Bayless, Thomas Keller, Nobu Matsuhisa,
Char lie Tr otter, Alan Wong, Douglas Rodr iguez,
Jer r y Tr aunfeld, Floyd Car doz and Ar un
Sampanthavivat.
Better Ingredients
Savvy chefs have come to the conclusion that
they'r e not going to come up with some br illiant
cooking methods. I nstead they ar e
concentr ating on using better ingr edients.
Food Trends specific to India
Although all the above tr ends being witnessed in
USA ar e applicable to India, some specifics
attr ibutable to r estaur ants her e ar e:
An incr easing tr end towar d vegetar ian food
and an incr easing tr end of r eduction in r ed
meats
Fast food is finally her e to stay. Ther e have
been some failur es but the success of Mc
Donalds, Pizza Hut and Domino's Pizza
have caused some people to eat their
wor ds. It is, however, impor tant to note
that the I ndian consumer wants
"inter national desi" and that the Indian
palate is indeed addicted to a cer tain level
of spice. Any new inter national entr ants
would ignor e this fact at their per il.
Ther e is a tr emendous futur e for r egional
Indian cuisine r estaur ants. Ther e ar e ver y
few authentic r estaur ants offer ing r egional
Indian cuisine and that is an ar ea that
could witness significant gr owth over the
next few year s.
An incr easing tr end of fr eestanding
inter national cuisine r estaur ants ser ving
I talian, Mediter r anean, Thai, Spanish,
Kor ean, and other exotic cuisines.
The spr ead of I ndian fast food as
popular ised by Haldir am's, Nathu Sweets
and other s continues and r emains a ver y
lar ge mar ket.
Pizzas, Bur ger s, Indian Tandoor i, Chinese,
South Indian & Thai continue to dominate
the take away business and is gr owing at
double digit annual r ates.
28
A
I nternational Chain Restaurants& FranchiseOpportunities
Introduction
The last few year s have seen significant incr ease
in the number of new r estaur ants opening in
most major Indian cities. This has, in many
ways, coincided with the r evolution that has
taken place in the r etail space, which has
spawned new locations for r estaur ants in the
malls which have developed.
Two types of developments have clear ly
emer ged: one, the gr owth of multinational
r estaur ant chains and two, the bir th of home
gr own br ands like Bar ista, Caf Coffee Day,
Mainland China and many other s.
I nter nationally, lar ge chains dominate the
r estaur ant business and stand-alone outlets ar e
a small per centage. As the r estaur ant industr y in
I ndia gr ows, mor e and mor e inter national
chains will attempt to establish fr anchise
networ ks, while domestic entr epr eneur s will tr y
and establish new r estaur ants under an
established br and name. This will not only be a
tr end pr evalent in independent r estaur ants but
will also apply to hotel r estaur ants. Many hotels
that need a "pr estige" label ar e tur ning to thir d
par ties with the r ight cr edentials and we will see
incr eased activity in this ar ea in India as well.
Fr anchising, which is ver y popular in the United
States, is spr eading fast to developing nations.
This is par tly aided by the str ategy that some
fr anchisor s ar e adopting. While some
fr anchisor s gr ow in their own countr y and
r egions, other s take their concepts over seas in
sear ch of new customer s. Subway looked to
Bahr ain, a small, oil-pr oducing countr y in the
Middle East in their fir st explor ation outside
U.S. bor der s. Today, not counting Canada,
Subway has close to 800 inter national
fr anchises. If we wer e to include Canada, the
number skyr ockets to 2,000. The company's size
has helped them expor t their concept
successfully.
KFC began ventur ing over seas in the 1960s, and
was the pioneer in doing business thr ough
inter national fr anchises. McDonalds then
star ted developing aggr essively, followed by
Subway. Now Subway uses a pioneer pr ogr am
wher e they encour age Amer ican fr anchisees to
find a par tner in another countr y and wor k to
take the Subway exper ience ther e.
Whether sandwiches in the Middle East or
upscale dining uptown, the outlook for food
fr anchising in the next decade continues to look
str ong for savvy r estaur ant chains, accor ding to
The Entr epr eneur 's Sour ce. We have, in this
section, listed some pr ominent tr ends and
popular br ands within those tr ends. This section
is not an exhaustive list of fr anchise
oppor tunities but has been pr ovided as a r eady
r eckoner for potential investor s looking to invest
in a r estaur ant fr anchise. The list also does not
include the mor e tr aditional fr anchise
oppor tunities but is an attempt to highlight the
latest emer ging companies and tr ends.
Mor eover, this is the list of fr anchising br ands
wor king in the inter national mar ket and
par ticular ly the USA. Many of them may not
have a pr esence in India as yet.
29
5. International Chain Restaurants &
Franchise Opportunities
11 Trends & 101 brands
It is impor tant to r emember that almost all
chains star ted as stand alone outlets befor e
becoming multi unit ventur es. Below, we outline
some of the significant inter national tr ends and
br ands.
Noodles, wok, sushi & Co
Tasty and healthy, pan-Asian food has never
been mor e popular. Wok and noodle bar s ar e
popping up all over the wor ld be it, often, with a
ver y modest r oll-out str ategy. Some of the Asian
chains that have gained much popular ity ar e:
Big Bowl, Stir Cr azy Caf, Wok Wok, Wok Away,
Flat Top Gr ill, Noodles & Co, Mar k Pi, Sushi
Samba, Sushi Dor aku, Har u Sushi, Chowking,
Caf' de Cor al, Azie, Asia Nor ia, Wagamama,
Nobu, Quiet Revolution, Yo Sushi, Lo Sushi,
New Cultur e Revolution, Blue Elephant, Busaba
Eatha, Roy's, Itsu, Sushi Map, Matsur i, Sumo,
Amo, Nudelland, Sushi & Soul, Thar a Tha,
Zao Noodle Bar, Dr agon Inn, Pei Wei Asian
Diner, Pick Up Stix, Mongolian Bar becue,Dim
Sum Cour t, Cool Basil, Elephant Jump, Golden
Leaf, P.F. Chang's, Chilli Club, etc. Our own
China White, Mainland China, Or iental Bloom,
Yo China, Stir fr y, Noodle bar ..
Quick / Fast Casual
The fastest gr owing segment of the r estaur ant
industr y is the fast casual dining concept.
Restaur ants in this segment bor r ow some of
their concepts fr om counter ser vice fast food
r estaur ants like Bur ger King and Taco Bell and
still pr ovide an atmospher e and menu mor e the
likes of casual dining at Chili's or Bahama
Br eeze.
Among the fastest gr owing chains in this
categor y ar e Paner a Br ead, Cor ner Baker y,
Chipotle, Culver 's, Cosi, and Potbelly Sandwich
Wor ks. These r estaur ants ar e quickly becoming
the new neighbor hood coffee shops. They ar e
the place to meet after jogging, to get together
while the kids ar e at pr e-school, to r elax
between sales calls, to tr eat an aunt or gr andma
to a meal out, or to br ing a son or daughter for
a special lunch.
What sets these pr oper ties apar t fr om
competition is an eating ar ea that is similar to a
"sit-down" r estaur ant combined with good-
value, high quality menu items. Fr eshness and
quality ar e the mantr as of these menus. Bold
flavor s ar e another distinguishing
char acter istic. Robust pr ofiles continue to be a
main featur e in new menu offer ings, taking cues
fr om ethnic pantr ies. I talian, Asian,
Southwester n, Car ibbean cuisine and heat fr om
chilies and pepper s dominate. Some of the
chains that have acquir ed pr ominence ar e:
Cor ner Baker y, La Madeleine, Paner a Br ead, Au
Bon Pain,Cosi/Xando, La Fer me, Cojean, Le
Pain Quotidien, Par tie De Campagne, Gust,
Ber t's, Atlanta Br ead Company, Piadina, Gr eat
Har vest Br ead, Br ead Shop, Br iazz, House of
Br ead, Noodles & Co., Gar land, Rubio's Baja
Gr ill, Baja Fr esh Mexican Gr ill, Qdoba,
Chipotle, New West Ranch House, Fazoli's, Via
Gio, Bio.it, Wingstop, Exki, Enor m, Itsu,La
Table d'Olivier s & Co, Oh ! Poivr ier !, etc.
Bio / Organic/Fresh
A gr owing number of consumer s want foods
that ar e good for them - high in nutr ition, yet
low in fat and cholester ol. Many ar e shopping at
stor es that stock or ganic and natur al foods.
Ther e ar e ther efor e a number of r estaur ants that
ser ve healthy, nutr itious meals in a fast-casual
for mat. Some of the chains that have made their
mar k in this segment ar e:
Healthy Bites, Hear twise Expr ess, Evo's, Topz,
Bio.it,La Fer me, Cojean, Ber t's, Hear tbeat, Oh!
Bio Mio, Cr ank's, Fr esh & Wild, Jamba Juice,
30
Fr esh Choice Expr ess, Sweet Tomato,
Souplantation, Soup C, Soup Oper a,
Soupwor ks, Soup + Salad, The Quiet
Revolution, Itsu, Pixx, Coco's (Italie), Exki,
etc.
Black Gold
The Star bucks stor y epitomizes "imagine that" in
ever y sense. When the company went public 11
year s ago, it had just 165 stor es cluster ed
ar ound Seattle and in neighbor ing states. At the
time coffee was a 50-cent mor ning habit, and
your local diner was the pusher of choice.
Skeptics r idiculed the idea of $3 coffee as a West
Coast yuppie fad.
Today the company, which does not fr anchise,
has over 6,000 stor es in mor e than 30 countr ies,
with thr ee new stor es opening ever y day. The
str ategy is simple: Blanket an ar ea completely,
even if the stor es cannibalize one another 's
business. A new stor e will often captur e about
30% of the sales of a near by Star bucks, but the
company consider s that a good thing: the
Star bucks-ever ywher e appr oach cuts down on
deliver y and management costs, shor tens
customer lines at individual stor es, and
incr eases foot tr affic for all the stor es in an ar ea.
Ever y week 20 million people buy a cup of
coffee at a Star bucks. A typical customer stops
by 18 times a month; no Amer ican r etailer has a
higher fr equency of customer visits. Sales have
climbed an aver age of 20% a year since the
company went public. Even in a down economy,
when other r etailer s have taken a beating,
Star bucks stor e tr affic has r isen between 6%
and 8% a year. Per haps even mor e notable is the
fact that Star bucks has managed to gener ate
those kinds of number s with vir tually no
mar keting, spending just 1% of its annual
r evenues on adver tising. (Retailer s usually
spend 10% or so of r evenues on ads.)
Bar ista pioneer ed the caf cultur e in India and
r apidly spr ead nationwide with its 'Espr esso
Bar s', with 65 outlets alr eady in oper ation. Caf
Coffee Day is another name that has made its
pr esence felt, with existing 30 outlets in 6 cities.
It plans for 200 cafs, 400 coffee stor es and
3,000 coffee vending machines to post a
tur nover of Rs. 6.5 billion by 2004. Cr aze, that
just opened its fir st outlet in Delhi, plans 5 mor e
soon, car r ying a by-line 'not just coffee'. Qwiky's,
a concept or iginally conceptualised for the US
ur ban locations by two young I ndian
entr epr eneur s, Sashi and Syam of Silicon
Valley, is yet another name that tasted instant
success when its cafes opened in India. With an
investment of Rs 70 million, the chain has
alr eady made its pr esence in 6 cities with 20
self-owned outlets. Its pr oduct/ser vice basket
not only offer s coffee and light snacks but also
includes lifestyle mer chandise like T-shir ts,
books, magazines, gr eeting car ds, coffee mugs
and home espr esso machines. Some of the
chains that have established themselves
inter nationally as well ar e:
Star bucks, Car ibou Coffee, Diedr ich Coffee,
Seattle Best Coffee, Mc Caf, Columbus Caf,
Scapucci, Caf Nescaf, Malongo, Costa Coffee,
Coffee Republic, Caffe Ner o, Puccino's, BB's
Coffee & Muffins, Madisons, Caffe Ritazza, Viva,
Ar oma,Jamaica, Il Caffe Di Roma, Cafe & Te,
Expr esso I llycafe, Plantaciones de Or igen,
Segafr edo Boutique, Il Caffe Di Fior i, Lavazza,
Wor ld Coffee, Caf Einstein, Wiener 's Kaffeebar,
Cafeter io, Balzac Coffee, San Fr ancisco Coffee
Company,Testa Rossa Caffbar, Woyton Coffee,
Java Java, etc.
Italian
Italian food has been the flavor of the moment
for a good few year s now, but it wasn't so long
ago that the only types of pasta available in
31
super mar kets wer e spaghetti and macar oni.
