Description
Restaurant (industry)of india
Sr. no
CHAPTER
PAGE NO
1.
HISTORY.
1-8
2.
THE MARKET SIZE OF COUNTRY?S RESTAURANT SECTOR.
9-11
3.
EXECUTIVE SUMMARY
12-17
4.
BACKGROUND & SCENARIO
18-28
5.
WHATS IS MY RESTAURANT WORTH?
29-40
6.
FEASIBILITY STUDY
40-63
7.
NATIONAL RESTAURANT ASSOCIATION OF INDIA (NRAI)
64-67
8.
SERVICE TAX CONFUSION
68-77
9.
CASE STUDY
78-87
10.
RECOMMENDATION
88-89
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CHAPTER 1
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1. Restaurants Industry in India
HISTORYIndia is known as the land of snake charmers to some, as land of religious diversity to some others and as land of Bollywood to entertainment lovers. Whether it?s the food, the diversity in cultures, handicrafts or business opportunities, everybody seems to have some or the other reason to travel to India. And the fact that the World Travel and Tourism Council considers India to be one of the top most tourist spot with the highest ten year growth potential (2009-18) [ www.wttc.org ], we have a reason to believe that India is only going to see more visitors. It is said that the Indian tourism brings a substantial share to the country?s foreign exchange earnings and if you closely examine it, most of that comes from the hospitality business in India. The revenue from the hospitality sector in India broadly comes from two sources: 1. Hotels: Which include lodging, attending business conferences and meetings. 2. Restaurants: Which includes all sort of eateries whether fine dining restaurants, quick service restaurants, takeaways or other forms of eating joints.Hotels and Restaurants after all are the prerequisites for any visitor, local or foreign. And focusing on the last bit, it?s hard to not miss out on the fact that not only the foreign visitors, but Indian visitors travelling across states and cities bring in a huge chunk of revenue for the country?s Hotel and Restaurant Industry. Therefore it can be said that the Tourism and the Hotel and Restaurant Sectors go hand in hand. Or rather, it can be said that the latter forms a prominent and an important part of the former.The market comprising of the foreign tourists is huge and is only growing year after year. The Foreign Tourist Arrivals standing at a figure of 4.15 Lakh in September 2012, registered a growth of a little over 3 percent compared to the corresponding month in the previous year. To
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prove the huge amount of foreign exchange that is added to the country?s reserves is the fact that the Foreign Exchange Earnings during September 2012 were almost Rs. 6,650 Crores! The rise in incomes coupled with fascination to travel to a new country is a considerable reason to believe the growth of foreign visitors to India. Similar reasons can be attributed to upsurge in the domestic visitors too. India is believed to be a country with the fastest growing middle class, and applying the general principles of economics with respect to availability of leisure time and disposable income, travelling is now a necessity for many. Visiting the dear ones, exploring your own country, taking a break from work, searching for business opportunities, there are reasons galore for Indian citizens to look to travelling. Thanks to this upsurge, the hotel rates in India increased by almost 12 percent in the first half year in 2012!
Restaurants Industry: A source for bread for many it is clear that the Tourism and the
hospitality industry are highly interrelated but not only that, the hospitality or the Hotels and Restaurants sector is substantially linked with other industries in the economy like agriculture, transportation and construction which can be easily reasoned. To add to that the sector creates the maximum number of jobs than any other industry in the economy. After all it has place for all kinds of people, no matter how unskilled or specialized, which can be easily sampled in any hotel or a restaurant. Typically a hospitality unit such as a Hotel or a Restaurant consists of various departments which work in close tandem to provide the combine service a customer enjoys. There is facility maintenance and direct operations which includes bartenders, kitchen workers, servers, housekeepers, porters, etc. Apart from that there is the obvious and more prominent Human Resources department, people taking care of the marketing and the management. Not only this, the employment generation potential has not gone unnoticed. The World Travel and Tourism Council says that India?s Travel and Tourism sector is soon going to be the second largest employer in the World. It will be employing more than 40 lakh persons by 2019.
What’s enhancing the business lately?
The tourism can be divided into various categories depending on the purpose of the visiting tourists. We have all known adventure tourism, heritage tourism, rural tourism and pilgrimage tourism; the heritage tourism being the most important driving factor in the Indian tourism sector
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because of the country?s rich heritage and ancient culture that is known Worldwide. But what is catching up more lately is the medical tourism. It is said that medical tourism is a sunrise sector in India because of a large number of foreign visitors coming to India for medical purposes. With good quality medical services at rates cheaper than those in other countries, India seems to have become one of the most preferred medical tourist destinations. Not only this, domestic tourists also avail these facilities especially if they can afford the super specialty hospitals which are known for guaranteed treatment in most cases. That?s the reason you see so many guest houses and B&B facilities (Bed & Breakfast) around hospitals these days. According to a RNCOS report titled „Booming Medical Tourism in India?, it is expected that the country will experience a Compound Annual Growth Rate of 27% during 2011-2015 in this sector. Another form is the wellness tourism which is more or less a subset of the medical tourism. Since India is known for Ayurveda, Yoga, Naturopathy and spiritual philosophy, our country is one of the most sought after wellness destinations which attracts tourists from world over and from around the country to various Ashrams and centers which have been established to promote the natural way of health and healing. Also, with the India Inc. brimming with opportunities, a trend which was well existing before has become stronger. It is the MICE tourism, which is basically an abbreviation for Meetings, Incentives, Conferences and Exhibitions, that is the fastest growing concept in the industry Halls in hotels are almost perpetually booked by companies for such events and this brings in the business travelers. Some top hotels cater to these needs thus facilitating conduct of domestic as well as international business meets.
Approval of Hotels
The nodal authority for regulation of Hotels is the Hotel & Restaurant Approval & Classification Committee which is a division of the Ministry of Tourism. It approves the projects on a 5 yearly basis. Once the hotel becomes operational, an application for classification has to be made whether or not all the rooms have been completed or not which again is valid for 5 years. Apart from the necessary prescribed documents, the following local approvals are required from: • Municipal Authorities • Concerned Police Authorities • Airport (for projects located near Airports)
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• Municipal Health Officer • Fire Service Department • Bar License The approvals shall depend on the classification of the Hotels in “Star Category” or “Heritage Category” Necessary Licenses for a Restaurant. A restaurant apart from requiring a license under the respective state?s Shop and Establishment Act will require the following licenses among others: • Food Safety License from FSSAI (Food Safety & Standards Authority of India) • Health License from the Health Department of the Municipal Corporation • Eating House License from the Police Commissioner • Liquor License from the Excise Commissioner • License for playing music from the Phonographic Performance Limited • NOC from the Fire Department
Some Important Associations you can be a part of if you operate in the Industry:
1. Federation of Hotels and Restaurants Associations of India: The 3rd largest Hotel & Restaurant Association in the world, FHRAI is the apex body of four regional associations representing the Indian hospitality industry. Aiming to promote and protect
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the interests of the Hospitality industry, FHRAI keeps its members wellinformed about latest trade information and trends, statistics and other studies.
2. Hotel Association of India: The Association aims at projecting the industry?s role as a contributor to increasing employment opportunities and sustainable economic and social development. It?s objective is to raise the standards of hotel and build an image for the industry both outside and within the economy. 3. National Restaurant Association of India: The NRAI is the leading association for stand alone and chain restaurants and offers individual and corporate memberships to them. Having a pan India presence with over 1000 members, it aims at representing, educating and promoting the independent restaurant owners and operators. 4. International Hotel and Restaurant Association: This International organization monitors issues that are raised by major international organizations involved in tourism and lobbies for better recognition of the hospitality members Worldwide. The membership is not only open to the National Associations for Hotels and Restaurants in various economies but individual restaurants and hotels as well. Foreign Direct Investment: The Indian Government allows FDI up to 100% under the automatic approval route in the Hotels Industry. The investment is available for construction and development including that of hotels and resorts, recreational facilities and infrastructure. For this purpose the term hotels includes restaurants, beach resorts and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Not only this, 5 year tax holiday is available for organizations which set up resorts, convention centres or hotels at specific destinations.Major names in the industry: Several players, national and international have established a strong
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foothold on the Indian platform for Hotels and Restaurants. International names like Accor, Amanda, InterContinental, Hilton, Marriot, Starwood, Satinwoods and the similar continue to woo the customers whether Indian or visitors to India. But on the other hand, Indian Companies in the industry are equally well established and in many a case doing better than their international counterparts. The Indian Hotels Company, East India Hotels, ITC, Leela, Asian Hotels have all kept the visitors in awe. Where the restaurants are concerned, the Indian brands and stand alone restaurants co-exist in harmony with international food chains like Domino?s, McDonalds, Pizza Hut, KFC, Costa Coffee and now Starbucks also
Important Developments that are hoped to boost the industry:
• The Indian Company ITC launched its hotel “Great Chola” in Chennai with an investment of over Rs. 1,200 Crores which is touted to be the World?s largest LEED Platinum Green Hotel. • The KEF Company plans to set up a luxury hotel and a super specialty hospital in Kerala with an investment of Rs. 1,600 Crores approximately. • Bengaluru based Hyagreev Hotels have entered into a JV with the Japanese Toyota Enterprises. • FHRAI has signed four memorandums of understanding with its counterparts operating in USA, Europe, Middle East, United Kingdom and China to exchange expert solutions regarding the industry. • USA based Wyndham Hotels will increase its properties in India to 70 in number by 2016.Government?s Initiatives which will have a direct impact on the Hotels and Restaurants Industry • The Maharashtra Government will set up an international cruise terminal at the Mumbai port which is expected to bring the European and the American tourists to India. • The Gujarat State Government is whole heartedly trying to boost tourism in the State and has allocated Rs. 400 Crores for the purpose. The Planning Commission has also approved a grant of Rs. 1,200 Crores to promote coastal tourism in Gujarat. • The Incredible India Campaign started by The Ministry of Tourism which is already playing a huge role in development of the industry is hoped to continue bringing more tourists to India
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because of the way it promotes the Indian culture that leaves a lasting impression on the minds of people. Other campaigns started by the Government like the “Colors of India” and “ Atithi Devo Bhava” are also doing well. • The Central Government allows the visa on arrival for tourists from Countries like Finland, Luxembourg, New Zealand, Japan and Singapore which removes unnecessary hassles for these tourists in terms of obtaining a visa. • The Government has introduced a new category of visa altogether, called the „Medical Visa? or simply M-visa to promote medical tourism Given the enthusiasm of top players in the Industry, of the Government to promote the industry and of the tourists to visit India is proof enough of the bright future this Industry has. Setting up a new Hotel might be a herculean task requiring a lot of investment but starting a restaurant offers huge earning potential even for those who want to start small.
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CHAPTER 2
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2. The market size of the country’s restaurant sector
The market size of the country 's restaurant sector is Rs.247, 680 crore ($48 billion), which makes it 24 times bigger than the film industry and places it $9 billion ahead of the telecom sector. And, it is projected to swell to Rs.408, 040 crore ($78 billion) by 2018 at a compounded annual growth rate (CAGR) of 11 per cent with the organised sector expanding at 16 percent.
The National Restaurant Association of India (NRAI) and management consultancy firm Technopak have presented this buoyant picture in the India Food Services Report 2013, which was released in the Capital by Union Commerce and Industry Minister Anand Sharma.
The report estimates that the industry, 70 per cent of which is in the unorganised sector, provides direct employment to 4.6 million people. Besides, by lifting demand for real estate and food products, it creates multiple job opportunities in ancillary industries such as construction, food processing, logistics and kitchen equipment. It also contributes up to Rs.11,900 crore as revenues to the Central and state exchequers.
Driving this recession-proof growth is a cocktail of factors listed in the report: swelling disposable incomes, rising population of younger people, widening exposure to new cultures and cuisines, growing propensity of eating outside the home, and the increasing popularity of takeaways and home deliveries.
There are shades of grey as well in this rosy picture despite the impressive figures (and the bulging list of private equity firms and venture capitalists investing in restaurant chains) that crowd the report. On the sidelines of the report's release, NRAI president Samir Kuckreja pointed out that the restaurant industry is "overtaxed and overlicensed".
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With no political unanimity over a uniform goods and service tax, patrons of restaurants in the organized sector have to pay VAT (10-15 per cent on food across states, and up to 70 per cent, as in the case of Andhra Pradesh, on alcohol) and service tax (4.94 per cent), which is charged even on takeaways and home deliveries.
