I will have 25 percent
of the restaurant and garlic bread on the side"
is not likely to raise as many eyebrows as you
would imagine. Increasingly, the trip to a restaurant
is not just about tucking into your favourite
dish, but also about owning a part of the restaurant
and diversifying your portfolio. Eating out has
become derigueur and the restaurant trade is seen
as the next big story. Savvy investors, especially
those who are also food enthusiasts, are snapping
up stakes in their favourite restaurants faster
than you can say lasagna Bolognese.
The trend of investing in restaurants began less
than ten years back. The early converts were celebrities
and Page3 inhabitants. Restaurant openings got
expansive write-ups and many saw this as a way
to garner some free publicity. But with more urban
Indians eating out, returns touched 30 percent
a year. Now, a restaurant in your portfolio is
not just an affirmation of your presence in the
swish set but also a wise money move.
High net worth individuals who have optimized
on their equity and debt portfolio and bought
all the art they wanted, are now looking at unorthodox
investment areas. Restaurants, antiques, vineyards
and coffee plantations are becoming part of asset
portfolios of the very wealthy. Restaurants today
are professionally run with transparent accounting
procedures. Angel investors are thronging to grab
a piece of the pie. Well-run, standalone restaurants
make sound profits and parking a part of your
portfolio in this business is an ideal asset diversification
strategy.
THE TRADE
The restaurant in a five-star hotel might be a
fine dining experience and the roadside eatery
a quick place to grab a bite, but when it comes
to investing your money, the standalone restaurant
is where you should look. Broadly, a restaurant
with less than 40 covers (or one that seats 40
people at a time) is classified as a "small" restaurant,
40-80 covers is medium-sized and over 120 covers
is large. This classification can vary from city
to city. In Mumbai and Delhi, where rents are
high and space is at a premium, a 40-seater could
cost as much as a medium-sized restaurant in Bangalore
or Ahmedabad.
Setting up a small restaurant costs approximately
Rs.15-20 lakh while a medium size one costs about
Rs.50 lakh. This covers interiors, furniture,
staff uniforms, kitchen equipment, crockery and
cutlery.
HOW TO INVEST
Passion for food is a good enough reason to be
an angel investor in a restaurant. Like Devjani
Pillai, who had no restaurant background and no
prior experience in investing in a restaurant,
but missed having authentic Bengali food when
she moved to Bangalore to be with her husband.
She teamed up with the partners of a Bengali restaurant
in Kolkata and brought 6, Ballygunge Place to
Bangalore, with an investment of Rs.5 lakh each.
Business is booming and she is investing in two
more restaurants in the city.
It helps if you invest in a restaurant that is
run by someone you know. This is a very hands-on
business and one of the partners should be completely
devoted to the operation of the business. So,
if you are going to be an angel investor, then
park your money only if it is run by one of the
owners and you have faith in their operational
expertise.
Unlike the west, there are no advisory or consultancy
practices in India that focus on the restaurant
trade. The sector is still largely unorganized
and word of mouth is your best bet to find out
if a restaurant is looking for funds or a partner.
"We have patrons who love our food and have seen
the consistency of our quality and who approach
us with the intent of investing in our business.
A lot of people are providing seed capital to
restaurants," says S.Ramani, who runs a chain
of restaurants in Kolkata and Bangalore. Typically,
restaurants that are doing well would need additional
funds to open a second branch in the same city
or diversify into other cities. The format of
a successful restaurant can easily be mirrored
and local tax structures give additional incentives
to branch out.
Restaurant owners usually find it difficult to
get term loans from banks, and it is an accepted
practice to take on partners.
So, the next time you go to your favourite restaurant,
there is no harm in asking to speak to the owner
and broaching your interest in investing in his
business. Even if he is not interested, he would
know others in the industry who are looking for
partners and spread the word around for you.
RETURNS
On an average, a restaurant grosses between 28
to 35 per cent returns annually. A well-run operation,
where costs are kept low, can gross even up to
50 per cent, according to industry sources. Average
net returns are 14-18 per cent, says Ramani.
Operationally, most restaurants make money. If
the capital expenses have been very high, then
your break-even period could get pushed back a
little. Most reasonably run restaurants should
break-even in the first 12-18 months.
Indirect returns from this investment are also
significant. "My entertainment expenses are considerably
reduced because of my catering and restaurant
business. I do entertain outside my restaurants
at times, even so, total cost of entertaining
is significantly lower than what it would have
been, had I not invested in the restaurant trade,"
says Prahlad Kakkar, professional filmmaker and
passionate restaurateur.