Pasta consumption has doubled since the 1980s,
and it is now consider ed to be Amer ican food,
eaten 1 to 3 times per week. I ndian
super mar kets like Cr ossr oads, Food Wor ld,
Nilgir i and all major neighbor hood gr ocer s now
stock Italian pasta br ands. At least thr ee new
Italian r estaur ants have opened in the capital in
the last one year and we ar e awar e of at least
two new fr eestanding r estaur ants which ar e
planned for opening by ear ly next year. Some of
the inter national chains that have gained much
popular ity ar e:
Maggiano's, Buca Di Beppo, Vinny Testa's,
Romano's Macar oni Gr ill, Cosi, Car luccio's,
Fuzio Univer sal Pasta, Johnny Car ino's,
I taliani's, Timpano I talian Chophouse,
Pepper oni Gr ill, Pasta Pomodor o, Pasta Basta,
Caf Di Fior e, Il For naio, Bice Ristor ante, Zio's
Italian Kitchen, Br avo ! Cucina Italiano, Piatti,
Cucina ! Cucina ! Italian Caf, Pizza Magia,
Palomino Eur o Bistr o, Str ada, Est Est Est, Del
Ar te, Bistr oRomain, etc.
French....
Br asser ies and bistr os offer ing tr aditional,
simple, Fr ench food ar e in vogue. This is a tr end
that has not caught on in India so far, but we
believe that in the next few year s ther e will be at
least half a dozen r estaur ants ser ving bistr o food
in the countr y. Some of the chains that one
should watch out for ar e:
Mon Ami Gaby, Balthazar, L'Adr esse, Caf
Rouge, Au Pied De Cochon, Fouquet's, Mimi's
Caf, La Madeleine, Mignon, Chez Gr ar d, Le
Colonial, Oh!..Poivr ier !, Spoon Food & Wine,
etc.
Fusion or Mix & Match
Restaur ant concepts based on fusion of two
cultur es or cuisines ar e ver y popular in Eur ope
and the United States. Some of the chains that
have acquir ed pr ominence ar e:
Bahama Br eeze, Sushi Samba, Samba Room,
Pipa Tapas y Mas, Suva, Bongos Cuban Caf,
Kuhunaville, Fogo De Chao, Zoza's, Blue
Elephant, Little Buddha Caf, Bodegon
Colonial, Planet Tha, Compagnie Des
Comptoir s, Qubec, Mundaka, etc.
Eat-tertainment
Customer s have mor e choices than ever, higher
expectations than ever, and mor e mar keter s
competing for their attention than ever. So how
do you br eak thr ough all of the clutter and
captur e the attention of customer s suffer ing
fr om sensor y over load? By cr eating exper inces
that ar e so distinctive, so compelling, that they
stand out in a cr owded landscape. Some of the
chains that one should watch out for ar e:
Hooter 's, Bubba Gump, Mar s 2112, Mar gar ita
Ville,Dave & Buster 's, House Of Blues, ESPN
Zone, Gamewor ks,Buddha Bar, Bar r io Latino,
Club Med Wor ld, Nir vana Lounge, La Bodga
Fait Son Cir que, etc...
Take Away
The ter m Home Meal Replacement may not
always accur ately descr ibe today's takeout
scenar io. Although it's tr ue that many
consumer s want home cooked food, ther e ar e
many, especially the high-spending customer s
who ar e looking for r estaur ant food. They just
want it at home. People don't want, and cannot
affor d, to eat out on ever y dining occasion, but
they want--and have become accustomed to--
r estaur ant-caliber meals. The r eal action in
r estaur ant convenience meals may come fr om
the specialty mar ket ar ena. The Br ennan family
spent thr ee year s developing Foodies Kitchen,
which debuted in Metair ie, Los Angeles in July
2003. Customer s can select some signatur e
32
dishes fr om Commander 's Palace, like Tur tle
Soup, as well as gour met gr ocer y items and
wines. Some of the chains that ar e ver y active in
the take out ar ena ar e:
Bennigans, Buca di Beppo's, Chili's, Foodies
Meal Mar ket, Famous Daves, Mvenpick
Mar ch, Mon Ami Gabi,Outback
Mediterranean
Restur ants focusing on Mediter r anean cuisine
ar e in fashion for their flavor ful and healthy
cooking. Chains that have established
themselves well ar e :
Medi (NY : Ver g), Olives, Le Sud,La Maison de
Char ly, Casa Sud, Villazur, La Table d'Olivier s&
Co, La Cigale Or ientale, La Compagnie
The Big brands are coming !
Des Comptoir s,etc...
The big br ands like Haagen -Dazs, Ben & Jer r y
etc ar e all expanding both at home and in
inter national mar kets. Most lar ge br ands ar e
looking at India with keen inter est and it is only
a matter of time befor e some mor e big br ands
enter the domestic mar ket. Some of the chains
to watch out for ar e:
Hagen-Dazs Caf, Ben & Jer r y, Chester field
Caf,MCM Caf, Latina Caf, Eur ospor t Caf,
Foster 's Austr alian r estaur ant, Segafr edo
Boutique, Expr esso Illycaf, Tchibo, Romboust,
Malongo caf, Caf Nescaf etc
33
A
34
What ismy Restaurant Worth?
This section examines how to value a r estaur ant
business including its r eal estate and per sonal
pr oper ty. It may be noted that few r estaur ant
tr ansactions have taken place in India till date,
lar gely because the r estaur ant business has not
yet evolved into a matur e business. However, we
for esee a fair bit of activity in this ar ea in the
futur e: changes in mar ket tr ends and
competition, spur r ed by a huge expansion in the
food ser vice industr y in all major metr o cities,
would cause many r estaur ants to change hands
fr om one oper ator to the other.
Another impor tant factor affecting r eal estate
and r estaur ant valuation in most developed
countr ies is the pr esence of lar ge, well-
established chains whose financial statements
and r estaur ant sales ar e accessible and
ther efor e aid the valuation pr ocess immensely.
We believe that the need for valuations will also
be dr iven to a lar ge extent by r eal estate
investment tr usts as and when they begin
oper ating in the countr y, and a small per centage
of their holding could be r estaur ant r eal estate.
Restaurant Valuation
Restaur ant oper ator s often need to know the
appr oximate value of their r estaur ant business
and/or r eal estate and per sonal pr oper ty, even if
they ar e not cur r ently contemplating sale of the
business. Knowledge of value becomes
impor tant for a var iety of r easons. Some of the
r easons include r efinancing of the r eal estate;
dissolution of a par tner ship or sale of stock
r epr esenting a major ity or minor ity inter est in
the business; insur ance settlement after a fir e or
natur al disaster ; and settlement of an estate
upon the death of an owner.
Restaur ant value can be separ ated into at least
thr ee components, which include the value of
the business (business enter pr ise value), the
value of the per sonal pr oper ty (fur nitur e,
fixtur es, and equipment), and the value of the
r eal estate. Real estate value can be br oken
down fur ther to leased fee value (value to the
landlor d of the lease encumber ing the pr oper ty),
leasehold value (the value of the tenant's inter est
in the lease), and the value of the simple
owner ship inter est in the r eal estate. In the
United States, appr oximately one-half of the
r estaur ants occupy a leased building and land,
and slightly less than one-half own the building
and land. In India, the histor ical tr end was that
the major ity of r estaur ants owned the building
and land, but with the advent of lar ge number of
shopping malls in metr o cities, this is fast
changing.
Business Value of a Restaurant
The table below shows a statement of income
and expenses for a hypothetical r estaur ant. In
this example, the value of the leasehold inter est
in the r eal estate has been r emoved by
subtr acting r ent paid to the landlor d fr om
income. The r emaining ear nings - befor e
income taxes, depr eciation and amor tization
(EBITDA) - equal Rs 1,930,000. This is the cash
flow available to cover a r etur n of and on the
investment in per sonal pr oper ty, and a r etur n to
the business component of the going concer n
value of the r estaur ant. The r etur n r equir ements
for the non-r eal pr oper ty components ar e
typically significantly higher than the r etur n to
the land and building. As the net income
allocated to the per sonal pr oper ty and business
is r eceived by the business owner after all
35
6. What is my Restaurant Worth?
occupancy costs have been paid, including
r ental income attr ibutable to the land and
impr ovements, the r isk of the oper ator is
significantly higher than that of the landlor d.
Tabl e 6-1 St at ement of I nc ome &
Ex pense
My Restaurant
SALES: Ammount % of Gross
Food 10,000,000 74%
Beverage (alcoholic) 3,500,000 26%
Total Sales 13,500,000
Sales per day 36,986
Covers Per Day 125
APC 296
COST OF SALES:
Food 3,500,000 35%
Beverage (alcoholic) 1,050,000 30%
Total Cost of Sales 4,550,000 34%
GROSS PROFIT 8,950,000
(Total Sale minus Cost of Sale)
OPERATING EXPENSES:
Salaries and Wages 2,025,000 15%
Direct Operating Expenses 1,080,000 8%
Music and Entertainment
Advertising & Promotion 270,000 2%
Utility Services 540,000 4%
Repairs and Maintenance 270,000 2%
Administrative & General 540,000 4%
Total Restaurant Operating
Expenses 4,725,000 35%
Franchise/Management Fee 0 0%
Licenses 270,000 2%
Insurance 0 0.0%
Income before Occupancy
Costs 3,955,000 29%
Occupancy Costs 2,025,000 15%
Earnings before Taxes,
Depreciation & Interest 1,930,000 14%
The Capitalization Rate or Cap Rate is a r atio
used to estimate the value of income pr oducing
pr oper ties. Put simply, it is the net oper ating
income divided by the sales pr ice or value of a
pr oper ty expr essed as a per centage. Investor s,
lender s and appr aiser s use capitalization r ates
to estimate the pur chase pr ice for differ ent type
of income pr oducing pr oper ties. A mar ket cap
r ate is deter mined by evaluating the financial
data of similar pr oper ties which have r ecently
sold in a specific mar ket. Capitalization r ates for
a r estaur ant oper ator 's invested capital typically
fall into one of thr ee r anges: for an efficient,
pr ofitable oper ation with new equipment, good
location, and expectations of str ong annual
gr owth in r evenue, a capitalization r ate of 13%
to 19% is appr opr iate. Stable, matur e
r estaur ants with a tr ack r ecor d of steady cash
flows, but annual gr owth in sales attr ibutable to
inflationar y menu pr ice incr eases, may use cap
r ates r anging fr om 15% to 25%. Capitalization
r ates for r estaur ant businesses with declining
r evenue may r ange fr om 20% to 30% in or der to
cover the incr eased r isk. The following table
indicates the value r ange for the hypothetical
r estaur ant business based on the thr ee scenar ios
listed above. The values shown include the
depr eciated value of per sonal pr oper ty, which
must be subtr acted fr om the total capitalized
value to isolate the business value.
Tabl e 6-2 St at ement of I nc ome &
Ex pense
EBIDTA = Value
Capitalization Rate
Optimistic Scenario 1,930,000 = 12,062,500
(Growing) 16%
Median Scenario 1,930,000 = 9,190,476
(Stable) 21%
Pessimistic Scenario 1,930,000 = 7,148,148
(Declining) 27%
The per sonal pr oper ty within a r estaur ant
consists of its fur nitur e, fixtur es, and equipment
(FF&E). On aver age, r estaur ant equipment has
a useful life of ten year s. In the example above,
we will assume that the or iginal value of the
fur nitur e, fixtur es, and equipment was Rs
20,00,000 and it is now seven year s old, or 70%
depr eciated. On a str aight-line basis, the value
in use of this per sonal pr oper ty would be:
36
Rs20,00,000 x 70% = Rs 14,00,000,
Rs12,062,500 - Rs14,00,000= Rs10,662,500
depr eciated value in use
Subtr acting the depr eciated value in use of the
fur nitur e, fixtur es, and equipment fr om the
thr ee values indicated in the table above, the
value of the business r anges fr om Rs 5,748,148
to Rs 10,662,500.
Ther e ar e other var iables to consider in the
valuation of the r estaur ant business, such as the
immediate need for capital impr ovements,
which may also need to be deducted fr om the
capitalized value of the business and per sonal
pr oper ty. This appr oach uses only one year of
cash flow, which does not account for futur e
var iation in cash flow. However, the above
method of valuing a r estaur ant business will
give a "ball par k" indication of value.
Estimating the Value Of Land And
Improvements
It is also impor tant to value a r estaur ant's r eal
estate and impr ovements, i.e., the building,
landscaping, and par king lot. Restaur ant
impr ovements ar e typically designed to
accommodate a specific concept or type of
r estaur ant, and may r equir e extensive
r emodeling to suit the needs of a differ ent owner
or tenant if the or iginal r estaur ant oper ator
vacates the pr oper ty, even if the impr ovements
continue to be used as a r estaur ant. The value of
the impr oved site and r estaur ant building
components may be higher or lower than the
or iginal cost to pur chase and pr epar e the site
and build a r estaur ant building, depending on
the age of the impr ovements and whether the
building is occupied by an oper ating r estaur ant
business.
Appr aiser s of r estaur ant r eal estate nor mally
consider thr ee appr oaches to value: the cost
appr oach, the sales compar ison appr oach, and
the income appr oach. Each appr oach has its
own str engths and weaknesses, depending on
the age and condition of the impr ovements and
whether the building is occupied by an
oper ating r estaur ant or is vacant. The cost
appr oach is used to estimate the cost of
pur chasing a site suitable for r estaur ant
development and building a r estaur ant on the
site, including the cost of landscaping the site.