Dhabas don't pay any tax (some of them which have turned air-conditioned have just come into the service tax net) though they form the bulk of the unorganised sector, which account for 70 per cent of the restaurant market. The NRAI has been lobbying with state governments to rationalise taxes and offset the losses by making dhabas pay VAT.
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CHAPTER 3
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3. Executive Summary
Purpose of the Study
The Federation of Hotel and Restaurant Industries in India (FHRAI) engaged HVS International to research the restaurant industry in India and identify both global and domestic food trends. 165 questionnaire responses from independent and hotel restaurants in India provided the statistical basis for analysis of operations and financials of the existing restaurant industry in the country. In addition, a large cross section of professionals involved in the industry was consulted for their views. The report presents the results of the analysis and includes the following:
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Background Scenario and numbers which includes an analysis of the demographic changes occurring in India and their potential impact on the restaurant industry.
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Analysis of responses collected via the questionnaire representing a snapshot of trends in the Indian restaurant industry.
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A summary of key emerging global food trends as well as international restaurant chains that provide franchise opportunities for operators in India.
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A guide on how restaurants are valued and guidelines for conducting a feasibility study before opening a restaurant.
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Real life restaurant case studies on both successful and not so successful restaurants.
Conclusions for each of these sections are summarized below and discussed in greater depth throughout the report. The reader is advised to read the entire report for a comprehensive view.
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Based on projections extrapolated from the Third Economic Census conducted in 1990, we estimate that there are approximately 500,000 restaurants in India in the organized sector. This figure is expected to rapidly increase as a result of the changes in demographic and economic factors which are having a significant impact on the restaurant industry in India. Increasing urbanization and rising disposable incomes are characteristics that are common across several emerging economies, particularly in Asia. However, the pace at which this has taken place in India in the last few years is likely to continue over the next decade and will outpace most other economies in the region. In particular, Merrill Lynch estimates a growth in urban consumption at potentially 20% per annum in nominal terms (16% in real terms) for at least the next 5-7 year period. In addition, higher disposable incomes among consumers particularly in the top 25 cities and the trend towards eating out are combining with growth in organized retailing to fuel growth in the foodservice sector. There are 10 million households in India with average 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 emerged as a trend, which is prevalent within this elite group. Two of out of every five households in this group eat out at least once a month. There are 100 million 17-21 year olds in India, and six out of ten households have a child that was born in the post-liberalization era and has grown up with no guilt of consumption. Sales by Indian food service companies totalled Rs 350 billion in 2002. The organized sector is responsible for approximately Rs 20 billion worth of sales. Indian consumers spend only 2.4 percent of their food expenditure in hotels and restaurants (including on premises and take-out sales). American consumers, by comparison spend 46 percent of their food expenditure on awayfrom-home meals. These demographic numbers represent a young nation which has an increased propensity to spend in restaurant and other food service sectors.
Analysis of responses
An analysis of 165 responses out of 1100 questionnaire sent nationwide revealed some interesting statistics:
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A majority of respondents (53%) were restaurants that achieved an average check of between Rs 200 and Rs 400.
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The total number of employees employed by 66% of the restaurants is under 40 with only 3% respondents employing more than 100 employees. The sample therefore represented midsize restaurants, which are a majority in the country.
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With regards to questions on tip and sharing of tips, 83% of the respondents do not levy any service charge on the restaurant bill. In comparison, 77% of the respondents do not charge a service charge in banquets. A majority of the respondents (60%) have tip pools.
Emerging Food and Restaurant Trends
Some of the emerging culinary trends internationally include the popularity of health foods, use of fresh and authentic ingredients, acceptance of new fusion concepts and establishing of the chef entrepreneur. In India multinational restaurant chains had to make a downward price revision and offer more vegetarian toppings to increase sales volume. This led to a dramatic improvement in their performance. They are also adding more spicy items in their menus to satisfy Indian taste buds. International and domestic multi-unit restaurant groups are expected to drive the expansion in the restaurant industry in India. Among the leading trends in this regard would be the expansion of quick service Asian restaurants, fusion concepts, restaurants with a focus on entertainment, and ethnic and regional cuisine restaurants.
Restaurant Valuations and Feasibility Studies
There have been very few restaurant transactions that have taken place in India till date, largely because the restaurant business has not yet evolved into a mature business. However, we foresee a fair bit of activity in this area in the future: changes in market trends and competition, spurred by a huge expansion in the food service industry in all major metro cities, would cause many
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restaurants to change hands from one operator to the other. Restaurant valuation is a specialised art and appraisers of restaurant real estate normally consider three approaches to value: the cost approach, the sales comparison approach, and the income approach. Each approach has its own strengths and weaknesses, depending on the age and condition of the improvements and whether the building is occupied by an operating restaurant or is vacant. The cost approach is used to estimate the cost of purchasing a site suitable for restaurant development and building a restaurant on the site, including the cost of landscaping the site. The sales comparison approach considers recent sales of restaurant properties that are comparable to the subject restaurant property in location, size, and brand affiliation (if the restaurant was in operation at the time of sale). The income approach considers the actual or projected rental income that could be generated by a restaurant business occupying the building. A feasibility study is much more than a site-location study - this approach involves gathering and analysing a great deal of information, from demographics to design, which helps the operators make a better informed decision about the potential success of a specific concept at a certain location. In order to establish the feasibility of the proposed restaurant, one must first estimate the development costs of the project. By analysing both development cost figures and current market conditions, and by making adjustments for the specific characteristics attributed to the proposed restaurant (such as location, size, facilities, class and so forth), one will be able to derive an appropriate construction cost estimate for the restaurant. This investment has to be compared with the returns being indicated by the income and expense statement to evaluate whether or not the restaurant envisaged is financially feasible
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Restaurant Case Studies
Four real life case studies are presented with the attempt to highlight critical factors that determine the success or failure of a restaurant. For each case study, we interviewed the entrepreneur and asked him/her to identify the key lessons learnt in running a restaurant. We describe the experience of each entrepreneur, together with their perceptions of where they were right, or where they went wrong. Two case studies represent entrepreneurs who believed they had the right idea as well as the resources to make a success in the restaurant business, and they succeeded The other two cases highlight some of the factors that did not allow the restaurant to succeed and both of them had to close down. The studies give the factors, which led to the success of these enterprises
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CHAPTER 4
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4. Background & Scenario
Significant economic & demographic facts
India has arrived on the global roadmap. It is the only country that has experienced acceleration in growth rates of per capita income over the past decade. Almost all other economies have shown growth rates lower than India's through the decade. Also, India's per capita income growth over the past five years (1997-2002) has outperformed that of other developed and major Asian economies, save China. India's per capita income grew by about 19% in 1997-2002, second only to China, whose per capita income grew by 39% during this period. The only other emerging Asian country that compares with India's growth rates is Korea, which has grown around the same rate as India. Taiwan comes fourth with a growth rate of 13% during the period. During 1992-2002, India's per capita income grew by 46% - a rise of 980 basis points (9.8%) from the 36.5% growth rate observed during 1982-92. On the other hand, China has shown a decline in growth rate over the decade by as much as 700 basis points (7%). And countries such as Thailand and Hong Kong have seen a fall in growth rates by as high as 6,200 basis points (62%) and 5,100 basis points (51%) respectively. Increasing urbanization and rising disposable incomes are characteristics that are common across several emerging economies, particularly in Asia. However, the pace at which this has taken place in India in the last few years is likely to continue over the next decade and will outpace most other economies in the region. In particular, Merrill Lynch estimates growth in urban consumption at potentially 20% per annum in nominal terms (16% in real terms) for at least the next 5-7 year period. What explains this phenomenon? The answer lies in the demographic shift that is taking place in India. To put it simply, India is producing a much larger number of young people entering the job market compared to other Asian economies. The number of working-age adults in the country is rising at a fast pace. While this is true of China as well, the pace of increase is faster in India than in China. Thus, even with China's vigorous population policies, its per capita income growth is not rising as fast as India. The restaurant industry is an important component of our nation's economy, and employment
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opportunities in this sector should continue to grow in the future as a direct result of the demographic changes taking place. Indian consumers spend only 2.4 percent of their food expenditure in hotels and restaurants. American and British consumers, by comparison, spend 46 percent and 29 percent respectively, of their food expenditure on away-from-home meals. This indicates that there is significant scope for the growth of food service sector in India in the years to come. A number of factors are driving increased foodservice sales in India:
Growth in personal income- The increase in buying power of Indian consumers is driving
the growth in the foodservice sector. Apart from the growth in per capital income, as per figures given above, there are other important factors also contributing to this kind of consumption. Just 2.4 percent of Indian households earn 50% of India's GDP. The top 3.9 million households have an average household income of approximately $35,000 per annum. According to the National Council for Applied Economic Research (NCAER), as indicated in Table 4-1, high income households in urban India grew at over 21.5% on a compounded annual growth basis between 1995-96 and 1998-99.
Table 4-1 growth in per capita income by income classes
Income Class* Average Annual Growth in per capita income
(CAGR in %), 1995-96 to 1998-99 Urban Lower Lowermiddle Middle Uppermiddle High 9.9 21.5 8.6 14.3 9.3 18.6 0.9 5.3 7.7 7.8 5.6 6.6 -10.8 Rural -4.5 Tol -5.5
* Inflation adjusted, comparable over time
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Source: NCAER
The consuming classes consist of 40 million income-earners 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). Consumers are also migrating up the income chain - from the "have nothing" to the "have some" to the "have more" to the "have lots" and, finally, "have all". These numbers for different income groups are given in Table 4-2.
Table 4-2 No of Households by income classes
No of Househol ds 2 Million 10 Million 40 Million 100 Million 30 Million Have More Have Some Have Nothing 200 700 1,500 6,000 4,000 16,000 Have Lots 12,000 46,000 Have All Category Annual Monthly Income USD 30,000 Income Rs 115,000
Conversion rate of 1 USD = Rs 46 was used for this table.
Shrinking household size- The size of the Indian household has declined over the last few
years (from 5.9 people per household in 1990 to 5.5 people in 1998). The total number of
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households in India has increased by less than 3 percent per year from 1990 to 1998; however, the number of households in middle, upper and high-income segments has grown by 12% annually. Approximately 23.6 million households have been added to the high, upper and middle income segments of Indian consumers from 1990 to 1998. These households have higher disposable income per member and have a greater propensity to spend on food.
Urbanization- Most high income Indian consumers live in urban India. Approximately 50
percent of households in the high, upper and middle income groups reside in urban areas. Over one-third of urban Indian consumers reside in less than one percent of the total number of cities in India. The percentage of Indians living in cities has increased from 19.9 percent in 1980 to 30.5 percent in 2000.
Growing number of women in the workforceThe number of dual income households where both husband and wife work is increasing. Over 16 percent of the population of Indian women work full-time and spend most of their time away from home; this has been an important factor influencing the trend towards more meals away from home.
Emergence of the Liberalization ChildrenThere are a 100 million, 17-21 year olds in India, and six out of ten households have a "liberalization child" (Post 1991). This is a generation that was born in the post-liberalisation era and has grown up with no guilt about consumption.
The rise of the self employed- The proportion of self employed in urban India has risen to
above 40%, replacing the employed salary earner as the new "mainstream market". A Hansa Research Group study shows the even in the 'creamy layer', comprising the top two social classes in towns having a population of 10 lakh plus, in urban India, 40% of chief wage earners in
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households are shop owners, petty traders, businessman and self employed professionals. Unlike the salary earner, the self employed use products much more to signal success.
Menu diversification- High-income Indian consumers are seeking variety in their choice of
food. Urban Indian consumers are aware of various international cuisines (Continental, Chinese, Mexican, Italian, Thai and Japanese) and an increasing number are willing to try new foods.
Super Rich Defined
The Media Research Users Council (MRUC) undertook a study of the incomes and spending patterns of households and called it The IRS Platinum. The data collected was then analysed by the Communication Channel Planning (CCP) division of Initiative Media. IRS Platinum defines super rich as any household that has a colour television, refrigerator, washing machine and a car. The study was restricted to Mumbai, Delhi, Ahmedabad, Bangalore, Chennai, and Pune - the cities having a high proportion of households that satisfied the above criteria. These towns account for 39 percent of all the super rich households that reside in urban India today. It is interesting to note that metros such as Calcutta and Hyderabad are missing from the list. These cities would have definitely qualified by the normal demographic parameters. They missed out since the penetration of one or more of the listed durables was low in these otherwise large metros. A sample of 5,226 households was surveyed by ORG-MARG on behalf of MRUC to understand the lifestyles of the affluent, with media and consumer habits of such individuals and their households. Only 3.4 percent of the households in those six metros qualified to be included in the Platinum category. The average monthly household income (MHI) of a Platinum household is Rs 23,000. And, interestingly enough, every month, 60 percent of this amount is spent to maintain the life and style of the household.
