From fine-dining and specialty chains to quick service restaurants, venture capitalists (VC) and private equity (PE) players are looking to increase their share of the pie in the R8,500 crore organised restaurant business in the country, which is growing at 20% annually.
Data from Venture Intelligence, an investment research firm, shows funding in the restaurant space has increased by almost six times in the last two years. The 2012 numbers show investment of $114.2 million across 8 deals so far, up from $19.66 million from 4 deals in 2010.
In December, Bangalore-based Mast Kalandar, a quick service restaurant (QSR) chain serving north Indian vegetarian food, raised $6 million from Helion Venture Partners and Footprint Ventures, an early-stage VC fund, in its third round of funding. Started in 2005, the QSR chain plans to ramp up its geographic presence and open 100 outlets across 8 cities in the next 18 months. In October, Premji Invest, an investment fund by IT czar and Wipro chairman Azim Premji, invested in JSM Corp, which operates global brands such as Hard Rock Cafe and California Pizza Kitchen restaurants in India and super premium luxelounge Shiro. According to reports, JSM Corp has raised about $25 million from Premji Invest.
In the same month, fine dining restaurant chain Olive Bar and Kitchen raised an undisclosed amount from Aditya Birla Private Equity. The investment is estimated to be around $15 million. Olive Bar and Kitchen owns brands such as Olive, LAP, Monkey Bar, Ai and Soul Fry across the country. In September, Indian Angel Network (IAN), which funds start-ups and early stage ventures, invested an undisclosed amount in Poncho, a Mumbai- based Mexican QSR. While in August, Bangalore-based QSR chain Ammi’s Biryani raised about $7.2 million from PE firm SAIF Partners.
According to a report by the National Restaurant Association of India, the overall restaurant industry in the country is pegged at about R43,000 crore, growing at 5-6% annually. However, the organised segment of the market is estimated at 16-20% of the total restaurant business. Experts feel with an increasing disposable income, consumer aspirations, changing food habits and move towards lifestyle-oriented consumption, food business is ?very well-placed.?
?In recent times, the food and beverage industry in India has under gone a sea change and is growing exponentially. The invasion of international brands with the launch of QSR format has inspired domestic brands to follow their path in the same way,? said Padmaja Ruparel, president, Indian Angel Network.
According to Venture Intelligence, some major investment movement in the restaurant space this year includes private equity major New Silk Route (NSR) putting $38 million in the Bangalore-based south Indian food chain Vasudev Adiga’s.
The $1.4-billion Asia-focused private equity major NSR has been actively looking at investing in the domestic F&B space in the last few years. The PE firm, which has an investment of $75 million in the Coffee Day Holding, is looking to build India?s biggest platform in this sector with a commitment of $100 million.
Earlier this year, private equity firm SAIF Partners, a venture and growth-capital investor, floated a $18-million restaurant fund focusing on funding and managing restaurant businesses, including QSRs and casual dining formats.
?The gross margins in the industry are in the range of 70% and store level net profit margins is like 20%. The restaurant industry in India being mostly unorganised and with only few big chains proposes amazing opportunity for growth. If things are done in the right manner, brands can achieve scale,? said Amit Raj, co-founder of Poncho, which started in August 2011.
Be it pastas, pizza or dosas, investors are increasingly developing an appetite for restaurant business, one of the fastest-growing consumer spending segments. Chains that offer competitive pricing and good quality products are attractive investment targets. Among the restaurant formats, experts feel, home-grown quick service restaurant chains are seen as funding targets due to the convenience offered in terms of access, sharp pricing and diverse menu.
Investors said while both fine-dining and QSR formats can show margins of 20%-30%, low-cost QSRs, which require an initial investment of R30-Rs 40 lakh, have better chances of breaking even.
?It depends how one would like to start. We started with only one outlet with a seed capital of R18 lakh. However, I think if a person has the money to start 2-3 outlets initially, it will help to attract the VC funding,? said Gaurav Jain, founder, Mast Kalandar, which had a turnover of Rs 25 lakh after one year of business.
Jain points out that within the QSR space, there are different type of operating models. ?A unit level Ebidta of about 25% and above is good for any model. Unfortunately, there are not many businesses operating with these kind of profit margins,? said Jain, adding that as of now there are no plans to enter the fine dining space.
It is estimated that the over R3,000-crore QSR space in India is growing at about 25-30% every year. Other investments in the space include Accel Partners? funding Bangalore-based Kaati Zone, Chennai-based TVS Capital’s investments in Om Pizza, which runs brands like Papa John?s pizza chain, Matrix Partners’ funding Yo!China and Beacon India Advisors? R75-crore investment in Impresario Entertainment and Hospitality, which owns brands like Mocha.
In recent times, initial public offerings (IPOs) of restaurant chains in the country have shown profitable exit for investors. Jubilant Foodworks, which got listed at a price of R161.6 in February 2010, has zoomed almost eight times to R1283.35 as on December 27, 2012.
Speciality Restaurant, which owns brands like Mainland China, Oh! Calcutta, Sigree, Flame & Grill and Machaan, got listed at a price of R153 in May 2012 and is trading at R172.05 as on December 27, 2012.
?The restaurant space is one of the exciting areas of investment for most investors. We do see several avenues of exit including M&A with other synergistic players, acquisition by global players and IPO. Apart from Jubilant Foodworks and Speciality Restaurant, Nirulas was the other recent exit,? said Kanwaljit Singh, senior managing director, Helion Advisors.
In 2013, experts feel the restaurant space will continue to attract investor interest. ?We are likely to see a few consolidation and investment in the restaurant space as several VC and PE players have announced specific funds or corpus to invest in the restaurant business,? said Singh.