The sales compar ison appr oach consider s
r ecent sales of r estaur ant pr oper ties that ar e
compar able to the subject r estaur ant pr oper ty in
location, size, and br and affiliation (if the
r estaur ant was in oper ation at the time of sale).
Adjustments ar e made to the sales pr ices of the
compar ables to account for differ ences between
the compar ables and the subject pr oper ty. The
income appr oach consider s the actual or
pr ojected r ental income that could be gener ated
by a r estaur ant business occupying the building.
Cost Approach
The fir st method of valuing r estaur ant r eal
estate pr esented is the cost appr oach. New
r estaur ant buildings and the under lying land ar e
often pur chased by individual investor s or
REITs (Real Estate Investment Tr usts) at a pr ice
that r eflects the cost of pur chasing a vacant
par cel of land and constr ucting, and equipping,
a chain-affiliated r estaur ant on the site.
I nvestor s often pr efer chain-affiliated
r estaur ants because chains have a tr ack r ecor d
of past success and ample financial data upon
which the investor can base the decision to
pur chase. Typically, investor s pur chase
r estaur ants in or der to lease them to oper ator s.
These sale/leaseback tr ansactions ar e
consider ed financing vehicles, as opposed to
"ar m's-length" r eal estate sales tr ansactions. The
pur chase pr ice is negotiated based on the r ate of
r etur n r equir ed by the investor and the amount
of r ent the oper ator of the r estaur ant business
37
can affor d to pay, based on the sales expected to
be gener ated by the r estaur ant business
oper ation. The pr ice paid is an "investment
value" r ather than a "mar ket value" because the
ter ms of the pur chase ar e tailor ed to meet the
r equir ements of an individual investor, and ar e
not necessar ily a r eflection of what a "willing
buyer and willing seller " would agr ee to in an
open mar ket.
Because a new r estaur ant building is usually
designed with a specific concept in mind, it is
appr aised as a "going concer n." The appr aiser of
r estaur ant r eal estate most often will pr ovide the
client with an opinion of the "value in use" of the
pr oper ty oper ating as a specific br and or
concept. "Value in use" for a r estaur ant is based
on the pr emise that the value of r estaur ant r eal
estate is dependent on the r estaur ant business
pr oducing a r evenue str eam gr eat enough to
cover the r etur n on capital invested in the land
and impr ovements. Until such time that the
r estaur ant oper ation r eaches a stabilized level of
r evenue, the highest value indication, when a
building is new, is often der ived using the cost
appr oach, and is identified in the industr y as the
"full value" of the land and building.
After a r estaur ant pr oper ty is four year s old, the
cost appr oach begins to lose its validity.
Restaur ant pr oper ties ar e pur chased in the r e-
sale mar ket for two main r easons including
anticipation of r ental income in the futur e to the
owner of the pr oper ty (r ent to the landlor d), and
occupancy by an owner /oper ator of the
r estaur ant. The income appr oach car r ies mor e
weight than the cost appr oach for these
pr oper ties.
Sales Comparison Approach
A second method, the sales compar ison
appr oach, or mar ket appr oach, attempts to
value the subject r estaur ant r eal estate based on
the selling pr ices of similar pr oper ties. This
appr oach is the least r eliable of the thr ee
valuation appr oaches when applied to
r estaur ant r eal estate, because it is almost
impossible to find a sale of a r estaur ant pr oper ty
that is tr uly compar able to a subject pr oper ty.
This is tr ue even if the compar able's concept and
chain-affiliation ar e the same as the subject
pr oper ty and the compar able is in the same
geogr aphical ar ea as the subject pr oper ty. Many
subjective adjustments must be made to the sale
pr ices of the compar able r estaur ants to ar r ive at
an indication of value for the subject pr oper ty.
Typically, the appr aiser makes adjustments to
compar able sale pr ices for differ ences in
conditions of sale, location, access, visibility,
and volume of business gener ated by the
r estaur ant compar ed to the subject pr oper ty.
However, it is ver y difficult, if not impossible,
for the appr aiser to tr uly identify the r easons,
concer ns or attr actions that motivated the buyer
and seller to make their pur chase and sale
decisions. This is the gr eatest weakness of the
sales compar ison appr oach.
In addition, allocating the sale pr ice between
r eal estate, per sonal pr oper ty, and business
value is always pr oblematic. Never theless, the
sales compar ison appr oach is used by
appr aiser s to der ive capitalization r ates to be
applied in the income appr oach to value, and to
pr ovide a r ange of values for the subject
pr oper ty that can be used as a test of
r easonableness for the values indicated in the
cost appr oach and the income appr oach.
Allocations of sale pr ices ar e pr oblematic
because business value can make a significant
differ ence in the sale pr ice of an oper ating
r estaur ant. For example, say that two identical
fast food r estaur ant buildings (same squar e
footage and seating capacity) ar e situated on
plots of similar size in a city in USA in fr ont of a
38
neighbor hood shopping center. One of the
r estaur ant buildings is occupied by a
McDonald's r estaur ant, and the other building is
owned by an independent r estaur ant oper ator
and is called "Smoking Pizza." The McDonald's
pr oper ty sells for $1,800,000 and the other
pr oper ty sells for $750,000. Assuming both
r estaur ants ar e in oper ation at the time of sale,
the sale pr ice r epr esents a "value in use," which
may be higher or lower than the "mar ket value"
of the r eal estate if it wer e to become vacant.
The differ ence in sale pr ice may be attr ibuted to
business value over and above the value of the
land, impr ovements, and FF&E (fur nitur e,
fixtur e and equipments). This is an impor tant
consider ation in valuing r estaur ant pr oper ty for
ad valor em pr oper ty tax pur poses. An assessor
is typically instr ucted to exclude business value
so that only the value of the r eal estate, and in
some states per sonal pr oper ty, is taxed.
Income Approach
A thir d appr oach to valuing r estaur ant r eal
estate is the income appr oach. In this appr oach,
the appr aiser assumes that the pr oper ty is
r ented to the r estaur ant oper ator at mar ket r ent,
even if the pr oper ty is owned by the oper ator
and no r ent is paid. This assumption is made in
or der to isolate the income to the land and
building fr om income attr ibutable to the
investment in fur nitur e, fixtur es and equipment
(per sonal pr oper ty), and the r etur n to the
r estaur ant oper ator for taking the r isk of
r unning a business (business value). The
economics of the r estaur ant business dictate
that an oper ator cannot pay mor e than 8% of
gr oss r evenue in occupancy costs and still have
an adequate r etur n of and on the investment in
FF&E, and an equitable r etur n on the capital
invested in the oper ation of a r estaur ant
business.
Typically, r ent on the land and building r anges
fr om 7% to 10% of the gr oss sales of the
r estaur ant for fast food or quick ser vice
r estaur ants. It could be slightly higher at 10% to
12% for mor e upmar ket r estaur ants. Ther e may
be differ ent var iations but over all r ent should be
in this r ange if the r estaur ant oper ation is to be
successful over the long ter m. Ther e ar e
exceptions to this r ange, as in the case of a food
cour t in a r etail mall. Per centage r ent in a food
cour t can be as high as 10%-15%, but this is
mitigated by the lar ge volume of customer s
gener ated by the mall r etailer s and the fact that
the r estaur ant oper ates in a small space and
shar es a lar ge dining ar ea with the other
oper ator s in the food cour t.
Valuing the land and building in use as a
r estaur ant r equir es knowledge of mar ket r ent
for similar type pr oper ties in the r estaur ant's
neighbour hood. I f ther e is no lease
encumber ing the pr oper ty, the appr aiser
assumes that the r estaur ant is leased at a mar ket
r ent. If the pr oper ty is encumber ed by a long
ter m lease at below mar ket r ent, with no
additional r ent based on a per centage of the
r estaur ant's sales, the value of the land and
building may be negatively impacted.
If the oper ating r estaur ant is paying r ent based
on a minimum r ent plus a per centage of gr oss
sales, the income appr oach to value may
indicate a value for the subject r eal estate,
which is higher than the cost to buy the land and
build a r estaur ant on it. On the other hand, if the
r estaur ant has ceased oper ation and is no
longer a going concer n, the "going dar k" value of
the vacant r estaur ant building may be far lower
than the "value in use" when the r estaur ant was
in oper ation.
When the income appr oach is used to value the
land and impr ovements of a pr oposed
39
r estaur ant, the value der ived depends heavily on
the pr ojection of the r estaur ant's stabilized gr oss
r evenue estimated by the appr aiser. Because the
r eal estate's "value in use" is dir ectly r elated to
the potential r evenue gener ated by the
r estaur ant, the indication of value is only as
r eliable as the pr ojected r estaur ant's food and
bever age sales. The pr ojection of stabilized
gr oss sales can be estimated with r elative
confidence in the case of a chain-affiliated
r estaur ant with a past oper ating histor y in
multiple locations. However, pr ojecting r evenue
for a new r estaur ant concept r equir es
exper ience in the r estaur ant business suppor ted
by mar ket r esear ch in the ar ea wher e the
r estaur ant is to be built.
The combined "value in use" of the land and
r estaur ant building can be appr oximated by
capitalizing the net income str eam that would
flow to a hypothetical landlor d, after the
deduction of vacancy and cr edit loss, and
management expenses, assuming the building
and land is leased to the r estaur ant oper ator at
mar ket r ent. The key deter minant in calculating
the value of the subject pr oper ty is the selection
of an appr opr iate capitalization r ate. For
example:
Annual food and bever age sales Rs 13,500,000
Multiplied by r ent per centage 7.0%
Annual r ent
(Potential Gr oss Income) Rs 9,45,000
Less: Management Expense @ 2% Rs 18,900
Net Rental Income Rs 9,26,000
Net Rental Income Capitalization Rate =
Value of the Land & Building
Rs9,26,000 9.5% = Rs 9,747,368
Rs9,26,000 10.0% = Rs 9,260,000
Rs9,26,000 10.5% = Rs 8,819,048
As shown in this example, a one-per centage
point differ ence in the capitalization r ate r esults
in a differ ence in value of appr oximately Rs
9,28,321. This emphasizes the impor tance of
choosing a capitalization r ate that is der ived
fr om the mar ket by analyzing compar able sales
and inter viewing buyer s and seller s who ar e
actively involved in the mar ket for r estaur ant
r eal estate investments.
Complex Valuation
After each of the thr ee appr oaches to value has
been consider ed, the appr aiser r econciles the
thr ee indications of value, or r ange of values, to
r each a conclusion of value for the subject
pr oper ty. The weight given to each appr oach to
value may var y depending on many factor s
including the age of the impr ovements, whether
the pr oper ty is vacant or occupied, the length of
time the r estaur ant has been in oper ation, the
cr editwor thiness of the r estaur ant oper ator, and
the availability of compar able sales of similar
r estaur ant pr oper ties. I n conclusion, the
valuation of r estaur ant r eal estate and business
value is complex and dependent on many
var iables.
40
A
Courtesy: Richard D. Williams, HVS International
Conducting a Feasibility Study
As the costs of opening a r estaur ant and r unning
it pr ofitably continue to climb, r estaur ateur s
need to be as cer tain as possible that the kind of
oper ation they envision has a ver y good
potential for success at a par ticular site. One
way to find out is to conduct a feasibility study.
A feasibility study is much mor e than a site-
location study - this appr oach involves
gather ing and analysing a gr eat deal of
infor mation, fr om demogr aphics to design,
which helps the oper ator make a better
infor med decision about the potential success of
a specific concept at a cer tain location.
To guide oper ator s thr ough this analysis, we
have put together this section which offer s a
step-by-step pr ocess for mar ket r esear ch
techniques to deter mine whether a pr oposed
site is suitable for a r estaur ant and, if so, which
combination of r estaur ant char acter istics offer
the best chance for success.
Obtaining the infor mation is r elatively easy, but
tur ning it into conclusions about the site and
r estaur ant concept is a much mor e difficult task.
A r estaur ateur 's judgement, per sonality and
standar ds of excellence can make an enor mous
differ ence in whether a r estaur ant sinks or
swims, and all of those qualities ar e difficult to
measur e.
Reasons for going into the restaurant
business
Please tick off whichever of the following ar e the
r easons you know will make you successful in
the r estaur ant business.
I like food.
I often eat in r estaur ants and know good
food.
I make a gr eat Bir yani.
My par ents always wanted me to be a gr eat
chef.
My spouse is a gr eat cook and will be the
chef.
I know someone named Quer ishi who will
be my chef.
I have this secr et r ecip I got fr om a
r estaur ant in Eur ope.
I know why other r estaur ants didn't make
it.
Ther e's this r estaur ant down the str eet that
went br oke and the r ent is only.
Most r estaur ants don't open for br eakfast.
I will specialize in . (fill in the empty
space).
Ever ybody likes Mughlai (or inser t your
own cuisine choice) food.
I will beat the competition with lower
pr ices.
Running a r estaur ant is no differ ent fr om
any other business.
I gr ow special her bs in my gar den.
I will not allow tipping.