Well-heeled Capital of India
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As per the study, every second Platinum household is in Delhi. Mumbai comes next, but the probability drops down to one out of five. It is true that today, Delhi is, by far, the city of the super rich of India. The city's Platinum households have an average income of Rs 24,450. Mumbai earns the highest (Rs 31,970) and Bangalore earns the least (Rs 20,180). The chief wage earner of the family is highly educated. In terms of occupation, he is predominantly a businessman in Mumbai, Chennai and Ahmedabad. In the other cities he is either an officer or an executive at a senior level. Moreover, eighty-eight per cent of Platinum households' adult members have a college-level degree. In these households the housewife is also highly educated (68 per cent are at least graduates). However, in spite of their high education, only 17 percent are working, either full-time or parttime. The average household size is 4.5, which reflects the nuclear structure of the families. 85 percent of this elite group has its own house and is gradually going in to buy its second TV set. Almost all the households in this group have a cable and satellite connection.
If you have it then spend it
The interesting part is the information that IRS Platinum provides on the monthly family expenditures. The patterns are indeed very revealing. On an average 61 percent of MHI is spent to maintain the life and style of these elite households. It rises to 69 percent in Ahmedabad and drops to 56 percent in Chennai. The expenditure is tracked across 20 heads ranging from the monthly electricity bill to the amount spent on last eating out. On an average, each head accounts for about 5 percent of the total expenditure. The highest amount goes for monthly provisions accounting for almost 17 percent of the total spend.
Chennai is the surprise package
At city level certain interesting patterns emerged. Chennai had the highest average monthly telephone bill. Its residents spend the maximum on personal care products as well as on cosmetics. Likewise, they spend the maximum while eating out, on alcohol and beverages, on buying gifts and also on charity and donations. Bangalore pays the highest monthly rents, and spends the highest among all cities on maintenance and on travelling and conveyance. In terms of occupation, it is the reflection of the Indian economy with 44 percent focussing on the manufacturing sector. Within this, engineering goods alone account for 8 percent of them.
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This is the largest skew across all the three sectors put together. Financial services including banks (5.5 per cent) and the current favorite, IT and software (4.2 per cent) stand out amongst the rest. In terms of their media habits, as expected, almost all the Platinum households can be easily reached through either the print or the television. Radio has lost out (25 percent), but of those tuning in, almost 90 percent are tuning into FM. However, unlike the West, predominantly they tune in at home. But the surprise package is Internet. It has already overtaken Radio (30 percent). Platinum households are spending more time on the Internet than on reading.
Number of Restaurants in India
It is difficult to assess the number of restaurants in India. They receive their licenses from the local municipal authority, which is mainly a licence from the point of view of health and hygiene. In certain bigger cities, there is also a requirement of a license from the local police for starting operations. Restaurant establishments in semi-urban and rural areas, which may also include road-side restaurants and dhabas on inter-city roads and highways, may not be possessing any license, from any authority. It is, therefore, difficult for anyone to compile statistics of all the restaurants in India. We believe that the best effort in this regard has been made in the government census. We have figures available from The Third Economic Census which was conducted in all cities/union territories except Jammu and Kashmir during 1990, along with the house listing operations of the 1991 population census. We have not been able to access the economic census which may have been done in 2000, as part of the population census of 2001. The economic census of 1990 divided hotel and restaurant enterprises in two categories, Own Account Enterprises (OAE) and Establishments (Estt). The figures of the two categories have been separately given for rural and urban areas. Table 2-3 reflects the break-up of hotel and restaurant establishments for rural and urban India. Table 2-4 reflects data relating to the statewise distribution of hotel and restaurant enterprises in the country.
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The eating out culture
Eating out has evolved into a popular trend among Platinum households. Two out of five such households eat out at least once a month. This is highest in Bangalore (43 percent) and lowest in Pune (33 percent). It is estimated that Indians spend Rs 350 billion annually on eating out. Moroever, of this Rs 350 billion, the organised sector accounts for only Rs 20 billion, suggesting a tremendous potential for growth in this area. An analysis of National Accounts Statistics data with regards to private final consumption figures (PFCE) reveals interesting insights as well. The national accounts provide disaggregated data for 37 consumption categories. Although the overall PFCE is available for 2001-02, the disaggregate data is available up to 2000-01. There were only nine PFCE segments that have recorded continuous high growth performance and include hotels and restaurants. Another survey that captures eating out habits is the Readership Survey. The survey helps in identifying certain trends as regards the use of restaurants and frequency of their use. The results indicated that Bangalore scored the highest in terms of the percentage of respondents eating out more than once a week followed by Kolkata and Chennai. On a broader level the all India average of respondents rarely eating out was 70%, once again indicating the potential that exists for the food service sector in the country in the years to come.
Table 4-3 Geographical Distribution of Hotel and Restaurant Enterprises
Own Account Enterpris Establishme State/UT Andhra Pradesh Arunachal 69,979 446 26,504 96,483 1,029 1,475
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es
nts
All
Pradesh Assam Bihar Delhi Goa Gujarat Haryana Himachal Pradesh Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh West Bengal Others Total 68,179 1,719 702,178 26,508 94,687 1,766 376,128 3,485 73,911 28,760 102,671 39,248 47,828 2,174 2,222 1,010 589 34,811 10,006 29,426 261 85,563 4,096 24,412 63,660 52,237 100,065 794 3,100 619 949 2,968 5,322 1,629 1,538 7,931 60,093 71,472 3,214 11,145 34,429 94,522 27,483 98,955 12,005 39,822 10,917 1,740 14,759 11,971 14,713 26,718 21,599 61,421 10,642 21,559 1,189 2,929
12,945 27,704 5,426 17,397
18,007 52,818 6,694 16,700 14,820 44,246 398 659
36,637 122,200 1,254 5,350
1,078,30
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“All great deeds and all great thoughts have a ridiculous beginning. Great works are often born on a street corner or in a restaurant's revolving door.”
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CHAPTER 5
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5. What is my Restaurant Worth?
This section examines how to value a restaurant business including its real estate and personal property. It may be noted that few restaurant transactions have taken place in India till date, largely because the restaurant business has not yet evolved into a mature business. However, we foresee a fair bit of activity in this area in the future: changes in market trends and competition, spurred by a huge expansion in the food service industry in all major metro cities, would cause many restaurants to change hands from one operator to the other. Another important factor affecting real estate and restaurant valuation in most developed countries is the presence of large, well-established chains whose financial statements and restaurant sales are accessible and therefore aid the valuation process immensely. We believe that the need for valuations will also be driven to a large extent by real estate investment trusts as and when they begin operating in the country, and a small percentage of their holding could be restaurant real estate.
Restaurant Valuation
Restaurant operators often need to know the approximate value of their restaurant business and/or real estate and personal property, even if they are not currently contemplating sale of the business. Knowledge of value becomes important for a variety of reasons. Some of the reasons include refinancing of the real estate; dissolution of a partnership or sale of stock representing a majority or minority interest in the business; insurance settlement after a fire or natural disaster; and settlement of an estate upon the death of an owner Restaurant value can be separated into at least three components, which include the value of the business (business enterprise value), the value of the personal property (furniture, fixtures, and equipment), and the value of the real estate. Real estate value can be broken down further to leased fee value (value to the landlord of the lease encumbering the property), leasehold value (the value of the tenant's interest in the lease), and the value of the simple ownership interest in the real estate. In the United States, approximately one-half of the restaurants occupy a leased building and land, and slightly less
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than one-half own the building and land. In India, the historical trend was that the majority of restaurants owned the building and land, but with the advent of large number of shopping malls in metro cities, this is fast changing.
Business Value of a Restaurant
The table below shows a statement of income and expenses for a hypothetical restaurant. In this example, the value of the leasehold interest in the real estate has been removed by subtracting rent paid to the landlord from income. The remaining earnings - before income taxes, depreciation and amortization (EBITDA) - equal Rs 1,930,000. This is the cash flow available to cover a return of and on the investment in personal property, and a return to the business component of the going concern value of the restaurant. The return requirements for the non-real property components are typically significantly higher than the return to the land and building. As the net income allocated to the personal property and business is received by the business owner after all occupancy costs have been paid, including rental income attributable to the land and improvements, the risk of the operator is significantly higher than that of the landlord.
Table 5-1 Statement of Income & Expense My Restaurant
SALES:
Amt
Gross
Food Beverage (alcoholic)
Total Sales
10,000,000 3,500,000 13,500,000 36,986 125 296
74% 26%
Sales per day Covers Per Day APC
COST OF SALES:
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Food Beverage (alcoholic) Total Cost of Sales GROSS PROFIT (Total Sale minus Cost of Sale)
3,500,000 1,050,000 4,550,000 8,950,000
35% 30% 34%
OPERATING EXPENSES: Salaries and Wages Direct Operating Expenses Music and Entertainment Advertising & Promotion Utility Services Repairs and Maintenance Administrative & General 270,000 540,000 270,000 540,000 2% 4% 2% 4% 2,025,000 1,080,000 15% 8%
Total Restaurant Operating Expenses Franchise/Management Fee Licenses Insurance 4,725,000 0 270,000 0 35% 0% 2% 0.0%
Income before Occupancy Costs 3,955,000 29%
Occupancy Costs Earnings before Taxes, Depreciation & Interest
2,025,000
15%
1,930,000
14%
The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. Put simply, it is the net operating income divided by the sales price or value of a
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property expressed as a percentage. Investors, lenders and appraisers use capitalization rates to estimate the purchase price for different type of income producing properties. A market cap rate is determined by evaluating the financial data of similar properties which have recently sold in a specific market. Capitalization rates for a restaurant operator's invested capital typically fall into one of three ranges: for an efficient, profitable operation with new equipment, good location, and expectations of strong annual growth in revenue, a capitalization rate of 13% to 19% is appropriate. Stable, mature restaurants with a track record of steady cash flows, but annual growth in sales attributable to inflationary menu price increases, may use cap rates ranging from 15% to 25%. Capitalization rates for restaurant businesses with declining revenue may range from 20% to 30% in order to cover the increased risk. The following table indicates the value range for the hypothetical restaurant business based on the three scenarios listed above. The values shown include the depreciated value of personal property, which must be subtracted from the total capitalized value to isolate the business value.
Table 5-2 Statement of Income & Expense
EBIDTA Capitalization Rate Optimistic Scenario (Growing) 1,930,000 16% = 9,190,476 = 12,062,500 = Value
Median Scenario 1,930,000 (Stable) Pessimistic Scenario (Declining) 1,930,000 27% 21%
= 7,148,148
The personal property within a restaurant consists of its furniture, fixtures, and equipment (FF&E). On average, restaurant equipment has a useful life of ten years. In the example above, we will assume that the original value of the furniture, fixtures, and equipment was Rs 20,00,000 and it is now seven years old, or 70% depreciated. On a straight-line basis, the value in use of
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this personal property would be: Rs20,00,000 x 70% = Rs 14,00,000, Rs12,062,500 Rs14,00,000= Rs10,662,500 depreciated value in use Subtracting the depreciated value in use of the furniture, fixtures, and equipment from the three values indicated in the table above, the value of the business ranges from Rs 5,748,148 to Rs 10,662,500. There are other variables to consider in the valuation of the restaurant business, such as the immediate need for capital improvements, which may also need to be deducted from the capitalized value of the business and personal property. This approach uses only one year of cash flow, which does not account for future variation in cash flow. However, the above method of valuing a restaurant business will give a "ball park" indication of value.
