When close friends Kabir Suri, 34, and Rahul Khanna, 32, decided to start a casual pan-Asian restaurant called Mamagoto in New Delhi’s upscale Khan Market in January 2010, they had a well-defined business strategy. “It was definitely meant to be a chain,” says Khanna. “When we were devising our menu, style of service, uniforms, etc, we asked ourselves: ‘Is this scalable?’ If the answer was no, we didn’t get into it.” The focus was on building a strong brand based on a template that could be easily replicated.
Five years on, their company, Azure Hospitality, runs nine Mamagoto restaurants in the country and 10 other outlets under their quick service restaurant (QSR) brands Rollmaal and Speedy Chow. And, this July, Azure Hospitality raised $10 million in growth capital from investment bank Goldman Sachs.
Now this isn’t the largest investment in the Indian food service industry. Not by a long shot. For instance, late last year, Singapore’s Temasek Holdings Advisors invested $81.31 million in Devyani International, which operates over 500 outlets of Pizza Hut, KFC, Costa Coffee and Vaango, among others, in India.
Big as these deals may be, they pale in comparison to the investments pouring into the food tech space. Earlier this month, Temasek, along with Vy Capital, invested $60 million into online restaurant aggregator, Zomato. Also, in April, Zomato had already raised $50 million in a round led by its existing investor Info Edge. In another development emblematic of the sector’s brisk growth, Rocket Internet-backed food delivery service Foodpanda raised $100 million from Goldman Sachs in May.
However, while the new-age food tech sector may be all the buzz, the core business of food remains an attractive avenue for investment. And the Azure deal is a hat-tip to the enduring appeal of the food service sector, which is expected to grow at a compound annual growth rate (CAGR) of 8 percent from Rs 272,680 crore in 2014 to Rs 423,140 crore in 2020, according to a QSR market report by management consulting firm Technopak Advisors. This growth is expected to be driven by a 15 percent CAGR in the restaurant chain segment.
As Mukul Singhal, principal, SAIF Partners, whose firm is an investor in the listed Speciality Restaurants Ltd, which owns and operates brands such as Mainland China, Oh! Calcutta and Cafe Mezzuna, puts it: “Food is a large spend bucket in itself. Restaurants belong to a very fragmented market, which is also highly unorganised, with no single large business. Therefore there is scope to create large companies.” But there are challenges, he adds. “The success rate is low so investors need to be disciplined.”
Unpretentious, young and quirky
Suri and Khanna had discussed the possibility of jointly opening a restaurant soon after they returned to India in 2008, having spent nine and 10 years abroad, respectively. But friendships can sour fast in business, says Khanna, who is a hospitality management graduate from Switzerland’s Ecole hôtelière de Lausanne and has also worked with the Mandarin Oriental and Jumeirah (the latter as team leader, food and beverages). “Both of us were quite hesitant about getting into business with each other. In theory, we wanted to do it, but we knew we had to be very careful.” So they took their time.
Shortly after returning, Khanna opened Below 8 in Gurgaon. “It was loosely based on a wine bar I used to love while I was working abroad,” he tells Forbes India. Below 8 closed last year after the lease expired and Khanna became busy with Mamagoto.
His partner Suri, too, had experience in the hospitality industry, having worked for three years, first in operations and later in business development, with international Japanese restaurants Zuma and Roka.
Around 2008, there was an explosion of cafes in India, bringing in the culture of casual dining. As it became evident to the two friends that India’s youth was driving growth in the food service sector, Khanna and Suri began to identify a niche. “Mamagoto was about finding a niche in the market and whether there was something fun we could do with it,” says Khanna.
Wait a while
Khanna and Suri had all the right ingredients for a successful launch but, like other restaurateurs, they had to prepare for stiffer challenges ahead. “In this sector, sustaining consumer interest is the biggest challenge,” says Tarun Khanna, a partner with CX Advisors LLP, which has invested $35 million in the popular food chain Barbeque Nation. “There’s always a new restaurant or bar which is a hit for a few months and then it goes away.”
Azure Hospitality’s investors would agree. “When we approached our angel investors (Gautam Thapar, founder and chairman of the Avantha Group, and Mauritius-based Blue Sky Capital), we had gone with a mandate to open five restaurants,” says Rahul Khanna. However, the investors urged them to first open just one and gauge customer reaction. “Good PR can fill your restaurant for 2-3 months,” he says, “but it’s what happens next that matters.”
“You have to get your value proposition right,” says Thapar. “We did not want them to scale unless they got it right.” After about seven months, investor confidence strengthened, and the duo finally received the funds for four more restaurants.
The cautious approach stems from the perception that some restaurant companies were scaling up too fast or getting private equity (PE) money and signing impractical lease agreements. “In the past, the sector had gotten a bad name,” says Riyaaz Amlani of Impresario, which runs Smoke House Deli and Social, among several other bars and restaurants. He cites the same stories, including those of investors not being able to make a profit, that made them wary of putting money in the industry.
But this trend has been changing for a while. Approximately $128 million in investment went into the restaurant space in 2014, and investors have already poured in about $111 million in eight months this year, says VCCEdge.
In the last three months alone, about $72 million has been pumped into the sector. With a $30 million investment in July, India Value Fund Advisors acquired a controlling stake in deGustibus Hospitality, the parent company of Indigo restaurants. In the same month, a consortium of investors led by Samara Capital acquired the south and west India operations of the Pizza Hut franchise from the Dodsal Group for a reported sum of Rs 200 crore. Later, in August, it was reported that Carpedium Capital Partners had picked up a stake for an undisclosed amount in Gurgaon-based Thea Kitchen, which runs Biryani Blues, a QSR chain. A number of other investments are expected, including one in Impresario, claims Amlani.
“Very often, what you don’t see in this business [back end] is what needs to be the strongest,” says Rahul Khanna. According to him, the problem with many horror stories in the restaurant business was that they were growing without strengthening their back end. “They had the best locations, good chefs, but bad purchase, recruitment networks and accountants.” He admits that “even 2-3 years ago, our own systems were not there yet”.
“As we grew, we got better people, and we spent time strengthening our back end,” he adds. It was only in 2012, when they were satisfied with the strength of their network, that Khanna and Suri started the process of opening 14 restaurants in a year, including launching their two QSR brands.
It is at this stage that brand identity can begin to flounder. “You have to keep engaging with the customer to make sure you remain relevant,” says Suri. Thapar believes understanding what the customer appreciates in your brand and continuing to provide them with that is essential. “Competition should not make you change your value proposition,” says Thapar. Once the continuous focus in value drivers is ingrained, it should penetrate the entire organisation, he adds.
While there are challenges aplenty in any business, scale, above all, seems to be a point of conflict between restaurateurs and prospective investors: “You may create a brand, but is it strong enough for a financial investor?” asks Tarun Khanna. An entrepreneur is going to have a different perspective on scale than an investor, he says.
Very few restaurants in India have been able to scale their operations successfully, say experts.
“A restaurant is a holistic product. When scaling up, a restaurateur has to ensure the consistency of food and the service, and maintain the same standard for 365 days in a year. This to me is the biggest challenge and a reason why the restaurant mortality rate in the country is very high,” says Anjan Chatterjee, the founder of Speciality Restaurants.
Chatterjee, who forayed into the restaurant business in 1992, says nearly 50 percent of the restaurants that start shop across the country’s top metros die in the first or second year of operation due to consistency related issues.
(This story appears in the 02 October, 2015 issue of Forbes India. To visit our Archives, click here.)