I was successful in an expor t business.
I took a Cor don Bleu cour se by
cor r espondence.
If even a single one of the above r easons is your
pr ime motivation for going into the r estaur ant
business, you may be in tr ouble fr om the star t.
In a fr ee enter pr ise society, it is anyone's r ight to
go into business just as it is often their pr ivilege
to close up shop - sometimes in bankr uptcy.
One business wher e going br oke is easier than
any other is the r estaur ant business. Walk down
any block in any r easonably lar ge town in the
United States or in Eur ope wher e the r estaur ant
41
7. Conducting a Feasibility Study
mar ket is matur e and wher e r estaur ants ar e
likely to be and you will pr obably see one or
mor e buildings with signs in the window
pr oclaiming "Opening soon under new
management" or "Closed for r enovations". The
chances ar e that, befor e those signs appear ed, a
r estaur ant oper ated unsuccessfully, and another
one is going to open ther e soon.
The r estaur ant business in most cities is spr ead
so thinly that for any new r estaur ant to open,
another one must have gone br oke. However,
ther e always seems to be another entr epr eneur
to take over and r isk life savings in the
r estaur ant business.
Investment cost
To put up a r estaur ant building on owned land
can cost anywher e fr om Rs 1,00,00,000 to Rs
5,00,00,000. Even taking over leased pr emises,
pur chasing necessar y r estaur ant equipment and
fur nitur e (FF&E), and making leasehold
impr ovements can r equir e as much as Rs
10,00,000 to 10,000,000. In our sur vey, the
median amount spent of FF&E was Rs
20,00,000 with the median for total r estaur ant
investment being Rs 45,00,000. If you have to
finance 70% to 75% of that, the debt ser vice
char ges (inter est and r epayment of pr incipal)
may put you in the poor house befor e you can
star t making a r easonable r etur n on your own
investment.
Return on investment
Successful r estaur ants, ver y successful ones,
might make as much as 20 paise pr ofit on each
sale of one Rupee. A r easonably successful one
might make 10 paise. The aver age r estaur ant
that manages to sur vive might make 3 to 5
paise; but when that 3 to 5 paise is r elated to the
amount of money the owner invested, it might
end up being less than the amount that could
have been ear ned in inter est by leaving the
money in the bank. And money in the bank
r equir es no har d wor k, long hour s, or high r isk.
High risk
The r isk in the r estaur ant business is high. In
Nor th Amer ica, about one-thir d of all
r estaur ants in business today will tur n over
within a year. Within thr ee year s, 50% of them
will be out of business. Only 20% will sur vive to
their fifth anniver sar y.
In India we ar e not so thinly spr ead at this point
in time and ther e ar e a lot of oppor tunities for
well-r esear ched concepts.
The independent r estaur ant oper ator has even
mor e of a str uggle than the oper ator who is par t
of a chain or fr anchise. Also if you have a dr eam
of owning your own r estaur ant and letting
someone else r un it for you, bewar e! Mor e than
one absentee owner has gone br oke because he
or she has allowed the manager to lose money.
Other absentee owner s think that the r estaur ant
makes money out of liquor so the food oper ation
doesn't matter. A liquor license is not a r ight to
pr int money. For example, "salting the bar " is a
classic r ip-off by bar tender s who br ing in their
own bottles of liquor, sell the contents, make no
r ecor d of the sales, and pocket the cash. You
will never know the differ ence if you ar e not
ar ound to see what's happening.
What kind of restaurant is for you?
One of the ear liest decisions you ar e going to
have to make is the type of r estaur ant you wish
to oper ate.
1. Family or Commercial
Family r estaur ants in I ndia ar e gener ally
multicuisine type with a medium pr ice r ange. If
they have a liquor license, it is usually r estr icted
to beer and wine. Dcor is br ight. Par king is a
now a necessity since customer s (the family
42
unit) gener ally ar r ive by car. Pr ice r ange of the
menu items has to appeal to the aver age family
income. Location is impor tant as it should have
pr oximity to a r esidential ar ea or shopping
complex.
Oper ating hour s ar e gener ally fr om noon to
midnight. Staff ar e gener ally fr iendly and
efficient, but not necessar ily highly tr ained.
Investment is medium to high.
2. Cafeteria
Cafeter ias r equir e lar ge tr affic volumes.
Location is cr itical to encour age this volume.
Shopping center s and office buildings ar e good
locations. Self-ser vice is typical in cafeter ias
with menus somewhat limited but cover ing
soups, entr ees, desser ts, and bever ages.
Cafeter ias often r equir e lar ge pr epar ation ar eas.
Staff ar e minimally tr ained. Beer and wine may
be offer ed. Speed of ser vice is essential to
handle the tr affic volume. Hour s will depend on
the location (for example, school, office
building). Ther e ar e some examples of these in
Mumbai and Bangalor e.
3. Gourmet
Gour met r estaur ants gener ally r equir e a higher
investment than the other s discussed so far.
They r equir e an ambience and dcor that costs
money. This type of r estaur ant cater s to those
who r equir e a higher standar d and ar e willing
to pay for it. Success depends on establishing a
r eputation that will attr act r epeat business.
Pr ices ar e higher because of the investment
r equir ed and because of the r educed seat
tur nover. Food and bever age offer ings must be
car efully selected because of the clientele. A
good var iety of wines is essential. Staff must be
highly tr ained.
Even though the lunch tr ade is impor tant to
such r estaur ants, the evening per iod is often
wher e the emphasis is placed, with leisur ely
dining an adver tising featur e.
4. Ethnic
Ethnic r estaur ants featur e the foods of a specific
r egion or countr y. Ethnic r estaur ants can r un
the gamut fr om family r estaur ants (e.g.,
Chinese) to gour met (e.g., classical Fr ench)
cuisine. Dcor fitting the ethnic motif is
impor tant, as is menu design, staff unifor ms,
and tr aining.
To be successful, ethnic r estaur ants must ser ve
authentic food, which means food pr epar ation
staff must be well tr ained and knowledgeable.
Pr ice r ange can be fr om budget to elevated.
Beer, wine, and liquor may or may not be
ser ved. Investment may be high because of
dcor and tr ained staff.
Location can be var iable, and the emphasis is on
evening meals, although luncheon business with
lower pr ices is not pr ecluded.
5. Fast Food
I n I ndia, fast food r estaur ants have
mushr oomed in the past 20 year s, in keeping
with the gr eater mobility and changing lifestyles
of the ur ban consumer. Fr anchising is pr evalent
in this type of r estaur ant. These r estaur ants can
be eat-in or take-out, or a combination of both.
The menu is limited, and pr ices ar e r elatively
low. You can choose one par ticular kind of food
to featur e. For example, ethnic food of one type
or another can be sold in a fast food for mat.
Because of low pr ices, a high tr affic volume
(pedestr ian and / or automobile) is cr itical.
A fast food r estaur ant has to stay open long
hour s, and gener ally seven days a week.
Alcoholic bever ages ar e not usually offer ed.
Staff tr aining may not be highly cr itical unless it
is a fr anchise oper ation wher e the fr anchisor
gener ally sets standar ds of ser vice and food
43
quality that must be maintained at all times.
Your menu
The type of r estaur ant you plan to oper ate can
dictate in par t the type of menu you must have.
This is par ticular ly tr ue of ethnic r estaur ants
wher e the people you ser ve expect to see cer tain
familiar items on the menu.
Commer cial and family r estaur ants also tend to
offer common items that customer s expect.
However, even in cases wher e your r estaur ant
type dictates cer tain menu items, you still have
flexibility in other menu items. For example,
even a seafood r estaur ant has to offer
alter natives such as chicken for those who ar e
not seafood eater s.
1. General menu requirements
I n gener al ter ms, your menu needs to be
balanced, nutr itious, and var ied. This balance
must also consider what your customer s ar e
likely to want, and not just what you think they
should have.
Impor tant aspects of menu composition ar e the
textur e, flavor, and color of food,
complementar y food items (potatos, vegetables,
salad), gar nishes, ar oma, taste, and appear ance.
The way you put together all these tangible and
intangible ingr edients is going to decide, in
lar ge par t, whether or not you will have
customer s.
2. Menu presentation
Your wr itten or pr inted menu cr eates the fir st
impr ession about what you offer, your r ange of
offer ings, and your selling pr ices. This may well
attr act customer s into your r estaur ant; but it is
the sense of satisfaction, of having r eceived
value for money fr om your food offer ings, as
well as the ser vice r eceived, that is going to
br ing customer s back.
Keep this in mind when you choose your menu
design, pr inting type, size, and colour s. You
want a menu that r eflects the style and theme of
your r estaur ant. For example, some smaller
r estaur ants with menu items limited by season,
availability, etc., find it easier to wr ite the daily
menu on a blackboar d. This way, customer s ar e
not ir r itated by being told that an item they want
is not available that day.
3. Effect of menu on pre-opening decisions
Your menu will affect a number of your major
pr e-opening decisions. Some of the mor e
impor tant ones ar e listed her e.
1. Location
Your menu can dictate your location, and vice
ver sa. For example, if you ar e going to open a
Mediter r anean r estaur ant, it might not wor k too
well on a busy r oad. You might be wiser to
consider locating it in an ar ea wher e ther e is a
lar ge upwar dly mobile population to dr aw on.
2. Building
Your menu can affect the size of building you
r equir e. A shor t-or der take-out r estaur ant will
r equir e consider ably less space than a sit-down
r estaur ant. But even sit-down r estaur ants
r equir e differ ent amounts of space.
A cafeter ia that has a limited menu may r equir e
less food pr epar ation ar ea than a gour met
r estaur ant with an extensive menu. This, in
tur n, affects seating ar ea. A cafeter ia may only
r equir e 10 to 12 squar e feet of seating ar ea per
customer, wher eas a fancy dining r oom may
r equir e 15 to 20 squar e feet.
3. Equipment
Your menu dir ectly affects your equipment
needs and thus the investment r equir ed.
Gener ally, the mor e extensive the menu, the
mor e var ied your equipment will need to be. If
all you ar e selling is bur ger s, hot dogs, fr ies, and
soft dr inks, your equipment r equir ements ar e
minimal compar ed to a r estaur ant with 20 or 30
44
menu items r equir ing a var iety of differ ent
cooking methods and possibly even some
specialized equipment.
If your investment budget is limited, you will
pr obably have to simplify your menu to fit what
you can affor d to invest in equipment,
fur nishings, dcor, and table settings.
4. Service
Your menu, combined with the type of
r estaur ant you plan to r un, usually dictates the
level of ser vice you will offer. In a cafeter ia, or
fast food take-out r estaur ant, the customer s
expect to pr ovide their own pick-up ser vice.
Thus, your menu has a dir ect impact on your
labor cost. For example, fast food r estaur ants
have menus that allow them to employ lower-
skilled employees who ar e often hir ed at
minimum wage, wher eas a gour met r estaur ant's
menu will r equir e employees who have mor e
exper ience, knowledge, and skills in food
pr epar ation and table ser vice and who expect to
be compensated with higher pay.
5. Purchasing methods
Your menu has a dir ect impact on your
pur chasing r equir ements and pr actices. For
example, if you plan to ser ve seafood, you must
consider how each type of seafood is to be
or der ed. In other wor ds what gr ade, size, and
specific cut is needed? How will seafood be
pur chased (fr esh or fr ozen), and how will they
be stor ed befor e using?
6. Food cost
The lar gest single cost for a r estaur ant is the
food. Your menu r eflects dir ectly on this cost.
Food cost is the pr ice you pay for food in
r elation to the pr ice you sell it for. The r atio of
food cost to r etail sales is expr essed as a
per centage.
7. Alcoholic beverages
Finally, depending on the laws in your ar ea and
for your type of r estaur ant, your menu is going
to dictate the kind of alcoholic bever ages you
ser ve. For some r estaur ants, this is not a
pr oblem. People do not gener ally expect to buy
alcoholic bever ages in a fast food, or deli, or
limited menu r estaur ant. A fine dining
r estaur ant on the other hand may r equir e a fair
var iety of wines.
Finding a Site
Once you have settled on the type of r estaur ant
you wish to have, the or ganizational for m it will
have, and the adviser s you need, you need to
seek out a suitable site. It is assumed that the
gener al location of your r estaur ant has been
selected. In other wor ds, you have made a
decision about the gener al ar ea in which you
wish to do business, and you ar e now down to
the choice of a specific site within that location.
You have two choices. You can find a good
existing site and plan your r estaur ant's dcor,
menu, and pr ices to fit that site. The other
alter native is to know in advance exactly what
type of r estaur ant you want and find a site that
fits.
a. Importance of site
Site selection can be cr itical. The objective in
site selection is to find a spot that will br ing in
the gr eatest number of customer s at the lowest
cost to you. Sites ar e often selected because of
their pr oximity to wher e the r estaur ant owner
lives or because the pr emises happens to be
vacant or the pr ice attr active. Do not fall into
this tr ap unless you have subjected the site to
some suitability tests.