Estimating the Value of Land and Improvements
It is also important to value a restaurant's real estate and improvements, i.e., the building, landscaping, and parking lot. Restaurant improvements are typically designed to accommodate a specific concept or type of restaurant, and may require extensive remodeling to suit the needs of a different owner or tenant if the original restaurant operator vacates the property, even if the improvements continue to be used as a restaurant. The value of the improved site and restaurant building components may be higher or lower than the original cost to purchase and prepare the site and build a restaurant building, depending on the age of the improvements and whether the building is occupied by an operating restaurant business. Appraisers of restaurant real estate normally consider three approaches to value: the cost approach, the sales comparison approach, and the income approach. Each approach has its own strengths and weaknesses, depending on the age and condition of the improvements and whether the building is occupied by an operating restaurant or is vacant. The cost approach is used to estimate the cost of purchasing a site suitable for restaurant development and building a restaurant on the site, including the cost of landscaping the site. The sales comparison approach considers recent sales of restaurant properties that are comparable to the subject restaurant property in location, size, and brand affiliation (if the restaurant was in operation at the time of sale). Adjustments are made to the sales prices of the comparables to account for differences between the comparables and the subject property. The income approach considers the actual or projected rental income that could be generated by a restaurant business occupying the building.
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Cost Approach
The first method of valuing restaurant real estate presented is the cost approach. New restaurant buildings and the underlying land are often purchased by individual investors or REITs (Real Estate Investment Trusts) at a price that reflects the cost of purchasing a vacant parcel of land and constructing, and equipping, a chain-affiliated restaurant on the site. Investors often prefer chain-affiliated restaurants because chains have a track record of past success and ample financial data upon which the investor can base the decision to purchase. Typically, investors purchase restaurants in order to lease them to operators. These sale/leaseback transactions are considered financing vehicles, as opposed to "arm's-length" real estate sales transactions. The purchase price is negotiated based on the rate of return required by the investor and the amount of rent the operator of the restaurant business can afford to pay, based on the sales expected to be generated by the restaurant business operation. The price paid is an "investment value" rather than a "market value" because the terms of the purchase are tailored to meet the requirements of an individual investor, and are not necessarily a reflection of what a "willing buyer and willing seller" would agree to in an open market. Because a new restaurant building is usually designed with a specific concept in mind, it is appraised as a "going concern." The appraiser of restaurant real estate most often will provide the client with an opinion of the "value in use" of the property operating as a specific brand or concept. "Value in use" for a restaurant is based on the premise that the value of restaurant real estate is dependent on the restaurant business producing a revenue stream great enough to cover the return on capital invested in the land and improvements. Until such time that the restaurant operation reaches a stabilized level of revenue, the highest value indication, when a building is new, is often derived using the cost approach, and is identified in the industry as the "full value" of the land and building. After a restaurant property is four years old, the cost approach begins to lose its validity. Restaurant properties are purchased in the re-sale market for two main reasons including anticipation of rental income in the future to the owner of the property (rent to the landlord), and occupancy by an owner/operator of the restaurant. The income approach carries more weight than the cost approach for these properties.
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Sales Comparison Approach
A second method, the sales comparison approach, or market approach, attempts to value the subject restaurant real estate based on the selling prices of similar properties. This approach is the least reliable of the three valuation approaches when applied to restaurant real estate, because it is almost impossible to find a sale of a restaurant property that is truly comparable to a subject property. This is true even if the comparable's concept and chain-affiliation are the same as the subject property and the comparable is in the same geographical area as the subject property. Many subjective adjustments must be made to the sale prices of the comparable restaurants to arrive at an indication of value for the subject property. Typically, the appraiser makes adjustments to comparable sale prices for differences in conditions of sale, location, access, visibility, and volume of business generated by the restaurant compared to the subject property. However, it is very difficult, if not impossible, for the appraiser to truly identify the reasons, concerns or attractions that motivated the buyer and seller to make their purchase and sale
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decisions. This is the greatest weakness of the sales comparison approach. In addition, allocating the sale price between real estate, personal property, and business value is always problematic. Nevertheless, the sales comparison approach is used by appraisers to derive capitalization rates to be applied in the income approach to value, and to provide a range of values for the subject property that can be used as a test of reasonableness for the values indicated in the cost approach and the income approach. Allocations of sale prices are problematic because business value can make a significant difference in the sale price of an operating restaurant. For example, say that two identical fast food restaurant buildings (same square footage and seating capacity) are situated on plots of similar size in a city in USA in front of a neighborhood shopping center. One of the restaurant buildings is occupied by a McDonald's restaurant, and the other building is owned by an independent restaurant operator and is called "Smoking Pizza." The McDonald's property sells for $1,800,000 and the other property sells for $750,000. Assuming both restaurants are in operation at the time of sale, the sale price represents a "value in use," which may be higher or lower than the "market value" of the real estate if it were to become vacant. The difference in sale price may be attributed to business value over and above the value of the land, improvements, and FF&E (furniture, fixture and equipments). This is an important consideration in valuing restaurant property for ad valorem property tax purposes. An assessor is typically instructed to exclude business value so that only the value of the real estate, and in some states personal property, is taxed.
Income Approach
A third approach to valuing restaurant real estate is the income approach. In this approach, the appraiser assumes that the property is rented to the restaurant operator at market rent, even if the property is owned by the operator and no rent is paid. This assumption is made in order to isolate the income to the land and building from income attributable to the investment in furniture, fixtures and equipment (personal property), and the return to the restaurant operator for taking the risk of running a business (business value). The economics of the restaurant business dictate that an operator cannot pay more than 8% of gross revenue in occupancy costs and still have an
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adequate return of and on the investment in FF&E, and an equitable return on the capital invested in the operation of a restaurant business. Typically, rent on the land and building ranges from 7% to 10% of the gross sales of the restaurant for fast food or quick service restaurants. It could be slightly higher at 10% to 12% for more upmarket restaurants. There may be different variations but overall rent should be in this range if the restaurant operation is to be successful over the long term. There are exceptions to this range, as in the case of a food court in a retail mall. Percentage rent in a food court can be as high as 10%-15%, but this is mitigated by the large volume of customers generated by the mall retailers and the fact that the restaurant operates in a small space and shares a large dining area with the other operators in the food court. Valuing the land and building in use as a restaurant requires knowledge of market rent for similar type properties in the restaurant's neighborhood. If there is no lease encumbering the property, the appraiser assumes that the restaurant is leased at a market rent. If the property is encumbered by a long term lease at below market rent, with no additional rent based on a percentage of the restaurant's sales, the value of the land and building may be negatively impacted. If the operating restaurant is paying rent based on a minimum rent plus a percentage of gross sales, the income approach to value may indicate a value for the subject real estate, which is higher than the cost to buy the land and build a restaurant on it. On the other hand, if the restaurant has ceased operation and is no longer a going concern, the "going dark" value of the vacant restaurant building may be far lower than the "value in use" when the restaurant was in operation. When the income approach is used to value the land and improvements of a proposed restaurant, the value derived depends heavily on the projection of the restaurant's stabilized gross revenue estimated by the appraiser. Because the real estate's "value in use" is directly related to the potential revenue generated by the restaurant, the indication of value is only as reliable as the projected restaurant's food and beverage sales. The projection of stabilized gross sales can be estimated with relative confidence in the case of a chain-affiliated restaurant with a past operating history in multiple locations. However, projecting revenue for a new restaurant concept requires experience in the restaurant business supported by market research in the area where the restaurant is to be built. The combined "value in use" of the land and restaurant building can be approximated by capitalizing the net income stream that would flow to a hypothetical landlord, after the deduction
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of vacancy and credit loss, and management expenses, assuming the building and land is leased to the restaurant operator at market rent. The key determinant in calculating the value of the subject property is the selection of an appropriate capitalization rate.
Complex Valuation
After each of the three approaches to value has been considered, the appraiser reconciles the three indications of value, or range of values, to reach a conclusion of value for the subject property. The weight given to each approach to value may vary depending on many factors including the age of the improvements, whether the property is vacant or occupied, the length of time the restaurant has been in operation, the creditworthiness of the restaurant operator, and the availability of comparable sales of similar restaurant properties. In conclusion, the valuation of restaurant real estate and business value is complex and dependent on many variables.
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CHAPTER 6
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6. Conducting a Feasibility Study
As the costs of opening a restaurant and running it profitably continue to climb, restaurateurs need to be as certain as possible that the kind of operation they envision has a very good potential for success at a particular site. One way to find out is to conduct a feasibility study. A feasibility study is much more than a site-location study - this approach involves gathering and analysing a great deal of information, from demographics to design, which helps the operator make a better informed decision about the potential success of a specific concept at a certain location. To guide operators through this analysis, we have put together this section which offers a stepby-step process for market research techniques to determine whether a proposed site is suitable for a restaurant and, if so, which combination of restaurant characteristics offer the best chance for success. Obtaining the information is relatively easy, but turning it into conclusions about the site and restaurant concept is a much more difficult task. A restaurateur's judgement, personality and standards of excellence can make an enormous difference in whether a restaurant sinks or swims,
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and all of those qualities are difficult to measure.
Reasons for going into the restaurant business
Please tick off whichever of the following are the reasons you know will make you successful in the restaurant business.
z
I like food.
z
I make a great Biryani.
z
My parents always wanted me to be a great chef.
z
My spouse is a great cook and will be the chef.
z z z
I know someone named Querishi who will be my chef. I have this secret recipé I got from a restaurant in Europe. I know why other restaurants didn't make it. There's this restaurant down the street that went broke and the rent is only…. Most restaurants don't open for breakfast.
z z
z z z
I will specialize in (fill in the empty space). Everybody likes Mughlai (or insert your own cuisine choice) food. I will beat the competition with lower prices.
z z
Running a restaurant is no different from any other business. I grow special herbs in my garden.
z
I will not allow tipping.
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z
I was successful in an export business.
z
I took a Cordon Bleu course by correspondence.
If even a single one of the above reasons is your prime motivation for going into the restaurant business, you may be in trouble from the start. In a free enterprise society, it is anyone's right to go into business just as it is often their privilege to close up shop - sometimes in bankruptcy. One business where going broke is easier than any other is the restaurant business. Walk down any block in any reasonably large town in the United States or in Europe where the restaurant market is mature and where restaurants are likely to be and you will probably see one or more buildings with signs in the window proclaiming "Opening soon under new management" or "Closed for renovations". The chances are that, before those signs appeared, a restaurant operated unsuccessfully, and another one is going to open there soon. The restaurant business in most cities is spread so thinly that for any new restaurant to open, another one must have gone broke. However, there always seems to be another entrepreneur to take over and risk life savings in the restaurant business.
Investment cost
To put up a restaurant building on owned land can cost anywhere from Rs 1,00,00,000 to Rs 5,00,00,000. Even taking over leased premises, purchasing necessary restaurant equipment and furniture (FF&E), and making leasehold improvements can require as much as Rs 10,00,000 to 10,000,000. In our survey, the median amount spent of FF&E was Rs 20,00,000 with the median for total restaurant investment being Rs 45,00,000. If you have to finance 70% to 75% of that, the debt service charges (interest and repayment of principal) may put you in the poorhouse before you can start making a reasonable return on your own investment.
Return on investment
Successful restaurants, very successful ones, might make as much as 20 paise profit on each sale of one Rupee. A reasonably successful one might make 10 paise. The average restaurant that
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manages to survive might make 3 to 5 paise; but when that 3 to 5 paise is related to the amount of money the owner invested, it might end up being less than the amount that could have been earned in interest by leaving the money in the bank. And money in the bank requires no hard work, long hours, or high risk.
High risk
The risk in the restaurant business is high. In North America, about one-third of all restaurants in business today will turn over within a year. Within three years, 50% of them will be out of business. Only 20% will survive to their fifth anniversary. In India we are not so thinly spread at this point in time and there are a lot of opportunities for well-researched concepts.
The independent restaurant operator has even more of a struggle than the operator who is part of a chain or franchise. Also if you have a dream of owning your own restaurant and letting someone else run it for you, beware! More than one absentee owner has gone broke because he or she has allowed the manager to lose money. Other absentee owners think that the restaurant makes money out of liquor so the food operation doesn't matter. A liquor license is not a right to print money. For example, "salting the bar" is a classic rip-off by bartenders who bring in their own bottles of liquor, sell the contents, make no record of the sales, and pocket the cash. You will never know the difference if you are not around to see what's happening.
What kind of restaurant is for you?
One of the earliest decisions you are going to have to make is the type of restaurant you wish to operate.
1. Family or Commercial
Family restaurants in India are generally multicuisine type with a medium price range. If they have a liquor license, it is usually restricted to beer and wine. Décor is bright. Parking is a now a necessity since customers (the family unit) generally arrive by car. Price range of the menu items
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has to appeal to the average family income. Location is important as it should have proximity to a residential area or shopping complex. Operating hours are generally from noon to midnight. Staff are generally friendly and efficient, but not necessarily highly trained. Investment is medium to high.