Also, a good restaurant is a great place to network.
"You attract many like minded people to your restaurant.
They (these customers) then start owning the restaurant
and begin referring to it as 'our restaurant'.
I have had such good times running my restaurant
and the goodwill I earned, especially from investing
in Prithvi Café, was enormous. Not to mention
the fact that it was great PR, and helped me cultivate
my public image," adds Kakkar.
RISKS
While it is true that more restaurants die than
live, experts says that the ones that die are
the ones that never had a chance to survive. Many
things can go wrong with a restaurant. But most
of these flaws can be fixed at the planning stage.
Over pricing is the number one killer. The second
is poor control and mismanagement. This is why
it is important to work with someone who knows
the business and not just team up with a few friends,
none of who have any idea about running a restaurant,
and hire a manager to do it for you.
If you are taking an existing restaurant format
and opening a branch in a different city, then
it is important to understand the demographics
of your new customers and price your menu accordingly.
As an angel investor make sure that you are convinced
about the business plan. Eat at similar restaurants
in the city and give feedback to your business
as a customer. Look at pricing and marketing plans,
check out the quality of the food and service.
Once you are convinced about all these, you can
be hands off and leave the operations to your
partners. Do visit as often as possible, so that
you can pick up any slip-ups in quality.
With more Indians traveling abroad and sampling
international restaurants and cuisines, they are
ready to experiment with their food. All this
bodes well for the industry and your investment.
If you have a product that scores 7 out of 10,
you have a hit on your hands. "It is like any
other business. You have to control your costs
and run a tight operation. If you manage to keep
your prices down and your employees' hands off
the till, that's half the battle won," says Kakkar.
TIME SPENT
You can choose to be a partner who is involved
in the operations of the business or one who only
wants to see the profit and loss statement every
quarter. If you fall in the first category you
reap additional benefits of networking, making
friends and ensuring that your money is well invested.
If you are investing in the business only for
the 20 per cent return that you expect it to give
then you can be just an occasional diner.
EXIT ROUTES
With the current boom in the trade, chances are
if you have found the right restaurant to invest
in, you have very few reasons to want to exit.
The restaurant industry is looking to hit the
stock market as well, and several large ones are
planning IPOs of their own. With retail continuing
to be the flavour of the stock markets, restaurant
business would be the follow through to the spate
of multiplex IPOs that the markets witnessed in
the last year. There are various line expansions
planned like ready-to-eat meals. We are planning
an IPO to fund some of these plans," says Ramani.
Selling your stake in the market once the restaurant
goes public is the first exit route for the angel
investor.
If the IPO route is not one that your partners
want to take, there are many people waiting to
lay their hands on a thriving business. Once you
pass the word around it is easy to find interested
parties to sell your stake to. If the restaurant
is doing well, chances are the other partners
will buy out your stake. They can then decide
to increase the valuation of the restaurant and
invite interested parties to become prospective
partners.
It is fairly easy to exit from business, provided
it is a clean one, according to industry experts.
Traditionally the finances behind the restaurant
trade have been a gray area, with a mixture of
white and black money. With more and more professionals
entering the business, this is changing and investing
and accounting are becoming increasingly transparent.
So if your restaurant is run on legitimate money,
then your exit route is a simple and clear one.
If dubious accounting has been a norm, then it
might be difficult to untangle your investments.
This is why it is important that you know your
partners well and take time out to assess the
financial and business plan of the restaurant
before you commit your money to it.
The worst-case scenario is also worth considering.
Standalone restaurants that fail to capture an
audience are usually shut down. Like any business,
the assets are sold and the partners share the
remaining consideration in a pre-decided ratio.
If you want to exit your share of the business
while the others want to continue with it, then
you can either sell your stake to a third party
or to the existing partners. Ensure that the initial
partnership deed or memorandum of association
spells out possible exist routes including selling
off to a third party.
Unless your restaurant is a disaster from day
one, chances are you will not lose all of your
investment. Restaurants usually manage to cover
operational costs. If you wind up the business,
the sale of furniture and fixtures would help
in recovering some of your investment.
The restaurant industry in urban India has metamorphosed
in the past decade. From coffee houses with capped
waiters in khaki to champagne brunches with a
five-figure price tag, restaurants and restaurateurs
have taken a giant leap forward. Over 8 per cent
GDP growth, IT, BPO and stock market millionaires
only spell better times for the restaurant trade.
If you have the taste for it and the money to
spare, go ahead, get you name engraved on a menu
card. Courtesy Outlook Money |