1. General suitability
A pr actical gener al r ule is to select a site that
suits the needs of the customer s who ar e the
45
mar ket for your r estaur ant. You need to be sur e
of the specifics of the r estaur ant you ar e
inter ested in to under stand its par ticular site
and mar ket r equir ements.
2. Site specialists
I f you ar e unfamiliar with the mar ket
r equir ements of your par ticular r estaur ant, you
may want to use a site specialist. The ser vices of
site selection companies include analysis of
population density, customer pr ofiles, access
and tr affic flows, the dr awing power of other
r estaur ants in the ar ea, visibility of r estaur ant
and signs, the aver age sale you should have per
squar e foot or seat, and the effect of any near by
competitor s or potential new competitor s.
Note, though, that assessing a commer cial site is
both complex and tr icky. It is mor e ar t than
science, and even the specialists can go wr ong.
b. Visibility, Accessibility and Suitability
Thr ee extr emely impor tant aspects of a good site
ar e visibility, accessibility, and suitability. Each
of these will be br iefly discussed.
1. Visibility
Visibility of the r estaur ant may be mor e
impor tant to the customer who ar r ives at your
fr ont door by automobile than it is for the
pedestr ian, but even for the pedestr ian it is
impor tant.
2. Accessibility
A second factor in site location is accessibility,
again par ticular ly for those ar r iving by
automobile. An ideal situation is wher e flow in
tr affic and ar ound the site r educes the effects of
such things as r ight tur n r estr ictions that
pr event the motor ist fr om easily appr oaching
the r estaur ant.
3. Suitability
Even with good visibility and easy access, the
suitability of the site is a cr itical factor. For
many r estaur ants, the gr eatest site limitation is
space for par king. The space r equir ed for
par king is usually gr eater than that r equir ed for
the building.
c. Downtown and shopping centres
You might also want to compar e the pr os and
cons of a downtown location or a shopping
centr e or mall in the subur bs.
1. Central Business District (CBD)
I n a Centr al Business Distr ict ther e ar e
gener ally mor e potential customer s than in a
subur ban ar ea. However, what is cr itical is
whether or not these potential customer s can be
par t of your mar ket. If not, then your mar ket
must be fr om people outside the ar ea, in which
case tr affic and par king consider ations ar e
cr itical. Also, in a downtown ar ea you can
expect higher r ent and oper ating costs.
2. Major shopping malls
Major shopping malls ar e distinguished fr om
neighbour hood mar kets. Shopping malls ser ve
communities of 50,000 to 500,000 people, and
ar e gener ally between a 10-minute and 40-
minute dr ive fr om r esidential ar eas.
3. Neighbourhood Market
Neighbour hood shopping centr es ser ve local
populations fr om 50,000 to 200,000 people and
ar e either within walking distance, or a few
minutes' dr ive, fr om the major ity of the
population. Your mar ket is gener ally limited to
those living in the immediate ar ea and because
par king is often a pr oblem you may have to r ely
on the walk-in tr ade. Not all r estaur ants ar e
suited to that.
Renting premises and equipment
As a r estaur ateur, chances ar e you will star t
your new business in leased or r ented pr emises.
The last thing you should consider doing when
star ting a new r estaur ant (unless you have a lot
of money to invest) is buying land and/or an
46
existing building. In fact, some money lender s
will not lend to new r estaur ateur s for the
pur chase of such assets.
Gener ally, most fir st-time business owner s
invest far too much money in br icks and mor tar
(the building) when they should be leasing that
asset, par ticular ly in the ear ly days. To a lesser
degr ee the same is tr ue of equipment and
fixtur es.
It is in these ear ly year s that the r isk is often the
gr eatest, and you may not be able to affor d the
heavy debt load that owning land and / or a
building and expensive equipment obliges.
Even if you ar e investing your own money, you
may want to keep some of it in r eser ve for
meeting the losses in the fir st few months.
Advantages of leasing
Some advantages of leasing ar e:
a. Under a lease ar r angement you have the
obvious advantage of not having to pr ovide
capital to buy the pr oper ty. Any capital that
you might have is then available for
investment elsewher e.
b. Your bor r owing power is fr eed up to r aise
money, if r equir ed, for mor e cr itical ar eas
of the business.
c. Lease payments on a building ar e gener ally
fully tax deductible.
d. Owned land is not depr eciable for tax
pur poses, but the cost of leasing land is tax
deductible.
e. Any leasehold impr ovements that you make
to the building ar e gener ally amor tized
over the life of the lease r ather than over
the life of the building. The lease per iod is
nor mally less than the building life, ther eby
pr oviding a tax saving.
Disadvantages of leasing
Some disadvantages of leasing ar e:
a. In a lease ar r angement, any capital gain in
the assets accr ues to the landlor d and not to
you. In a similar way, at the expir y of the
lease, the value of the futur e pr ofit of the
business that you have wor ked har d to
build up does not benefit you unless the
lease is r enewed.
b. The cost of a lease may be higher than some
other for m of financing.
c. It may also be mor e difficult for you to
bor r ow money with leased pr emises if ther e
ar e no assets (other than a lease agr eement)
to pledge as collater al.
Market analysis
Ever y r estaur ant must be concer ned with its
mar ket. The wor d "mar ket" is defined in ter ms
of people, their money, and their desir e to
exchange it for your food and ser vice.
A r estaur ant's mar ket is gener ally limited to a
par ticular ar ea (e.g., an ar ea or a city), and it
may be fur ther limited by such things as
competition and customer s' pr efer ences.
Mar ket analysis is based on the assumption that
your r estaur ant must be developed ar ound the
customer s' wants and needs in or der to satisfy
those customer s. Customer s ar e, ther efor e, the
r eason for being in business.
a. Market Analysis
Befor e you open a new r estaur ant, have a sur vey
done. This sur vey will ultimately ser ve to
deter mine if your sales goal can be met, and it
will aid in your financial planning. For a lar ge
r estaur ant, you may need to use a specialist in
mar ket r esear ch to pr ovide you with per tinent
mar ket infor mation and to develop a specific
47
mar ket for ecast and action plan to ser ve that
mar ket.
b. Market Research
In other cases, in-depth mar ket r esear ch may be
necessar y to suppor t your sales pr ojections, to
demonstr ate that ther e is a lar ge enough mar ket
to pr ovide you with sufficient customer s, and to
show potential lender s that your sales
pr ojections ar e r ealistic.
1. Identify your trading area
In mar ket r esear ch, you need to define your
r estaur ant's tr ading ar ea. The definition of your
tr ading ar ea will show you how many people
live and / or wor k within it. That does not mean
these people will all be customer s of your
r estaur ant. Only a cer tain pr opor tion of them
ar e potential r estaur ant customer s, and because
of competition fr om other r estaur ants in your
tr ading ar ea you can only expect to obtain a
shar e of that mar ket.
2. Analyse the competition
For example, if a tr ading ar ea with a tar get
population of 50,000 can only suppor t two
r estaur ants of your kind, and ther e ar e alr eady
two in the business, you would have to ser iously
consider whether a thir d could sur vive.
Alter natively, if the two alr eady ther e ar e
sur viving only mar ginally because of poor
management or other r easons, you could
possibly move in and take away sufficient
business to thr ive.
3. Research the demographics
In addition to knowing the boundar ies of your
nor mal tr ading ar ea, you also need to know as
much as possible about the demogr aphics of the
people living and / or wor king ther e.
Demogr aphics ar e statistical infor mation about
people such as their age, sex, mar ital status,
aver age family size, aver age household income,
education levels, ethnic or igin, and aver age
annual spending on dining out.
If your r estaur ant is going to cater to the
business clientale, then your demogr aphic
r esear ch must investigate such things as
business hour s, number of employees wor king
in the ar ea, and the dining patter n of those
employees. For example, do they br ing their
own meals with them, eat at company
cafeter ias, or patr onize local r estaur ants?
4. Find a gap
If you find that you ar e going to be competing in
a mar ket that is successfully filled by other
r estaur ants, you may have a pr oblem. It is best
if you can find a gap that is not being filled by
other s. Ask your self what unique menu items or
ser vices you can offer that differ fr om what
other s ar e offer ing.
c. Market Segment
These questions ar e ver y br oad in natur e and
need to be r efined to pr oduce mor e specific
infor mation that allows mar ket segmentation.
In other wor ds, it is unlikely an individual
r estaur ant will sell to a br oad r ange of possible
user s or customer s.
The pr oduct that you sell has a major impact in
deter mining who your customer s will be. For
example, a gour met r estaur ant will be
patr onized by a nar r ower segment of the mar ket
than a fast food r estaur ant.
1. Quality
Quality of food plays an impor tant r ole. A
standar d commer cial or family r estaur ant will
cater to a differ ent segment of the population
than a r estaur ant appealing to a specific ethnic
gr oup or a health-conscious clientele.
2. Price
Pr ice is also a factor in mar ket segmentation
and can, to a degr ee, dictate the mar ket segment
you ar e dealing with. But pr ice alone may not
48
be the only significant factor. A special segment
of the mar ket will pay a higher pr ice for similar
menu items if the ser vice in the r estaur ant is
better or if it comes with a r eputed br and name.
Sometimes if a hype is cr eated, the same r esults
can also be achieved. On the other hand,
another segment of the mar ket looks fir st for
low pr ices and is less concer ned about quality.
3. Competition
The existing competition may also dictate the
mar ket segment that you must concentr ate on.
For example, if your choice of location for a
Mexican food r estaur ant is an ar ea alr eady well
ser ved by fir mly established Mexican food
r estaur ants, you may have to change your
thinking.
d. Potential sales volume
The main pur pose of this mar ket analysis is to
establish your potential sales volume. This will
become the for ecast for your initial income
statements.
One way to do this is to conver t a per cent of
your tr affic count or tr ading ar ea population
into potential sales. For example, if 2,600
shopper s visit your planned location in the mall
you might estimate that 5% of them could be
customer s for your r estaur ant and 5% x 2,600 =
130.
Your pr ojected sale will have to be above your
pr ojected br eak-even sale point, which will be
dependent on your investment and your
monthly fixed and var iable costs. If it is not, you
may have to do your sums all over again. Or in
some cases change your concept or dr op the
pr oject altogeather.
The Competitive Market
An integr al component of a mar ket ar ea's supply
and demand r elationship that has a dir ect
impact on the per for mance is the cur r ent and
anticipated supply of competitive r estaur ant
facilities. To evaluate an ar ea's competitive
envir onment, the following steps should be
taken:
Identify the ar ea's r estaur ant facilities and
deter mine which ar e dir ectly and indir ectly
competitive with your r estaur ant.
Deter mine whether additional r estaur ants
(net of attr ition) will enter the mar ket in the
for eseeable futur e.
Quantify the number of existing and
pr oposed r estaur ants available in the
mar ket.
Review the aver age per cover, number of
cover s, mar ket or ientation, facilities and
amenities of each competitor.
This analysis will help calculate the total cur r ent
mar ket size in ter ms of number of people eating
out in the ar ea at each pr ice point. As your
r estaur ant is expected to compete with them for
mar ket shar e, based on your unique featur es
and competitive str ength, you need to calculate
your r estaur ants penetr ation over its fair mar ket
shar e in or der to ar r ive at the possible sales
volume for the r estaur ant.
Financial plan
Befor e you ventur e into the r estaur ant business,
you need a financial plan. You use a financial
plan just like a map when tr avelling by car ; it
helps you get wher e you want to go. A pr oper ly
pr epar ed plan will guide you in oper ating your
r estaur ant and help you allocate your r esour ces
effectively and pr ofitably; mor eover it will allow
you to r aise the necessar y funds to oper ate your
r estaur ant successfully.
A combined mar ket and financial plan (often
r efer r ed to as a feasibility study or a pr oject
r epor t by pr ofessionals who pr epar e them) is an
49
in-depth analysis of the oper ational and
financial feasibility of a new r estaur ant, r ather
than an entr epr eneur 's guess that a new
r estaur ant will be economically viable.
A feasibility study, or plan, is not designed to
pr ove that a new ventur e will be pr ofitable. An
independent plan pr ofessionally pr epar ed by an
impar tial thir d par ty could r esult in either a
positive or a negative r ecommendation. If you
pr epar e your own plan, you should take the
same har d appr oach. If the for ecast r esults ar e
negative, both you and any potential lender s of
funds for your new r estaur ant should be happy
the idea goes no fur ther.
However, even if the for ecast is positive, it is not
a guar antee of success. A plan can only
consider what is known at pr esent and what
may happen in the futur e. Since the futur e is
impossible to for ecast with absolute accur acy,
and since so many unfor eseen factor s can come
into play, ther e can be no guar antees.
In other wor ds, a plan may r educe the r isk of a
par ticular new ventur e, but it does not eliminate
that r isk. Your completed mar ket r esear ch
r esults will for m the foundation for your
financial plan.
Financial Analysis
I n a for mal feasibility study for a major
r estaur ant, you might need much mor e detail
than has been suggested so far. In fact, the
financial analysis section of a feasibility study is
usually br oken down into the following
subsections:
a. Capital investment r equir ed and tentative
financing plan
b. Pr ojected income statements for at least the
fir st year and for as far ahead as five year s
c. Pr ojected cash flow statement for at least
the fir st year and for as far ahead as five
year s
d. An evaluation of the financial pr ojections
and the economic viability of the new
r estaur ant.