2. Cafeteria
Cafeterias require large traffic volumes. Location is critical to encourage this volume. Shopping centers and office buildings are good locations. Self-service is typical in cafeterias with menus somewhat limited but covering soups, entrees, desserts, and beverages. Cafeterias often require large preparation areas. Staff are minimally trained. Beer and wine may be offered. Speed of service is essential to handle the traffic volume. Hours will depend on the location (for example, school, office building). There are some examples of these in Mumbai and Bangalore.
3. Gourmet
Gourmet restaurants generally require a higher investment than the others discussed so far. They require an ambience and décor that costs money. This type of restaurant caters to those who require a higher standard and are willing to pay for it. Success depends on establishing a reputation that will attract repeat business. Prices are higher because of the investment required and because of the reduced seat turnover. Food and beverage offerings must be carefully selected because of the clientele. A good variety of wines is essential. Staff must be highly trained. Even though the lunch trade is important to such restaurants, the evening period is often where the emphasis is placed, with leisurely dining an advertising feature.
4. Ethnic
Ethnic restaurants feature the foods of a specific region or country. Ethnic restaurants can run the gamut from family restaurants (e.g., Chinese) to gourmet (e.g., classical French) cuisine. Décor fitting the ethnic motif is important, as is menu design, staff uniforms, and training.
To be successful, ethnic restaurants must serve authentic food, which means food preparation
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staff must be well trained and knowledgeable. Price range can be from budget to elevated. Beer, wine, and liquor may or may not be served. Investment may be high because of décor and trained staff. Location can be variable, and the emphasis is on evening meals, although luncheon business with lower prices is not precluded.
5. Fast Food
In India, fast food restaurants have mushroomed in the past 20 years, in keeping with the greater mobility and changing lifestyles of the urban consumer. Franchising is prevalent in this type of restaurant. These restaurants can be eat-in or take-out, or a combination of both. The menu is limited, and prices are relatively low. You can choose one particular kind of food to feature. For example, ethnic food of one type or another can be sold in a fast food format. Because of low prices, a high traffic volume (pedestrian and / or automobile) is critical.
A fast food restaurant has to stay open long hours, and generally seven days a week. Alcoholic beverages are not usually offered. Staff training may not be highly critical unless it is a franchise operation where the franchisor generally sets standards of service and food quality that must be maintained at all times.
Your menu
The type of restaurant you plan to operate can dictate in part the type of menu you must have. This is particularly true of ethnic restaurants where the people you serve expect to see certain familiar items on the menu.
Commercial and family restaurants also tend to offer common items that customers expect. However, even in cases where your restaurant type dictates certain menu items, you still have flexibility in other menu items. For example, even a seafood restaurant has to offer alternatives such as chicken for those who are not seafood eaters.
1. General menu requirements
In general terms, your menu needs to be balanced, nutritious, and varied. This balance must also
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consider what your customers are likely to want, and not just what you think they should have.
Important aspects of menu composition are the texture, flavor, and color of food, complementary food items (potatos, vegetables, salad), garnishes, aroma, taste, and appearance. The way you put together all these tangible and intangible ingredients is going to decide, in large part, whether or not you will have customers.
2. Menu presentation
Your written or printed menu creates the first impression about what you offer, your range of offerings, and your selling prices. This may well attract customers into your restaurant; but it is the sense of satisfaction, of having received value for money from your food offerings, as well as the service received, that is going to bring customers back.
Keep this in mind when you choose your menu design, printing type, size, and colours. You want a menu that reflects the style and theme of your restaurant. For example, some smaller restaurants with menu items limited by season, availability, etc., find it easier to write the daily menu on a blackboard. This way, customers are not irritated by being told that an item they want is not available that day.
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3. Effect of menu on pre-opening decisions Your menu will affect a number of your major pre-opening decisions. Some of the more important ones are listed here.
1. Location
Your menu can dictate your location, and vice versa. For example, if you are going to open a Mediterranean restaurant, it might not work too well on a busy road. You might be wiser to consider locating it in an area where there is a large upwardly mobile population to draw on.
2. Building
Your menu can affect the size of building you require. A short-order take-out restaurant will require considerably less space than a sit-down restaurant. But even sit-down restaurants require different amounts of space.
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A cafeteria that has a limited menu may require less food preparation area than a gourmet restaurant with an extensive menu. This, in turn, affects seating area. A cafeteria may only require 10 to 12 square feet of seating area per customer, whereas a fancy dining room may require 15 to 20 square feet.
3. Equipment
Your menu directly affects your equipment needs and thus the investment required. Generally, the more extensive the menu, the more varied your equipment will need to be. If all you are selling is burgers, hot dogs, fries, and soft drinks, your equipment requirements are minimal compared to a restaurant with 20 or 30 menu items requiring a variety of different cooking methods and possibly even some specialized equipment.
If your investment budget is limited, you will probably have to simplify your menu to fit what you can afford to invest in equipment, furnishings, décor, and table settings.
4. Service
Your menu, combined with the type of restaurant you plan to run, usually dictates the level of service you will offer. In a cafeteria, or fast food take-out restaurant, the customers expect to provide their own pick-up service.
Thus, your menu has a direct impact on your labor cost. For example, fast food restaurants have menus that allow them to employ lower-skilled employees who are often hired at minimum wage, whereas a gourmet restaurant's menu will require employees who have more experience, knowledge, and skills in food preparation and table service and who expect to be compensated with higher pay.
5. Purchasing methods
Your menu has a direct impact on your purchasing requirements and practices. For example, if you plan to serve seafood, you must consider how each type of seafood is to be ordered. In other words what grade, size, and specific cut is needed? How will seafood be purchased (fresh or
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frozen), and how will they be stored before using?
6. Food cost
The largest single cost for a restaurant is the food. Your menu reflects directly on this cost. Food cost is the price you pay for food in relation to the price you sell it for. The ratio of food cost to retail sales is expressed as a percentage.
7. Alcoholic beverages
Finally, depending on the laws in your area and for your type of restaurant, your menu is going to dictate the kind of alcoholic beverages you serve. For some restaurants, this is not a problem. People do not generally expect to buy alcoholic beverages in a fast food, or deli, or limited menu restaurant. A fine dining restaurant on the other hand may require a fair variety of wines.
Finding a Site
Once you have settled on the type of restaurant you wish to have, the organizational form it will have, and the advisers you need, you need to seek out a suitable site. It is assumed that the general location of your restaurant has been selected. In other words, you have made a decision about the general area in which you wish to do business, and you are 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 restaurant's décor, menu, and prices to fit that site. The other alternative is to know in advance exactly what type of restaurant you want and find a site that fits.
a. Importance of site
Site selection can be critical. The objective in site selection is to find a spot that will bring in the greatest number of customers at the lowest cost to you. Sites are often selected because of their
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proximity to where the restaurant owner lives or because the premises happens to be vacant or the price attractive. Do not fall into this trap unless you have subjected the site to some suitability tests.
1. General suitability
A practical general rule is to select a site that suits the needs of the customers who are the market for your restaurant. You need to be sure of the specifics of the restaurant you are interested in to understand its particular site and market requirements.
2. Site specialists
If you are unfamiliar with the market requirements of your particular restaurant, you may want to use a site specialist. The services of site selection companies include analysis of population density, customer profiles, access and traffic flows, the drawing power of other restaurants in the area, visibility of restaurant and signs, the average sale you should have per square foot or seat, and the effect of any nearby competitors or potential new competitors. Note, though, that assessing a commercial site is both complex and tricky. It is more art than science, and even the specialists can go wrong.
b. Visibility, Accessibility and Suitability Three extremely important aspects of a good site are visibility, accessibility, and suitability. Each of these will be briefly discussed.
1. Visibility
Visibility of the restaurant may be more important to the customer who arrives at your front door by automobile than it is for the pedestrian, but even for the pedestrian it is important.
2. Accessibility
A second factor in site location is accessibility, again particularly for those arriving by
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automobile. An ideal situation is where flow in traffic and around the site reduces the effects of such things as right turn restrictions that prevent the motorist from easily approaching the restaurant.
3. Suitability
Even with good visibility and easy access, the suitability of the site is a critical factor. For many restaurants, the greatest site limitation is space for parking. The space required for parking is usually greater than that required for the building.
c. Downtown and shopping centers
You might also want to compare the pros and cons of a downtown location or a shopping centre or mall in the suburbs.
1. Central Business District (CBD)
In a Central Business District there are generally more potential customers than in a suburban area. However, what is critical is whether or not these potential customers can be part of your market. If not, then your market must be from people outside the area, in which case traffic and parking considerations are critical. Also, in a downtown area you can expect higher rent and operating costs.
2. Major shopping malls
Major shopping malls are distinguished from neighbourhood markets. Shopping malls serve communities of 50,000 to 500,000 people, and are generally between a 10-minute and 40-minute drive from residential areas.
3. Neighborhood Market
Neighborhood shopping centers serve local populations from 50,000 to 200,000 people and are either within walking distance, or a few minutes' drive, from the majority of the population. Your market is generally limited to those living in the immediate area and because parking is often a
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problem you may have to rely on the walk-in trade. Not all restaurants are suited to that.
Renting premises and equipment
As a restaurateur, chances are you will start your new business in leased or rented premises. The last thing you should consider doing when starting a new restaurant (unless you have a lot of money to invest) is buying land and/or an existing building. In fact, some money lenders will not lend to new restaurateurs for the purchase of such assets.
Generally, most first-time business owners invest far too much money in bricks and mortar (the building) when they should be leasing that asset, particularly in the early days. To a lesser degree the same is true of equipment and fixtures. It is in these early years that the risk is often the greatest, and you may not be able to afford the heavy debt load that owning land and / or a building and expensive equipment obliges. Even if you are investing your own money, you may want to keep some of it in reserve for meeting the losses in the first few months.
Advantages of leasing:
Some advantages of leasing are:
a.
Under a lease arrangement you have the obvious advantage of not having to provide capital to buy the property. Any capital that you might have is then available for investment elsewhere.
b.
Your borrowing power is freed up to raise money, if required, for more critical areas of the business.
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c.
Lease payments on a building are generally fully tax deductible. .
Any leasehold improvements that you make to the building are generally amortized over the life of the lease rather than over the life of the building. The lease period is normally less than the building life, thereby providing a tax saving?
Disadvantages of leasing:
Some disadvantages of leasing are:
a.
In a lease arrangement, any capital gain in the assets accrues to the landlord and not to you. In a similar way, at the expiry of the lease, the value of the future profit of the business that you have worked hard to build up does not benefit you unless the lease is renewed.
b. The cost of a lease may be higher than some other form of financing.
c.
It may also be more difficult for you to borrow money with leased premises if there are no assets (other than a lease agreement) to pledge as collateral.
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Market analysis
Every restaurant must be concerned with its market. The word "market" is defined in terms of people, their money, and their desire to exchange it for your food and service. A restaurant's market is generally limited to a particular area (e.g., an area or a city), and it may be further limited by such things as competition and customers' preferences. Market analysis is based on the assumption that your restaurant must be developed around the customers' wants and needs in order to satisfy those customers. Customers are, therefore, the reason for being in business.
a. Market Analysis
Before you open a new restaurant, have a survey done. This survey will ultimately serve to determine if your sales goal can be met, and it will aid in your financial planning. For a large restaurant, you may need to use a specialist in market research to provide you with pertinent market information and to develop a specific market forecast and action plan to serve that market.
b. Market Research
In other cases, in-depth market research may be necessary to support your sales projections, to demonstrate that there is a large enough market to provide you with sufficient customers, and to show potential lenders that your sales projections are realistic.
1. Identify your trading area
In market research, you need to define your restaurant's trading area. The definition of your trading area will show you how many people live and / or work within it. That does not mean these people will all be customers of your restaurant. Only a certain proportion of them are potential restaurant customers, and because of competition from other restaurants in your trading
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area you can only expect to obtain a share of that market.
2. Analyses the competition
For example, if a trading area with a target population of 50,000 can only support two restaurants of your kind, and there are already two in the business, you would have to seriously consider whether a third could survive. Alternatively, if the two already there are surviving only marginally because of poor management or other reasons, you could possibly move in and take away sufficient business to thrive.
3. Research the demographics
In addition to knowing the boundaries of your normal trading area, you also need to know as much as possible about the demographics of the people living and / or working there. Demographics are statistical information about people such as their age, sex, marital status, average family size, average household income, education levels, ethnic origin, and average annual spending on dining out.