Since the pr epar ation of the financial analysis
can be a fair ly complex matter that r equir es the
exper tise of someone with an accounting
backgr ound, it is r ecommended that you use a
pr ofessional consultant or accountant. Also,
lender s fr om whom you wish to bor r ow money
ar e mor e likely to be convinced to par t with that
money if the feasibility study is pr ofessionally
pr epar ed.
Finally, if the financial pr ojections made by an
impar tial thir d par ty appear to be negative, it is
better that you know this now r ather than two
or thr ee year s down the r oad after your
r estaur ant is bankr upt.
Forecast of Income and Expense
In for ecasting r evenues and expenses for the
r estaur ant, you need to identify your fixed and
var iable costs. The fixed component is adjusted
only for inflation, while the var iable component
is also adjusted for the per centage change
between the facility usage that pr oduced the
known level of r evenue or expense.
Food & Beverage Revenue
Food and bever age r evenue is gener ated by the
r estaur ant and bar. Food sales also include the
sale of coffee, tea, milk and fr uit juices, which
usually ar e ser ved as par t of a meal. If ther e is
no ser vice of liquor, beer or wines, the soft dr ink
sales also would be included in this categor y. A
bever age sale includes r evenue fr om the sale of
wine, spir its, liqueur s, and beer. These sales do
not include coffee, tea, milk, or fr uit juices,
which nor mally ar e ser ved with meals and,
ther efor e, ar e consider ed food.
50
In or der to for ecast the pr ojected guest count
visiting the r estaur ant you need to divide the
week into weekdays, which include Monday to
Thur sday and weekend, which compr ises of
Fr iday, Satur day and Sunday. Your inter views
with existing r estaur ant owner s in the ar ea will
indicate the tr ends and the busiest days in the
week. The guest count in r estaur ant par lance is
called cover s and the aver age per cover (APC) is
simply the total sales divided by the number of
guests. It is differ ent fr om the number of seats
in the r estaur ant. If the r estaur ant has 50 seats
and ser ves 100 guests at lunch time because on
the aver age ever y seat is used twice over, then it
would have had 100 cover s for lunch.
The sales for ecast for the fir st few months may
fluctuate either because it takes time for people
to r ealise that the r estaur ant is open or because
a lar ge number of people ar e attr acted to a new
r estaur ant. It can be low because a new facility
may take time to pick up or it may be high in the
beginning because of the novelty factor and the
initial cur iosity of customer s. The for ecasts for
the fir st few months may seldom wor k out as per
the plan.
Expenses
You will then need to estimate your oper ating
expenses. Table 7-1 outlines fixed and var iable
components along with industr y benchmar ks of
all expense items expr essed as oper ating r atios.
These figur es r epr esent typical r anges as a
br oad benchmar k for oper ating r atios in
fr eestanding r estaur ants in India. Please note
that wages and all the other staff r elated costs
as well as utilities ar e fixed costs. On the other
hand, food and bever age costs, which depend on
daily tur nover of guests ar e consider ed var iable
costs.
Cost of Sales
Cost of sales is the total of cost of food and
bever age sold. This is gener ally calculated in the
following way:
Opening inventor y + Pur chases - Closing
Inventor y = Cost of Sales
51
Tabl e 7-1 I ndust r y Benc hmar k s of Oper at i ng Rat i os
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%
Salaries and wages
This categor y includes the r egular salar ies and
wages, extr a wages, over time, vacation pay and
any commission or bonus payments made to
employees. The entir e r estaur ant payr oll
gener ally is included under this categor y.
Employee benefits
This categor y includes r etir ement and health
insur ance. Other items consider ed to be
benefits ar e welfar e plan payments, pension,
accident and health insur ance pr emiums,
hospitalisation and gr oup insur ance pr emiums.
Also listed under employee benefits ar e
education expenses, employee par ties, employee
spor ts activities, awar ds and pr izes, and
tr anspor tation and housing. We have assumed
all employee benefits to be cover ed under
Salar ies and Wages. The employee benefit costs
may also be gr eater for lar ger chain r estaur ants
as they tend to have mor e r ules abiding and
gener ous HR pr actices.
Direct operating expenses
Expenses dir ectly involved in pr oviding ser vice
to the customer, such as unifor ms, laundr y,
linen, china, and cleaning and paper supplies,
ar e consider ed oper ating expenses. Also
included ar e utensils, kitchen fuel, menus and
dr ink lists, flower s and decor ations, contr act
cleaning, auto or tr uck expense, par king, and
licenses and per mits.
Advertising & Promotion
This gr oup of expenses includes selling and
pr omotion expenses, such as dir ect mail and
enter tainment costs in pr omotion of business
(including gr atis meals to customer s). Also, the
cost of adver tising thr ough newspaper s,
magazines or tr ade jour nals, outdoor signs, and
r adio and television is included. Public
r elations and publicity (including fees and
commissions to adver tising or pr omotional
agencies) and r oyalties ar e included in this
categor y.
Utility services
This section is composed of the costs of all fuel
except that char ged to dir ect oper ating expenses
in the account "kitchen fuel." Water, ice and
r efr iger ation supplies, and the r emoval of waste
ar e also included. The cost of oils, boiler
compound, fuses, gr ease and other supplies,
plus any small tools used in the oper ation or
maintenance of the mechanical and electr ical
equipment, should also be char ged to this
account.
Repairs and maintenance
The following items constitute r epair and
maintenance expenses: painting and decor ating;
plaster ing; upholster ing; m e n d i n g
cur tains; and maintenance contr acts on
elevator s, signs and office machiner y. Repair s
to dining r oom fur nitur e, r efr iger ation, air
conditioning, building, floor s, plumbing and
heating ar e char ged to this categor y as well.
Repair s to dishwashing and sanitation
equipment, kitchen equipment and office
equipment ar e also included her e.
Administrative and General expenses
This gr oup of expenses is commonly consider ed
as over head and includes items that ar e
necessar y to the oper ation of the business r ather
than those connected dir ectly with the ser vice
and comfor t of the customer. This account
should be char ged with the cost of all pr inted
matter not devoted to adver tising and
pr omotion, such as accounting for ms, account
books, r estaur ant checks, office supplies, cash
r egister and other checking supplies,
letter heads, bills and envelopes. All postage,
except amounts applicable to adver tising,
52
should be char ged her e. The cost of telephone
equipment r ental, local and long-distance calls
should be char ged to this account, with the
exception of calls char geable to mar keting.
Other items char ged to this account ar e data
pr ocessing costs, dues and subscr iptions and
insur ance costs (other than those included as
employee benefits or fir e and extended cover age
on the pr emises and contents). Commissions on
cr edit car d char ges collection fees, cash
shor tages, pr ofessional dues and pr otective
ser vices ar e also consider ed gener al and
administr ative expenses.
Restaurant occupancy costs
Rent, taxes and pr oper ty insur ance ar e
occupancy costs. These ar e sometimes called
"fixed char ges", since they usually ar e
deter mined by the financial set-up of the
r estaur ant and usually not by the tr end of its
business.
Feasibility Analysis
I n or der to establish the feasibility of the
pr oposed r estaur ant, you fir st must estimate the
development costs of the pr oject. By analysing
both development cost figur es and cur r ent
mar ket conditions, and by making adjustments
for the specific char acter istics attr ibuted to the
pr oposed r estaur ant (such as location, size,
facilities, and class and so for th), you will be
able to der ive an appr opr iate constr uction or
setting up cost estimate for the r estaur ant. This
investment has to be compar ed with the r etur ns
being indicated by the income and expense
statement to evaluate whether or not the
r estaur ant envisaged is financially feasible.
53
A
54
Restaurant CaseStudies
Introduction
In this section we pr esent four r eal life case
studies in an attempt to highlight cr itical factor s
that deter mine the success or failur e of a
r estaur ant. For each case study, we inter viewed
the entr epr eneur and asked him/her to identify
the key lessons lear nt in r unning the r estaur ant.
Below, we descr ibe the exper ience of each
entr epr eneur, together with their per ceptions of
wher e they wer e r ight, or wher e they went
wr ong.
CASE STUDY 1
A restaurant which closed down
This r estaur ant was opened in Delhi by an
entr epr eneur who is about 50 year s old. He
wor ked in the hospitality industr y for 25 year s,
his entir e wor king car eer. Initially, he wor ked in
a few family-owned r estaur ants based in
Lebanon, Cypr us and England for about 8 - 10
year s. After r etur ning to India, he wor ked in the
five-star hotel segment, both at the hotel and
cor por ate level, r eaching senior-level positions,
and as a consultant in between some of his jobs.
As he had a long-standing wish to have his own
business, he took the plunge and opened a
r estaur ant of his own in November 2002.
Restaurant and Facilities
The r estaur ant was located in Connaught Place
in New Delhi, the oldest and most pr ominent
commer cial ar ea in the capital city. He r ented
the gr ound floor pr emises of a building, paying
Rs 2 lakh as monthly r ent for 2700 squar e feet of
ar ea. The r estaur ant had 120 seats and
pr ovided a mixed cuisine including Indian,
Chinese and Continental. It was tar geted at an
upmar ket clientele, ser ved lunch and dinner,
and had aver age cover r evenues of Rs 120. The
r estaur ant did not have a bar license and did not
acquir e one befor e the r estaur ant closed down.
Apar t fr om r ent, ther e wer e fixed monthly
expenses of about Rs 1.5 lakh on items like
wages, electr icity, water, telephone and so for th.
Taking into account all var iable expenses, the
br eak-even point was deter mined at a sales
volume of Rs 12,750 per day.
The r estaur ant star ted well and achieved
aver age daily sales of about Rs 15,000 dur ing
the per iod between November 2002 and
Febr uar y 2003. However, sales soon star ted to
decline, r educing to an aver age daily figur e Rs
5,000 in the months May-July 2003. The
entr epr eneur had the oper ation evaluated by a
financial consultant and, based on the
consultant's advice and own judgement, closed
the r estaur ant in August 2003, 10 months after
opening. He has not consider ed r e-opening it at
any other location, and has r etur ned to being a
consultant.
The r estaur ant had initial investments of Rs 40
lakh in dcor, equipment and so for th. The
entr epr eneur also had a par tner, a much
younger per son, who contr ibuted Rs 5 lakh as
equity. Both per sons wor ked full-time on the
ventur e, and wer e 'on the job' fr om 7 a.m. to 11
p.m. Taking into account the pr e-opening
expenses and financial consider ations (br ibes)
and r ecur r ing losses to differ ent gover nment
author ities, the two par tner s lost about Rs 60
lakh in their ventur e.
55
8. Restaurant Case Studies
Reasons for failure
Mentioned below ar e r easons why the
r estaur ant failed, based on the ver sion pr ovided
by the main entr epr eneur and our own analysis.
1. Soon after the r estaur ant opened, the Delhi
Metr o pr oject was commenced in Connaught
Place (CP), r esulting in a lot of digging and
disr uption. The pr oject for ced tr affic diver sion
within the CP ar ea, and r estr icted the space
available for par king. Lack of par king space
ar ound the r estaur ant became a ver y sever e
constr aint. This pr evented upmar ket customer s
fr om coming to the r estaur ant by car. We feel
that the entr epr eneur could have known this in
advance. The plan for the Delhi Metr o was
known befor e he opened the r estaur ant, and it
was also known that the pr oject would affect the
CP ar ea sooner or later.
Mor eover, the CP ar ea has suffer ed tr affic
congestion and par king-r elated pr oblems for
many year s now, and these pr oblems ar e known
to the public. It is also known that some of the
other tr aditional r estaur ants in this ar ea have
been losing sales over the last few year s and
some have closed down r ecently. Also, ther e ar e
a lar ge number of r estaur ants in CP and many
offer cuisine similar to that offer ed by the
subject r estaur ant. At the same time, it is also
tr ue that new food outlets continue to open in
the ar ea, but many of r ecent entr ants ar e
br anded r estaur ants, and mostly in fast food.
2. The entr epr eneur feels that, because of
par king pr oblems and other factor s, CP has
become downmar ket as a location for
r estaur ants. Although ther e ar e upmar ket
customer s at lunch time, these ar e few in
number ; the major ity of per sons lunching in CP
ar e middle to junior-level pr ofessionals. Also,
many of the customer s that visit CP's r estaur ants
fr om elsewher e come by buses, and ar e
obviously low spender s. Their aver age spend
tends to r ange between Rs 35 to Rs 50 per cover,
and hence they often pr efer snacks over full
meals. It is known that fast food r estaur ants
and ice-cr eam par lour s ar e doing ver y well in
the CP ar ea, compar ed to fine dining
r estaur ants.