If your restaurant is going to cater to the business clientele, then your demographic research must investigate such things as business hours, number of employees working in the area, and the dining pattern of those employees. For example, do they bring their own meals with them, eat at company cafeterias, or patronize local restaurants?
4. Find a gap If you find that you are going to be competing in a market that is successfully filled by other restaurants, you may have a problem. It is best if you can find a gap that is not being filled by others. Ask yourself what unique menu items or services you can offer that differ from what others are offering.
c. Market Segment
These questions are very broad in nature and need to be refined to produce more specific information that allows market segmentation. In other words, it is unlikely an individual
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restaurant will sell to a broad range of possible users or customers.
The product that you sell has a major impact in determining who your customers will be. For example, a gourmet restaurant will be patronized by a narrower segment of the market than a fast food restaurant.
1. Quality
Quality of food plays an important role. A standard commercial or family restaurant will cater to a different segment of the population than a restaurant appealing to a specific ethnic group or a health-conscious clientele.
2. Price
Price is also a factor in market segmentation and can, to a degree, dictate the market segment you are dealing with. But price alone may not be the only significant factor. A special segment of the market will pay a higher price for similar menu items if the service in the restaurant is better or if it comes with a reputed brand name. Sometimes if a hype is created, the same results can also be achieved. On the other hand, another segment of the market looks first for low prices and is less concerned about quality.
3. Competition
The existing competition may also dictate the market segment that you must concentrate on. For example, if your choice of location for a Mexican food restaurant is an area already well served by firmly established Mexican food restaurants, you may have to change your thinking.
d. Potential sales volume
The main purpose of this market analysis is to establish your potential sales volume. This will become the forecast for your initial income statements.
One way to do this is to convert a percent of your traffic count or trading area population into potential sales. For example, if 2,600 shoppers visit your planned location in the mall you might
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estimate that 5% of them could be customers for your restaurant and 5% x 2,600 = 130.
Your projected sale will have to be above your projected break-even sale point, which will be dependent on your investment and your monthly fixed and variable costs. If it is not, you may have to do your sums all over again. Or in some cases change your concept or drop the project all together.
The Competitive Market
An integral component of a market area's supply and demand relationship that has a direct impact on the performance is the current and anticipated supply of competitive restaurant facilities. To evaluate an area's competitive environment, the following steps should be taken:
z
Identify the area's restaurant facilities and determine which are directly and indirectly competitive with your restaurant.
z
Determine whether additional restaurants (net of attrition) will enter the market in the foreseeable future.
z
Quantify the number of existing and proposed restaurants available in the market.
z
Review the average per cover, number of covers, market orientation, facilities and amenities of each competitor.
This analysis will help calculate the total current market size in terms of number of people eating out in the area at each price point. As your restaurant is expected to compete with them for market share, based on your unique features and competitive strength, you need to calculate your restaurants penetration over its fair market share in order to arrive at the possible sales volume for the restaurant.
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Financial plan
Before you venture into the restaurant business, you need a financial plan. You use a financial plan just like a map when travelling by car; it helps you get where you want to go. A properly prepared plan will guide you in operating your restaurant and help you allocate your resources effectively and profitably; moreover it will allow you to raise the necessary funds to operate your restaurant successfully.
A combined market and financial plan (often referred to as a feasibility study or a project report by professionals who prepare them) is an in-depth analysis of the operational and financial feasibility of a new restaurant, rather than an entrepreneur's guess that a new restaurant will be economically viable.
A feasibility study, or plan, is not designed to prove that a new venture will be profitable. An independent plan professionally prepared by an impartial third party could result in either a positive or a negative recommendation. If you prepare your own plan, you should take the same hard approach. If the forecast results are negative, both you and any potential lenders of funds for your new restaurant should be happy the idea goes no further.
However, even if the forecast is positive, it is not a guarantee of success. A plan can only consider what is known at present and what may happen in the future. Since the future is impossible to forecast with absolute accuracy, and since so many unforeseen factors can come into play, there can be no guarantees.
In other words, a plan may reduce the risk of a particular new venture, but it does not eliminate that risk. Your completed market research results will form the foundation for your financial plan.
Financial Analysis
In a formal feasibility study for a major restaurant, you might need much more detail than has
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been suggested so far. In fact, the financial analysis section of a feasibility study is usually broken down into the following subsections:
a.
Capital investment required and tentative financing plan +
b.
Projected income statements for at least the first year and for as far ahead as five years
c. Projected cash flow statement for at least the first year and for as far ahead as five years
d. An evaluation of the financial projections and the economic viability of the new restaurant.
Since the preparation of the financial analysis can be a fairly complex matter that requires the expertise of someone with an accounting background, it is recommended that you use a professional consultant or accountant. Also, lenders from whom you wish to borrow money are more likely to be convinced to part with that money if the feasibility study is professionally prepared.
Finally, if the financial projections made by an impartial third party appear to be negative, it is better that you know this now rather than two or three years down the road after your restaurant is bankrupt.
Forecast of Income and Expense
In forecasting revenues and expenses for the restaurant, you need to identify your fixed and variable costs. The fixed component is adjusted only for inflation, while the variable component is also adjusted for the percentage change between the facility usage that produced the known level of revenue or expense.
Food & Beverage Revenue
Food and beverage revenue is generated by the restaurant and bar. Food sales also include the sale of coffee, tea, milk and fruit juices, which usually are served as part of a meal. If there is no
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service of liquor, beer or wines, the soft drink sales also would be included in this category. A beverage sale includes revenue from the sale of wine, spirits, liqueurs, and beer. These sales do not include coffee, tea, milk, or fruit juices, which normally are served with meals and, therefore, are considered food. In order to forecast the projected guest count visiting the restaurant you need to divide the week into weekdays, which include Monday to Thursday and weekend, which comprises of Friday, Saturday and Sunday. Your interviews with existing restaurant owners in the area will indicate the trends and the busiest days in the week. The guest count in restaurant parlance is called covers and the average per cover (APC) is simply the total sales divided by the number of guests. It is different from the number of seats in the restaurant. If the restaurant has 50 seats and serves 100 guests at lunch time because on the average every seat is used twice over, then it would have had 100 covers for lunch.
The sales forecast for the first few months may fluctuate either because it takes time for people to realise that the restaurant is open or because a large number of people are attracted to a new restaurant. 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 curiosity of customers. The forecasts for the first few months may seldom work out as per the plan.
Salaries and wages
This category includes the regular salaries and wages, extra wages, overtime, vacation pay and any commission or bonus payments made to employees. The entire restaurant payroll generally is included under this category.
Employee benefits
This category includes retirement and health insurance. Other items considered to be benefits are welfare plan payments, pension, accident and health insurance premiums, hospitalization and group insurance premiums. Also listed under employee benefits are education expenses, employee parties, employee sports activities, awards and prizes, and transportation and housing. We have assumed all employee benefits to be covered under Salaries and Wages. The employee benefit costs may also be greater for larger chain restaurants as they tend to have more rules
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abiding and generous HR practices.
Direct operating expenses
Expenses directly involved in providing service to the customer, such as uniforms, laundry, linen, china, and cleaning and paper supplies, are considered operating expenses. Also included are utensils, kitchen fuel, menus and drink lists, flowers and decorations, contract cleaning, auto or truck expense, parking, and licenses and permits.
Advertising & Promotion
This group of expenses includes selling and promotion expenses, such as direct mail and entertainment costs in promotion of business (including gratis meals to customers). Also, the cost of advertising through newspapers, magazines or trade journals, outdoor signs, and radio and television is included. Public relations and publicity (including fees and commissions to advertising or promotional agencies) and royalties are included in this category.
Utility services
This section is composed of the costs of all fuel except that charged to direct operating expenses in the account "kitchen fuel." Water, ice and refrigeration supplies, and the removal of waste are also included. The cost of oils, boiler compound, fuses, grease and other supplies, plus any small tools used in the operation or maintenance of the mechanical and electrical equipment, should also be charged to this account.
Repairs and maintenance
The following items constitute repair and maintenance expenses: painting and decorating; plastering; upholstering; m e n d i n g curtains; and maintenance contracts on elevators, signs and office machinery. Repairs to dining room furniture, refrigeration, air conditioning, building, floors, plumbing and heating are charged to this category as well. Repairs to dishwashing and sanitation equipment, kitchen equipment and office equipment are also included here.
Administrative and General Expenses
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This group of expenses is commonly considered as overhead and includes items that are necessary to the operation of the business rather than those connected directly with the service and comfort of the customer. This account should be charged with the cost of all printed matter not devoted to advertising and promotion, such as accounting forms, account books, restaurant checks, office supplies, cash register and other checking supplies, letterheads, bills and envelopes. All postage, except amounts applicable to advertising, should be charged here. The cost of telephone equipment rental, local and long-distance calls should be charged to this account, with the exception of calls chargeable to marketing. Other items charged to this account are data processing costs, dues and subscriptions and insurance costs (other than those included as employee benefits or fire and extended coverage on the premises and contents). Commissions on credit card charges collection fees, cash shortages, professional dues and protective services are also considered general and administrative expenses.
Restaurant occupancy costs
Rent, taxes and property insurance are occupancy costs. These are sometimes called "fixed charges", since they usually are determined by the financial set-up of the restaurant and usually not by the trend of its business.
Feasibility Analysis
In order to establish the feasibility of the proposed restaurant, you first must estimate the development costs of the project. By analysing both development cost figures and current market conditions, and by making adjustments for the specific characteristics attributed to the proposed restaurant (such as location, size, facilities, and class and so forth), you will be able to derive an appropriate construction or setting up cost estimate for the restaurant. This investment has to be compared with the returns being indicated by the income and expense statement to evaluate whether or not the restaurant envisaged is financially feasible.
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CHAPTER 7
7. The National Restaurant Association of India (NRAI)
The National Restaurant Association of India (NRAI) was set up in 1982 and is the leading association for stand alone and chain restaurants. We offer Individual and Corporate membership for all the restaurants. The association is headed by its President Mr. Samir Kuckreja, and two Vice President Mr. Vipin Luthra, MD the Palms and Country Club and Mr.Rajeev Panjawani CEO Travel Food Services, with other prominent members from leading individual domestic and international restaurant chains. Headquartered in Delhi, we have a Pan India presence with over 1000 members in 20 different states. The aim of our association is to represent, educate and promote exclusively the independent restaurant owners and operators in India. We also represent
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and lobby for the restaurant industry on various issues with the State and Central Government departments. We conduct regular training programmes for our members.
Objectives
?
To promote, encourage, support and execute schemes for the maintenance of high standard in restaurants.
?
To encourage ethical methods and practices in the restaurant industry.
?
To provide an institutional forum for education & training of the members.
?
To liaison with various local, state and central government about problems/issues that are being faced by our members.
Achievements
?
2011: Withdrawal of levy on prepared food products in restaurants by Union Government
?
Successfully got the extension of MCD/NDMC Health License and Police License from 1 year to 3 years for Delhi restaurants welfare . April 2008.
?
Favorable decision given by the Delhi High Court against the applicability of MRP provision in the Standards of Weight & Measures rules at restaurants in March 2007.
?
NRAI petition against the increasing license fees by music societies PPL (Phonographic Performance Limited) & IPRS (Indian Performing Rights Society) – pending in High Court. However the High Court has ordered for holding special events, the music societies would not charge from the petitioners more than 15% on the rates prevalent prior to Sep
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2005.
?
Got approval on the extension of restaurant timing from 12 a.m. to 1 a.m. both by Excise and Police department in Delhi in Oct 2004
?
Obtained exemption from the Delhi Pollution Control Committee for small restaurants who do not have the full fledged food processing units in July 2004.
?
Benefit
of
duty
free
import
of
liquors/alcoholic
beverages/capital goods extended to stand alone restaurants at 10% of the foreign exchange earnings of the preceding financial year in 2004.
WHITE PAPER INITIATIVE
NRAI has released the WHITE PAPER on Restaurant Industry on May 1, 2010, along with Mindscape (research division of Technopak). This is the first extensive national level research/study on the organized restaurant business in India. The paper will be used to aid in creating national awareness about the industry, provide a fact-based support to industry needs and can be used by industry leaders to influence government policy.
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CHAPTER 8
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8. The Service Tax Confusion
In the 2013 budget, the finance minister announced that all AC restaurants will be liable to pay service tax. 40% of the bill value will be assumed to be for service and service tax of 12.36% would be applicable on 40% of the bill value. So technically, a service tax component of 4.944% will need to be added to the bill value. If 40% of the bill value was for service, then shouldn't the VAT be applicable only on 60% of the bill value? But No - customers will have to pay VAT on
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100%
of
the
bill
value
and
then
service
tax
on
40%
of
the
bill
value.
For most restaurants, which add tax (VAT of 14.5%) as a separate component this is not too difficult to administer. Their bill will now look like this:
For restaurants which charge a service charge (now a common practice atleast in casual dining/fine dining restaurants), they will charge the service tax of 12.36% on this service charge amount, plus charge service tax on 40% of the bill value.
So for a customer, the bill value will go up by about 5%. For the restaurants, this may work out well as they can charge the customer this additional service tax, plus claim inputs credits. Most restaurants now pay service tax on the rental. They can now claim some input credit for this. So this may not necessarily be a bad things for restaurants and my assessment is that customers will get used to paying this 5% additional tax.The only impact could be a macro-level reduction in consumption - i.e. consumers reduce their eating out frequency owing to the higher costs. I believe that this will only be ashort term behaviour.
For restaurants on the composite tax model, this will get a little more complicated and the government has not clarified how the service tax levy will work. The easiest way to do this would be for the government to say that the composite tax would now be increased by 40% - i.e. if it is 4% now, the new composite tax will be 5.6% out of which, 4% will be the VAT payable and the remaining 1.6% will be the service tax payable. It will be good to get a clarification on this.
I'm back
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My blog train got derailed a little bit over the last 2 months. While I can think of several reasons for my temporary pause in writing posts on my blog, the honest reason is simply laziness. It took emails from about a dozen readers enquiring if all was well and why I had stopped blogging, to wake me up from my slumber. With my post on the impact of inflation and increase in various input costs, I am hoping to restart posting regularly. Hope I don't doze off again.
PS: The pic above is from the telugu movie "Eega" (dubbed in hindi as "Makkhi" and also in several other languages). This is one of those movies I really enjoyed watching.
Impact of increasing food costs on the restaurant business
Over the last 3-4 years, food costs have consistently been spiralling upwards. Most food items
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are now atleast 15-20% more expensive than they were 3-4 years ago, with a number of products almost at double the prices (e.g. Paneer - I remember having bought Milky Mist Paneer at Rs.95/kg at Metro in early 2009. Today the price of the same is Rs.185). Same story with good quality branded ghee and several other products.
The impact of such high increases is severe on the restaurant business, especially the value for money affordable food joints. Let's assume a local north Indian joint. If the cost of the raw materials for a curry was 38 bucks earlier, the joint could price the item at around 100 bucks. The net sale price would be 96 bucks (after taking out 4% VAT). So the food cost would be 40%. Now if the cost of the raw materials go up by about 20% = 45 bucks. To maintain the food cost @ 40%, the new selling price would need to be 117 bucks. Now it would not be easy for the affordable food joint owner to suddenly increase prices by 17-20 bucks. This is just for a 20% increase in the cost of the raw materials. Given the prices have gone up by over 40% on an average, the local affordable & VFM food joints are no doubt in trouble.
What do I foresee for the industry in the next year?
I can see a lot of the VFM affordable businesses struggling to stay alive. The market will slowly start accepting increased prices, but a lot of the businesses may not be able to hold on till that happens. This is because of the high increase in the food costs, plus an equally high increase in labour costs. Rentals, utilities etc. have also been very high, but even there the increases over the last 3-4 years have been significant (e.g. LPG cylinders now sell at 1700 bucks. 4 years ago the prices were at the 800 bucks level). Most businesses can absorb high cost increases in one or two of the key factors. Today, all the cost factors are coming into play, and the prices can only be increased by so much and may offset one or two of the factors.
The ones who manage to stay afloat?
The businesses which manage to survive and sustain longer should be able to grab a larger share of the customer's wallet. While the increased sales will not lead to increased profits, it should
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help offset the increased cost of all the input factors.
So all the affordable VFM food joints need to get their seat belts on and survive the turbulence. As the famous dialogue in "The Dark Knight", the night is darkest just before the dawn. I sure hope that this is true for the restaurant business in India.
A big heartfelt thanks to all of you for getting this blog to cross a significant blogging milestone 100,000 page views. This gives me the energy and motivation needed to continue posting content that will hopefully be useful.
The Birth of Resto Fund: Your Opportunity to Run a Small Pizza Restaurant in Bangalore
This is not one of my typical blogposts, giving some gyan about the Restaurant business. This is
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about a rare opportunity for a passionate individual/team to set-up and run a small Pizza focused Restaurant/Cafe in Bangalore, thanks to the generosity of some well-heeled gentlemen, through an experimental initiative called "The RestoFund" to financially support passionate folks to become Restaurant Business Entrepreneurs. Here is a quick summary of the first opportunity offered through the RestoFund:
What you will get?
1) A 400 sft space on the ground floor in a prime location in Bangalore 2) Interiors, Furniture & Fixtures, the way you want it 3) All kitchen equipment needed for you to run a small Pizza & Ice-Cream joint including a fancy big Pizza oven 4) All statutory approvals needed to run a cafe/restaurant 4) Reasonable support to set-up and run your business both financially & operationally 5) All the money you need for doing the above (You are not dreaming), including a small fixed salary to support you financially coupled with an aggressive profit share
What do you need to bring to the table?
1) Currently based in Bangalore 2) Strong passion for running a small restaurant/cafe 2) Willingness to spend the time and effort required to make the business a successful one 3) Strong interest in cooking with some experience making Pizzas and Baking. If you are chef/cook in a restaurant/hotel currently, that would be a huge plus 4) High energy levels and an ability to convince us that you are right person for us to invest in
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How critical are the Interiors for a Restaurant?
Most people would agree that it is reasonably important. My assessment is that it is actually very critical – much more critical than you can imagine. Again the exact look and feel would vary depending on your concept and your price-point. The trouble with interiors is that getting a great look is very difficult and is not really dependent on the amount of money you spend.
As an analogy, I have seen several of my friends buying an apartment for 50-60 lakhs, paying about 5-8 lakhs additional towards VAT, Service Tax, Registration, Khata etc. But most of them spend as little as possible on the interiors (say 3-4 lakhs). I have a complete contra view on this. My recommendation would be that you spend a large amount of money on interiors, because that will determine your quality of life in the house you buy. If your overall budget is 60 lakhs, you should spend about 20% of the budget (about 12 lakhs) on the interiors.
On the same note, when you are starting a restaurant, be prepared to spend atleast a reasonable amount of money on the interiors. This is what your customers will see, use and end up making an assessment of your business on. Getting the right look, feel and ambience for a restaurant without spending a lot of money is not an easy task. You will need a good interior designer who can give you ideas after understanding your concept. A lot of times, I have noticed that interior designers opt for solutions that they are comfortable with and ones they have executed in the past. Eg. Most interior designers will push for a false ceiling with lights embedded into the false ceiling. While this gives a “No Nonsense” look to the restaurant, it reduces the height of your
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restaurant and may make the place look smaller. Creating a great look without doing false ceilings is tougher and the final outcome is a little bit of an unknown. Similarly, on the wall paneling. Most interior designers will push for a plywood based panel with laminate covering. It is possible to create a better effect with paint on the wall – again this is tougher, the final outcome may be an unknown and getting access to the right labour may be difficult for the interior designer. If you go and see a few places that the interior designer has done already, you will notice that most of them will follow a similar pattern. Eg. One interior designer may use glass extensively, another may use laminate based paneling extensively. In my experience, pushing a interior designer out of his/her comfort zone is not easy. Whatever ideas you talk about, the final design will boil down to something that they are comfortable doing.
So to find a good interior designer who will deliver what you are expecting, you will need to go and take a look at few of the interior works the designer has completed recently. If the theme fits what you have in mind, sign up the designer. There are several components that are part of the Restaurant Interiors. I will use the use the next several posts to detail out each of the components:
1) Furniture - Tables & Chairs 2) Lighting Works 3) Restaurant Entry Area 4) Walls & Ceilings 5) Flooring 6) Operations Related Stuff - Cash Counter, Hostess, Waiting Area, Side Stations etc. 7) Air Conditioning 8) Kitchen Entry Area 9) Blinds/Curtains 10) Painting Works 11) Rest Room & Wash Area
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TOP 10 RESTAURANT’S OF INDIA
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CHAPTER 9
9. Restaurant Case Studies
Introduction
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In this section we present four real life case studies in an attempt to highlight critical factors that determine the success or failure of a restaurant. For each case study, we interviewed the entrepreneur and asked him/her to identify the key lessons learnt in running the restaurant.
Below, we describe the experience of each entrepreneur, together with their perceptions of where they were right, or where they went wrong.
CASE STUDY 1
A restaurant which closed down
This restaurant was opened in Delhi by an entrepreneur who is about 50 years old. He worked in the hospitality industry for 25 years, his entire working career. Initially, he worked in a few family-owned restaurants based in Lebanon, Cyprus and England for about 8 - 10 years. After returning to India, he worked in the five-star hotel segment, both at the hotel and corporate level, reaching 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 restaurant of his own in November 2002.
Restaurant and Facilities
The restaurant was located in Connaught Place in New Delhi, the oldest and most prominent commercial area in the capital city. He rented the ground floor premises of a building, paying Rs 2 lakh as monthly rent for 2700 square feet of area. The restaurant had 120 seats and provided a mixed cuisine including Indian, Chinese and Continental. It was targeted at an upmarket clientele, served lunch and dinner, and had average cover revenues of Rs 120. The restaurant did not have a bar license and did not acquire one before the restaurant closed down. Apart from rent, there were fixed monthly expenses of about Rs 1.5 lakh on items like wages, electricity, water, telephone and so forth. Taking into account all variable expenses, the break-even point was determined at a sales volume of Rs 12,750 per day.
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The restaurant started well and achieved average daily sales of about Rs 15,000 during the period between November 2002 and February 2003. However, sales soon started to decline, reducing to an average daily figure Rs 5,000 in the months May-July 2003. The entrepreneur had the operation evaluated by a financial consultant and, based on the consultant's advice and own judgement, closed the restaurant in August 2003, 10 months after opening. He has not considered re-opening it at any other location, and has returned to being a consultant.
The restaurant had initial investments of Rs 40 lakh in décor, equipment and so forth. The entrepreneur also had a partner, a much younger person, who contributed Rs 5 lakh as equity. Both persons worked full-time on the venture, and were 'on the job' from 7 a.m. to 11 p.m. Taking into account the pre-opening expenses and financial considerations (bribes) and recurring losses to different government authorities, the two partners lost about Rs 60 lakh in their venture.
Reasons for failure
Mentioned below are reasons why the restaurant failed, based on the version provided by the main entrepreneur and our own analysis.
1. Soon after the restaurant opened, the Delhi Metro project was commenced in Connaught Place (CP), resulting in a lot of digging and disruption. The project forced traffic diversion within the CP area, and restricted the space available for parking. Lack of parking space around the restaurant became a very severe constraint. This prevented upmarket customers from coming to the restaurant by car. We feel that the entrepreneur could have known this in advance. The plan for the Delhi Metro was known before he opened the restaurant, and it was also known that the project would affect the CP area sooner or later.
Moreover, the CP area has suffered traffic congestion and parking-related problems for many years now, and these problems are known to the public. It is also known that some of the other traditional restaurants in this area have been losing sales over the last few years and some have closed down recently. Also, there are a large number of restaurants in CP and many offer cuisine similar to that offered by the subject restaurant. At the same time, it is also true that new food
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outlets continue to open in the area, but many of recent entrants are branded restaurants, and mostly in fast food.
2. The entrepreneur feels that, because of parking problems and other factors, CP has become downmarket as a location for restaurants. Although there are upmarket customers at lunch time, these are few in number; the majority of persons lunching in CP are middle to junior-level professionals. Also, many of the customers that visit CP's restaurants from elsewhere come by buses, and are obviously low spenders. Their average spend tends to range between Rs 35 to Rs 50 per cover, and hence they often prefer snacks over full meals. It is known that fast food restaurants and ice-cream parlours are doing very well in the CP area, compared to fine dining restaurants.
3.