3. We also feel that the entr epr eneur should
have, or could have, studied his mar ket better. A
sur vey of existing establishments should have
been done, as also a detailed study of the
customer pr ofile. Having been in the industr y
for a number of year s and with wide contacts,
he could have had access to r estaur ant owner s
and manager s in the CP ar ea. He mainly went
by his own view that CP is a lar ge commer cial
ar ea and is visited by a lar ge number of
upmar ket shopper s. He should have
commissioned a pr ofessional feasibility study
for his pr oject.
4. The entr epr eneur himself says that he could
have, instead, taken up space in a r esidential
shopping center in Delhi, or in one of the
shopping malls or multiplexes in neighbour ing
Gur gaon or Noida. He also feels that he paid
too much r ent and could have taken a much
cheaper place at another location. The high
fixed cost led to ear ly failur e and closing of the
r estaur ant.
5. Consider ing his costs and other factor s, the
entr epr eneur believes the main r eason for his
failur e to be poor location. Although CP may
not be a poor location for some other kind of
outlets but it was for him. This was par ticular ly
so after the commencement of the Delhi Metr o-
r elated wor k. The entr epr eneur 's exper ience
br ings to mind a saying oft-r epeated by
teacher s, tr ainer s and consultants to the
hospitality/foodser vice industr y: the fir st thr ee
r equir ements for the success of a hospitality
56
enter pr ise ar e location, location and location.
6. He is bitter about having to br ibe
gover nment depar tments, saying that he paid
about Rs 4 lakh thr ough var ious channels to get
star ted. He would have had to pay another
heavy amount, had he gone ahead with his plans
for a liquor license. These expenses should have
been budgeted for in advance. This is the way of
life in India and all entr epr eneur s know about
it.
7. The entr epr eneur also feels that he spent
extr a on ever ything: the dcor need not have
been so fancy; he need not have hir ed such
expensive, qualified staff, but should have
settled for lower wages at all levels. His head
chef came fr om a five-star deluxe hotel. Having
been used to five-star set ups in his car eer, his
ideas of suitable salar y for the manager and staff
wer e also inflated. Mor eover, he feels that he
bought too much inventor y r ather than buying
for the shor test time per iod possible. He was
left with a lot of inventor y of dr y items after he
closed.
8. He also did not have enough or per haps no
financial backup; having spent the money he
could affor d in the fir st instance. Whatever
backup he had was put into the enter pr ise when
losses star ted. He r eached a stage wher e he
could not fund the losses and was for ced to close
down.
What ar e the lessons to be lear nt fr om this case
study? It is the usual scenar io of going by hype
and being convinced that "I know best". Ther e
was lack of study and mar ket r esear ch. It was
also a classical case of spending too much and
being confident of success. The entr epr eneur
did not imagine that sales would go down so
soon after opening and he would need to put in
mor e money, which he eventually did not have.
CASE STUDY 2
The restaurant that failed twice
The entr epr eneur is 55 year s old, and holds a
gr aduate degr ee. Dur ing the ear ly days of his
car eer, he managed an agency for two-wheeler s
and four -wheeler commer cial vehicles in
Jallandhar. Pr esently, he pr oduces baker y and
confectioner y pr oducts in his factor y in Okhla,
New Delhi, something he has been doing for the
last 15 year s He supplies to the r etail mar ket, to
hotels and r estaur ants, has a wide r ange of
pr oducts and a good r eputation. He also r uns
an agency for some machiner y as a side
business, fr om the same pr emises.
First Restaurant Project
Being in the baker y business, the entr epr eneur
was ver y keen to have a r etail confectioner y
counter-cum-r estaur ant of his own. Having
tr avelled to Eur ope sever al times to acquir e
baker y machiner y, he discover ed that the new
tr end at baker y eat-ins was to make the
confectionar y behind the r etail counter. Its
fr esh-fr om-the-oven appeal cr eated a sales
attr action for take-home pur chases by
customer s. The entr epr eneur thought that the
same concept would do ver y well in a major
Indian metr o - customer s would like to visit and
buy fr om a confectioner y outlet wher e pr oducts
ar e being made fr esh, par tly within their visible
r ange. The success of outlets such as Hot
Br eads, which wor k on the same concept,
r einfor ced the entr epr eneur 's confidence in this
par ticular foodser vice idea.
The entr epr eneur also had access to the
machiner y which had been sent by his England-
based collabor ator to India for an exhibition. In
fact, the collabor ator was willing to give the
machiner y to him without cash payment, and
57
join him as a par tner in the new r estaur ant
ventur e, his shar e being the cost of the
machiner y. The two par tner s selected a site in
the shopping centr e in East Patel Nagar in New
Delhi and hir ed a space of 1800 squar e feet.
Ther e was a Domino's Pizza outlet next door.
The total capital investment was Rs 75 lakh: Rs
30 lakh fr om the English par tner and Rs 45 lakh
fr om the Indian entr epr eneur. This was entir ely
spent on dcor, equipment and some pr e-
opening expenses.
Oper ational costs included Rs 65,000 per month
as r ent, which was to be incr eased to Rs 85,000
after six months. The entr epr eneur employed
20 per sons on a monthly wage bill of about Rs
65,000. Accounting for another Rs 25,000 for
electr icity, the total oper ational costs came to Rs
90,000 per month, which was, of cour se, in
addition to the food cost. Br eak-even sales wer e
calculated at Rs 12,500 per day. The
entr epr eneur hir ed a manager at Rs 12,000 per
month; he had ear lier wor ked in Wimpy's and
Hot Br eads. The manager cr eated a team of his
own choice. Since the entr epr eneur had other
businesses as well, he visited the r estaur ant for
about 2 hour s ever y day and tr usted the
manager to r un the shop pr ofessionally.
The r estaur ant r emained open fr om 8.30 a.m. to
10.30 p.m. It had a compr ehensive r ange of
about 125 pr oducts and apar t fr om counter
sales, it also had a r estaur ant with 25 seats.
Being a baker y and confectioner y ther e was
much emphasis on br eakfast-time sales. A
baker was sent by the English par tner fr om
England to stay for the fir st 20 days and he
tr ained the staff in the cr aft. Since the
entr epr eneur himself is a str ict vegetar ian, he
or der ed that all pr oducts must be str ictly
vegetar ian and even the cakes wer e made
without eggs. Apar t fr om the wide r ange of
baker y and confectioner y pr oducts, the
r estaur ant also included pizza, soups and
sandwiches in the menu.
The r estaur ant did not do well fr om the ver y
beginning. The br eak-even sales of Rs 12,500
was not r eached on any single day. Most
customer s wer e fr om near by r esidential homes
and ther e wer e no walk-in or tr ansit customer s
who usually come to the shopping centr es fr om
other ar eas. The highest sale was Rs 10,000 for
a few days, but it eventually tr ickled down to Rs
5,000 per day. The entr epr eneur closed the
r estaur ant exactly 12 months after it was
opened.
Second restaurant project
The entr epr eneur was still convinced about his
concept of baker y-cum- r estaur ant. He thought
that the location in East Patel Nagar was not
suitable and the concept would succeed in a
better locality in Delhi. He hir ed a place in the
East of Kailash Community Centr e, opposite a
cinema hall. Ther e was a Nir ula's acr oss the
str eet. One again, he r ented out 1800 squar e
feet of space, and opened a similar r estaur ant
with another name, five months after he closed
the fir st r estaur ant.
All machiner y and equipment wer e tr ansfer r ed
fr om the ear lier r estaur ant to the new one. The
Englishman r emained his par tner and they
spent another Rs 15 lakh on inter ior s. The r ent
was Rs 75,000 per month on a gr aded scale, to
go upto Rs 1 lakh per month after six months
and Rs 1.25 lakh per month after 12 months.
Other oper ational costs r emained mor e or less
the same as in the fir st r estaur ant, with slight
incr eases. The br eakeven sale was calculated at
Rs 16,000 per day. The pr oduct r ange was
extended and he included non-vegetar ian
pr oducts along with the str ictly vegetar ian
items. Cakes and pastr ies made with eggs wer e
sold. Buffet lunch and dinner, at a r easonable
58
pr ice of Rs 65 per head, wer e also on offer.
In addition to the cinema, Lady Shr i Ram
College, a well-established gir ls college, was
close, at a walking distance. The college also
had a hostel. Mor eover, with the r estaur ant
being situated in a community center having a
lar ge commer cial ar ea, and some r esidential
colonies near by, ther e seemed, fr om the
entr epr eneur 's viewpoint, a lar ge and var ied
enough tar get mar ket to tap into.
Having lear nt fr om his pr evious exper ience, the
entr epr eneur tr ied to do things better this time.
He made some pr e-opening adver tisements and
his mar ket r esear ch team visited near by houses
and shops. He also devoted mor e of his time to
the pr oject.
However, the r estaur ant did not succeed. In the
fir st month, the sales wer e Rs 20,000 per day
mainly because ther e was a good Hr ithik
Roshan movie playing at the cinema. However,
sales star ted to dr op off fr om second month and
wer e down to an aver age of Rs 7000 per day
dur ing the summer of 2001. The entr epr eneur
r ealised that he would have to spend mor e
money in adver tisements and also put in place
staff, equipment and two-wheeler s for home
deliver y. He had, by this time r un out of money,
as the little r eser ve funds that he had wer e used
up to cover the losses of the past few months.
He had no other sour ces of funds. He,
ther efor e, had to close the r estaur ant 14 months
after it opened.
Reasons for failure
1. The entr epr eneur did not engage anyone
for a feasibility study or a mar ket sur vey to
assess the r estaur ant concept i.e. the r ight
location for the concept, the potential clientele,
the pr oduct r ange for that location and that
customer pr ofile, and so for th. He believed that
he knew this business ver y well, because of his
baker y manufactur ing exper ience, and was
convinced of his concept. Mor eover, he could
not wait to get star ted with is r estaur ant pr oject.
He did not make a pr oject r epor t, or even take
the help of a char ter ed accountant or financial
consultant, for expense and ear ning pr ojections.
He now says that the location of the fir st
r estaur ant was not appr opr iate. This kind of
pr oduct r ange will succeed best in a place which
has good r etail shops in close pr oximity, which
ar e visited by mor e upmar ket customer s. Some
such customer s could walk in for snacks and
dr inks and take away some fr esh baker y and
confectioner y. Ther e wer e no such r etail outlets
ar ound the r estaur ant in East Patel Nagar. Hot
Br eads in G.K. II has an upmar ket fabr ic shop
next door, which r egular ly r eceives a lar ge
number of r elatively higher-income customer s
including diplomats. Ther e ar e other upmar ket
r etail shops in close pr oximity to Hot Br eads,
which ar e also well-fr equented. Mor eover, Hot
Br eads, which also has outlets in Chennai, has
acquir ed a br and image.
2. Unlike Gr eater Kailash-I I , which is a
pr osper ous south Delhi locality, East Patel
Nagar is mostly middle-income. East Patel
Nagar 's r esidents ar e not used to Wester n-style
confectioner y and ar e usually not willing to pay
a pr ice for it. They ar e mor e the type to go in for
Indian fast food. The entr epr eneur thought he
would be able to gener ate their inter est in a new
pr oduct r ange. Not only this, he felt his
r estaur ant would even tr ansfor m eating-out
behaviour in this locality. This failed to happen.
3. The entr epr eneur r ealised that his
insistence on totally vegetar ian items in the fir st
r estaur ant was wr ong. Although ther e may be a
small per centage of people who may insist on
vegetar ian confectioner y, a lar ge number of
people want pr oper cakes and pastr ies with a
59
pr oper r ecipe which may include use of eggs.
He lost a number of customer s on this account.
4. I n the new location, he did get the
advantage of the cinema, but it was an aver age,
even below-aver age cinema which did not get
the better movies. Its visitor s wer e typically
fr om the middle and lower income gr oups, who
wer e not inclined to spending money at a
r estaur ant after having bought movie tickets,
and pr efer r ed to r etur n home. Also, most of the
cinema-goer s wer e not attr acted by wester n-
style confectionar y and food items.
Fur ther mor e, because of conflicts among the
cinema's owner s, ver y little was being spent on
its upkeep, which adver sely affected the
cinema's mar ket per ception.
5. Mor eover, ther e wer e no r etail shops in the
locality, and the banks and offices that exist
ther e did not pr ovide him any significant
business. Another tar get mar ket- college-goer s
fr om LSR, also failed to appear. In both
r estaur ant pr ojects, he was wr ong on the choice
of location. The entr epr eneur says that in East
Patel Nagar he would have done better with an
I ndian fast food r estaur ant. The second
r estaur ant was also in an unsuitable location,
accor ding to his post-closur e analysis. He
would have been better off at a shopping mall.
At the locations chosen by him, he was ahead of
his time for his pr oduct r ange.
6. He feels his biggest mistake was to spend
all his funds on equipment and inter ior s and not
r etain funds for oper ational losses and
additional expenses. He r an out of funds within
a few months. In the second r estaur ant, he was
keen to spend money on adver tisements and a
home deliver y system but did not have any
funds left with him. The entr epr eneur now feels
that he should have only spent 50% of his funds
on capital expenditur e and expenses and
r etained the balance 50% as r eser ves.
7. Mor eover, his concept should have been
either a confectioner y stor e, or a r estaur ant. It
was a poor mix of the two. As he had exper tise
in making baker y items, he should have just had
a small counter-based stor e, in an ar ea of 300 to
500 squar e feet, with limited staff. The number
of such small stor es could have been incr eased
in the city, based on the success r ate. Tr ying to
r un a 25-cover r estaur ant with a confectioner y
shop involved too much space and oper ational
expenses, and did not have the USP of either a
good confectioner y counter or a good
r estaur ant. The entr epr eneur 's view that the
Eur opean style baker y and r estaur ant will
attr act customer s did not wor k well in his
chosen locations.
8. He is also bitter about having to pay br ibes to
Gover nment officials. He goes to the extent of
pr oving that many of these good looking
r egulations ar e not for health and safety of
consumer s, but for the benefit of officials. After
he paid the r equir ed fees to the MCD health
officer, he never even came to visit the pr emises
and sent the cer tificate fr om his office.
CASE STUDY 3
No Shortcuts to Success
The entr epr eneur is 30 year s old, is well-
educated, affluent and well tr aveled. She has a
passion for food and the r estaur ant business but
does not have for mal culinar y education.
Hailing fr om Kolkata, she moved to Delhi when
ver y young. At the age of 16, she joined the
family business of expor ting mar ble. This
pr ovided her with the oppor tunity of tr avelling
to Eur ope; her sojour ns saw her tr udging acr oss
Eur ope with a bunch of cr oss-cultur al
60
companions, pr edominantly Italians. Dur ing
this time, she stayed with her Italian fr iends in
their homes and got a peek into their lifestyle,
cultur e and tr aditional cuisine.
Dur ing the entr epr eneur 's many business tr ips
to Italy to test samples of gr anite and buy
machiner y, she developed a liking for Italian
cuisine. Soon, this liking tur ned into a passion,
and she lear nt the ar t of Sicilian cooking fr om
Mar chessa Anna Tasca Lanza, owner of one of
Italy's finest vineyar ds, who bar ter ed her secr et
r ecipes in exchange for r ecipes for Indian
cuisine. Her master ing the fine ar t of Italian
cooking coincided with the complete bor edom
that was cr eeping in as far as the mar ble
business was concer ned. At 22, the entr epr eneur
quit her family business and came to Delhi.
The first Restaurant
In 1994, influenced by and at the same time
fir ed by her exper ience in Italy, she, then 21,
r etur ned to Delhi to star t what was then possibly
the city's fir st Italian eater y, Mezzaluna (Italian
for a cr escent-shaped knife with a handle on
either end) in Hauz Khas Village. The r estaur ant
offer ed a Mediter r anean platter, but the focus
was on Italian food.
The total capital investment in the r estaur ant,
which was located on a 1300 squar e feet site
was Rs 10 lakh. This amount was entir ely spent
on dcor, equipment and some pr e-opening
expenses. The monthly r ent paid was Rs 20,000.
The r estaur ant, with 35 seats, was tar geted at an
upmar ket clientele, ser ved lunch and dinner,
and had a per cover aver age r evenue of Rs 700.
It did not have a bar for liquor and did not
acquir e one befor e the r estaur ant closed down.
Apar t fr om r ent, ther e wer e fixed monthly
expenses of about Rs 1.8 lakh on other items,
like wages, electr icity, water and telephone.
Accounting for the var iable expenses, the
br eakeven point came to sale of Rs 15,000 per
day.
At the time, fir st boom of fr eestanding
r estaur ants had just begun and, although Hauz
Khaz Village was consider ed a tr endy place, the
appr oach to its eater ies and shops was thr ough
dung-splatter ed by-lanes. The entr epr eneur
discover ed that the small clientele which she
had developed wasn't enough to make ends
meet. After suffer ing losses for 29 months,
Mezzaluna was sold to a keen buyer. The
entr epr eneur 's r easons as to why she believes
the r estaur ant did not wor k ar e:
1. "I misjudged the Indian palate. Back then,
Indians had not been fully exposed to
inter national cuisine and wanted the 'tr ied
and tested' far e."
2. The r estaur ant's location pr oved a
hindr ance in the r estaur ant attr acting its
tar get mar ket - high-spending customer s.
3. The excise laws did not per mit giving a
liquor license to fr ee standing r estaur ants
in that location.
4. Independent r estaur ants could not impor t
ingr edients and food pr oducts.
Second Restaurant: Vama in London
In 1996 ar med with the wisdom of hindsight, a
battalion of seven chefs, and an ar dent foodie
fr iend, she opened a r estaur ant in London. The
r estaur ant, ser ving nor thwest fr ontier cuisine,
cr awled into the cr owded eater y space of
London's 'hot, happening, hyped' Chelsea
distr ict. The cost to set up Vama was ver y high,
close to about 400 thousand pounds ster ling and
it took about two year s to br eak even. The 90-
cover r estaur ant, having an aver age spend of 40
pounds per per son, was a tr ue lear ning
exper ience. London has on an aver age, 70
r estaur ants opening ever y year, and 135
61
shutting down. Good publicity and a celebr ity
clientele helped Vama tur n into a sensation.
Some of the key success factor s wer e: quality
pr oduct, focused mar ket, and a location to suit
the r estaur ant. After 40 months and having
ensur ed that the r estaur ant was up and r unning
with the best team possible, the entr epr eneur
r etur ned to India.
Finally..Stupendous Success
In 2000, she once again decided to open an
Italian r estaur ant in New Delhi. This time
ar ound she was deter mined to steer clear of the
mistakes dur ing her Mezzaluna exper ience.
Running Vama in London had taught her both
good hospitality and how to manage r estaur ant
oper ations; this lear ning came in ver y handy for
her new r estaur ant ventur e, in Gr eater Kailash-
II (GK-II).
The entr epr eneur was ver y cer tain she wanted
to select the r ight location. She knew that in
or der to get a liquor license she would have to
be in a commer cial ar ea. She chose GK-II,
because despite being a centr al location in
affluent south Delhi, it was r elatively peaceful.
The 3000-squar e foot taken up was decor ated to
cr eate the r ight ambience. It has off-white walls,
Italian mar ble floor ing, an anytime coffee bar,
table top games (chess, backgammon) and
ample ` food for thought' - books fr om the
entr epr eneur 's per sonal collection. The total
capital costs associated with the 80 cover
r estaur ant was 80 lakh. Initially the monthly
fixed oper ational costs wer e about 5 lacs per
month, however ver y soon as business star ted
picking up, mor e staff r esulted in additional
costs. A r ent r eview took place this year, and
now the r estaur ant oper ates on a fixed
oper ational cost of appr ox 6.5 lacs per month.
This would wor k out to appr oximately 30% of
the total r evenues, but ther e is one catch, the
food costs ar e ver y high as most ingr edients ar e
impor ted and wor k out to be appr ox 40%. Today
she has a lar ge clientele that simply laps up the
Italian food ser ved at the r estaur ant and is
counted among the best r estaur ants in India.
She changes the r estaur ant menu ever y two
months and is behind the kitchen r ange ever y
night.
Some of the r easons she attr ibutes to the success
of the r estaur ant that other s should lear n ar e:
1. Right location for the concept
2. I nvolvement in ever ything about the
r estaur ant
3. Cur tail capital costs-spend on the
impor tant things-ingr edients, staff, tr aining
etc.
4. Resear ch your mar ket and your
competition
5. Keep up with the standar ds
6. Innovation of menu, ever y few weeks to
keep the inter est of r egular clientele
7. Most impor tant: hear t-felt hospitality
towar ds ever y client
Although she claims it to be fun, ther e ar e no
expansion plans in other par ts of the countr y.
One of the r easons is that she does not want to
spr ead it too thin so that it becomes out of her
r each to contr ol it. Mor eover, it's tough to r un a
r estaur ant business in India," she says.
Ask her the secr et of being a successful
entr epr eneur and she says, "Lear n ever ything
about the business you ar e doing and then give
it your best shot. You can't go wr ong then!"
62
CASE STUDY 4
First Fine Dining Five Star
Restaurant
It takes a lot of cour age and conviction to open
a new r estaur ant in an ar ea that has suddenly
been flooded with a lar ge number of r estaur ants
and bar s of all kinds, especially one that
r equir es a lar ge investment. A major tr avel
management company sought to diver sify its
por tfolio to include the hospitality industr y and
embar ked on its plan by opening its fir st outlet
in the for m of a Chinese (Szechwan) r estaur ant
in July 2003. It is pr obably NCR Delhi's fir st
lar ge fine dining r estaur ant outside of a Hotel,
located in Gur gaon. The 150 seater r estaur ant,
kitchen and other suppor t ar eas occupy
appr oximately 8000 sq.ft. of space. The
r estaur ant alone is appr oximately 5600 sq.ft.
The tr avel company owns the building wher e
the r estaur ant is located, a factor that mitigated
some of the r isks. No costs, however, wer e
spar ed in r etaining the best talent to design the
outlet, and a r enowned Hong-Kong based fir m
was hir ed to design the inter ior s, kitchen and
lighting. The r estaur ant houses a 116-seater
dining ar ea inclusive of Two Pr ivate Dining
Rooms accommodating 12 per sons each, and a
Lounge Bar to accommodate 33 per sons. A
state-of-the-ar t open kitchen for ms a unique
salient featur e of this r estaur ant. A team of
specialist Chefs fr om the Szechwan pr ovince of
China, have been flown in and they pr ovide the
key element in chur ning out authentic
Szechwan cuisine which the r estaur ant claims
its specialty.
Conception
Inter estingly, the idea to diver sify into the
hospitality industr y tr aces its r oots to the events
of 9/11 following which the tr avel business all
over the wor ld r eceived a ser ious r eview in the
wake of secur ity, and in most cases, a sever e cut-
back on existing tr ends was the outcome. India
was amongst the wor st hit by this r ecession and
its magnitude encompassed the entir e ser vice
industr y as a whole, with the fall-outs affecting
r elated per ipher al ser vices also.
The tr avel management company's bold and
aggr essive outlook, however, escalated their
entr y into a new business that would help them
diver sify, yet r emain within the folds of their
cor e competence of the ser vice industr y.
Star ting a r estaur ant fit nicely into their lar ger
objective of the setting up of a hospitality
division, and the Chinese r estaur ant took shape.
They alr eady owned the r eal estate wher e the
r estaur ant was to be located but being a Gr ade
"A" commer cial building, they wer e aler t to the
aspect of not wanting the r estaur ant to be an
ir r itation to the other occupants of the building,
or the complex as a whole. The r estaur ant,
ther efor e, was conceptualized with ver y high
hygiene and design standar ds that sought to
totally eliminate any smoke or food odor which
might have an adver se impact. Some of the
elements inducted to r ealize this objective, such
as a Rever se Osmosis (RO) Plant, an Effluent
Tr eatment Plant (ETP) to complement the
Gr ease Tr aps, a Gas Bank complying with ever y
r ule in the book, did incr ease the development
cost of the pr oject immensely, but for med an
integr al par t of the Business Plan. It fur ther,
emphasized the owning company's
uncompr omising eye for detail and commitment
towar ds safeguar ding the envir onment ar ound
its pr oject.
The total pr oject cost of setting up of the
r estaur ant, not including cost of r eal estate, was
in excess of Rs. 2.85 cr or es. This amount was
spent entir ely on design-dcor, equipment, back-
end development and some pr e-opening
63
expenses. A monthly r ental on pr evailing costs
per sq.ft. was sought to be incor por ated on the
P&L, even though the estate was owned by the
par ent company. The r estaur ant was tar geted at
the up-mar ket clientele populating its
sur r ounding ar eas, and its r evenue str eams
include lunch, dinner, snacks, and cor por ate
take-aways. An aver age meal cover cheque
between Rs.550 - 650 was envisaged. Apar t fr om
r ental, ther e wer e fixed monthly expenses on
items such as wages, electr icity, water, r epair &
maintenance. Keeping in mind the same, the
br eak even wor ks out in excess of six figur es per
day, but the r estaur ant has managed admir ably
on the same so far.
Some of the r easons the entr epr eneur s attr ibute
towar ds the success of the r estaur ant that other s
could bear in mind ar e:
Be a long ter m player.
Pr ovide a value for money exper ience
incor por ating a combination of Food,
Ser vice and Ambience, in that or der.
Be selective in the choice of cuisine and
ensur e ver satility in the style of cooking,
within the given fr amewor k. This will
ensur e your weaning the clientele towar ds
your cor e competence in the authentic style
of cooking.
No compr omise in the quality of
ingr edients, and to ensur e consistency and
authenticity in the quality of food ever y
time.
Listen to your clientele. Ensur e their
comments ar e acknowledged in ever y way,
even the cr itical ones. Build client
r elationships/loyalty and incr ease high
r ecall and mind shar e.
However, the r estaur ant is still in its fir st nine
months of wor king and all keen obser ver s, and
of cour se the management, will be keenly
watching its pr ogr ess over the next 2 year s.
64
A A

Restaurant Industry - QXD - 1336

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Restaurant Industry in India - Trends and Opportunities

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