We also feel that the entrepreneur should have, or could have, studied his market better. A
survey of existing establishments should have been done, as also a detailed study of the customer profile. Having been in the industry for a number of years and with wide contacts, he could have had access to restaurant owners and managers in the CP area. He mainly went by his own view that CP is a large commercial area and is visited by a large number of upmarket shoppers. He should have commissioned a professional feasibility study for his project.
4.
The entrepreneur himself says that he could have, instead, taken up space in a residential
shopping center in Delhi, or in one of the shopping malls or multiplexes in neighbouring Gurgaon or Noida. He also feels that he paid too much rent and could have taken a much cheaper place at another location. The high fixed cost led to early failure and closing of the restaurant. 5. Considering his costs and other factors, the entrepreneur believes the main reason for his failure 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 particularly so after the commencement of the Delhi Metrorelated work. The entrepreneur's experience brings to mind a saying oft-repeated by teachers, trainers and consultants to the hospitality/foodservice industry: the first three requirements for the success of a hospitality enterprise are location, location and location.
6.
He is bitter about having to bribe government departments, saying that he paid about Rs 4
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lakh through various channels to get started. 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 entrepreneurs know about it.
7.
The entrepreneur also feels that he spent extra on everything: the décor need not have been
so fancy; he need not have hired such expensive, qualified staff, but should have settled for lower wages at all levels. His head chef came from a five-star deluxe hotel. Having been used to fivestar set ups in his career, his ideas of suitable salary for the manager and staff were also inflated. Moreover, he feels that he bought too much inventory rather than buying for the shortest time period possible. He was left with a lot of inventory of dry items after he closed.
8.
He also did not have enough or perhaps no financial backup; having spent the money he
could afford in the first instance. Whatever backup he had was put into the enterprise when losses started. He reached a stage where he could not fund the losses and was forced to close down.
What are the lessons to be learnt from this case study? It is the usual scenario of going by hype and being convinced that "I know best". There was lack of study and market research. It was also a classical case of spending too much and being confident of success. The entrepreneur did not imagine that sales would go down so soon after opening and he would need to put in more money, which he eventually did not have
CASE STUDY 2
The restaurant that failed twice
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The entrepreneur is 55 years old, and holds a graduate degree. During the early days of his career, he managed an agency for two-wheelers and four-wheeler commercial vehicles in Jallandhar. Presently, he produces bakery and confectionery products in his factory in Okhla, New Delhi, something he has been doing for the last 15 years He supplies to the retail market, to hotels and restaurants, has a wide range of products and a good reputation. He also runs an agency for some machinery as a side business, from the same premises.
First Restaurant Project
Being in the bakery business, the entrepreneur was very keen to have a retail confectionery counter-cum-restaurant of his own. Having travelled to Europe several times to acquire bakery machinery, he discovered that the new trend at bakery eat-ins was to make the confectionary behind the retail counter. Its fresh-from-the-oven appeal created a sales attraction for take-home purchases by customers. The entrepreneur thought that the same concept would do very well in a major Indian metro - customers would like to visit and buy from a confectionery outlet where products are being made fresh, partly within their visible range. The success of outlets such as Hot Breads, which work on the same concept, reinforced the entrepreneur's confidence in this particular foodservice idea.
The entrepreneur also had access to the machinery which had been sent by his England-based collaborator to India for an exhibition. In fact, the collaborator was willing to give the machinery to him without cash payment, andjoin him as a partner in the new restaurant venture, his share being the cost of the machinery. The two partners selected a site in the shopping centre in East Patel Nagar in New Delhi and hired a space of 1800 square feet. There was a Domino's Pizza outlet next door. The total capital investment was Rs 75 lakh: Rs 30 lakh from the English partner and Rs 45 lakh from the Indian entrepreneur. This was entirely spent on décor, equipment and some pre-opening expenses. Operational costs included Rs 65,000 per month as rent, which was to be increased to Rs 85,000 after six months. The entrepreneur employed 20 persons on a monthly wage bill of about Rs 65,000. Accounting for another Rs 25,000 for electricity, the total operational costs came to Rs 90,000 per month, which was, of course, in addition to the food cost. Break-even sales were
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calculated at Rs 12,500 per day. The entrepreneur hired a manager at Rs 12,000 per month; he had earlier worked in Wimpy's and Hot Breads. The manager created a team of his own choice. Since the entrepreneur had other businesses as well, he visited the restaurant for about 2 hours every day and trusted the manager to run the shop professionally.
The restaurant remained open from 8.30 a.m. to 10.30 p.m. It had a comprehensive range of about 125 products and apart from counter sales, it also had a restaurant with 25 seats. Being a bakery and confectionery there was much emphasis on breakfast-time sales. A baker was sent by the English partner from England to stay for the first 20 days and he trained the staff in the craft. Since the entrepreneur himself is a strict vegetarian, he ordered that all products must be strictly vegetarian and even the cakes were made without eggs. Apart from the wide range of bakery and confectionery products, the restaurant also included pizza, soups and sandwiches in the menu.
The restaurant did not do well from the very beginning. The break-even sales of Rs 12,500 was not reached on any single day. Most customers were from nearby residential homes and there were no walk-in or transit customers who usually come to the shopping centres from other areas. The highest sale was Rs 10,000 for a few days, but it eventually trickled down to Rs 5,000 per day. The entrepreneur closed the restaurant exactly 12 months after it was opened.
Second restaurant project
The entrepreneur was still convinced about his concept of bakery-cum- restaurant. He thought that the location in East Patel Nagar was not suitable and the concept would succeed in a better locality in Delhi. He hired a place in the East of Kailash Community Centre, opposite a cinema hall. There was a Nirula's across the street. One again, he rented out 1800 square feet of space, and opened a similar restaurant with another name, five months after he closed the first restaurant.
All machinery and equipment were transferred from the earlier restaurant to the new one. The Englishman remained his partner and they spent another Rs 15 lakh on interiors. The rent was Rs 75,000 per month on a graded scale, to go upto Rs 1 lakh per month after six months and Rs 1.25 lakh per month after 12 months. Other operational costs remained more or less the same as in the
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first restaurant, with slight increases. The breakeven sale was calculated at Rs 16,000 per day. The product range was extended and he included non-vegetarian products along with the strictly vegetarian items. Cakes and pastries made with eggs were sold. Buffet lunch and dinner, at a reasonable price of Rs 65 per head, were also on offer.
In addition to the cinema, Lady Shri Ram College, a well-established girls college, was close, at a walking distance. The college also had a hostel. Moreover, with the restaurant being situated in a community center having a large commercial area, and some residential colonies nearby, there seemed, from the entrepreneur's viewpoint, a large and varied enough target market to tap into.
Having learnt from his previous experience, the entrepreneur tried to do things better this time. He made some pre-opening advertisements and his market research team visited nearby houses and shops. He also devoted more of his time to the project.
However, the restaurant did not succeed. In the first month, the sales were Rs 20,000 per day mainly because there was a good Hrithik Roshan movie playing at the cinema. However, sales started to drop off from second month and were down to an average of Rs 7000 per day during the summer of 2001. The entrepreneur realised that he would have to spend more money in advertisements and also put in place staff, equipment and two-wheelers for home delivery. He had, by this time run out of money, as the little reserve funds that he had were used up to cover the losses of the past few months. He had no other sources of funds. He, therefore, had to close the restaurant 14 months after it opened.
Reasons for failure
1. The entrepreneur did not engage anyone for a feasibility study or a market survey to assess the restaurant concept i.e. the right location for the concept, the potential clientele, the product range for that location and that customer profile, and so forth. He believed that he knew this business very well, because of his bakery manufacturing experience, and was convinced of his concept.
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Moreover, he could not wait to get started with is restaurant project. He did not make a project report, or even take the help of a chartered accountant or financial consultant, for expense and earning projections.
He now says that the location of the first restaurant was not appropriate. This kind of product range will succeed best in a place which has good retail shops in close proximity, which are visited by more upmarket customers. Some such customers could walk in for snacks and drinks and take away some fresh bakery and confectionery. There were no such retail outlets around the restaurant in East Patel Nagar. Hot Breads in G.K. II has an upmarket fabric shop next door, which regularly receives a large number of relatively higher-income customers including diplomats. There are other upmarket retail shops in close proximity to Hot Breads, which are also well-frequented. Moreover, Hot Breads, which also has outlets in Chennai, has acquired a brand image.
2. Unlike Greater Kailash-II, which is a prosperous south Delhi locality, East Patel Nagar is mostly middle-income. East Patel Nagar's residents are not used to Western-style confectionery and are usually not willing to pay a price for it. They are more the type to go in for Indian fast food. The entrepreneur thought he would be able to generate their interest in a new product range. Not only this, he felt his restaurant would even transform eating-out behaviour in this locality. This failed to happen.
3. The entrepreneur realised that his insistence on totally vegetarian items in the first restaurant was wrong. Although there may be a small percentage of people who may insist on vegetarian confectionery, a large number of people want proper cakes and pastries with a proper recipe which may include use of eggs. He lost a number of customers on this account. 4. In the new location, he did get the advantage of the cinema, but it was an average, even below-average cinema which did not get the better movies. Its visitors were typically from the middle and lower income groups, who were not inclined to spending money at a restaurant after having bought movie tickets, and preferred to return home. Also, most of the cinema-goers were not attracted by western-style confectionary and food items. Furthermore, because of conflicts among the cinema's owners, very little was being spent on its upkeep, which adversely affected
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the cinema's market perception.
5. Moreover, there were no retail shops in the locality, and the banks and offices that exist there did not provide him any significant business. Another target market- college-goers from LSR, also failed to appear. In both restaurant projects, he was wrong on the choice of location. The entrepreneur says that in East Patel Nagar he would have done better with an Indian fast food restaurant. The second restaurant was also in an unsuitable location, according to his post-closure 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 product range.
6. He feels his biggest mistake was to spend all his funds on equipment and interiors and not retain funds for operational losses and additional expenses. He ran out of funds within a few months. In the second restaurant, he was keen to spend money on advertisements and a home delivery system but did not have any funds left with him. The entrepreneur now feels that he should have only spent 50% of his funds on capital expenditure and expenses and retained the balance 50% as reserves.
7. Moreover, his concept should have been either a confectionery store, or a restaurant. It was a poor mix of the two. As he had expertise in making bakery items, he should have just had a small counter-based store, in an area of 300 to 500 square feet, with limited staff. The number of such small stores could have been increased in the city, based on the success rate. Trying to run a 25-cover restaurant with a confectionery shop involved too much space and operational expenses, and did not have the USP of either a good confectionery counter or a good restaurant. The entrepreneur's view that the European style bakery and restaurant will attract customers did not work well in his chosen locations.
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CHAPTER 10
10. RECOMENDATION
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Through, secondary data collection it is recommended that restaurants will be profitable if they have proper quality of goods, perfect ambience according to the changing trend, décor, music. Which people demand and proper customer attention. Restaurants are also recommended to follow certain CSR & ETHICS for developing good market image they are:-
? ? ? ? ? ?
To give proper attention to customers. To change the price structure. Food service should be given quickly by maintaining quality of food. Restaurants should take initiative to feed poor, by giving excess food left by customer. Giving employee discount. Also giving discount to employees family.
These following activities are recommended to increase the sales and maintain good market image & position.
BIBLIOGRAPHY:91 | P a g e
? Federation of Hotel and Restaurant Associations of India: The FHRAI ? Forbes India Magazine- 2013 ? Good Food Magazine India ? Food and Nightlife Magazine -India
WEBLIOGRAPHY:? WWW.WTTC.ORG ? WWW.FHRAI.COM ? ?
WWW.WIKIPEDIA.ORG WWW.NRAI.COM
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doc_406256848.docx
Restaurant (industry)of india
Sr. no
CHAPTER
PAGE NO
1.
HISTORY.
1-8
2.
THE MARKET SIZE OF COUNTRY?S RESTAURANT SECTOR.
9-11
3.
EXECUTIVE SUMMARY
12-17
4.
BACKGROUND & SCENARIO
18-28
5.
WHATS IS MY RESTAURANT WORTH?
29-40
6.
FEASIBILITY STUDY
40-63
7.
NATIONAL RESTAURANT ASSOCIATION OF INDIA (NRAI)
64-67
8.
SERVICE TAX CONFUSION
68-77
9.
CASE STUDY
78-87
10.
RECOMMENDATION
88-89
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CHAPTER 1
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1. Restaurants Industry in India
HISTORYIndia is known as the land of snake charmers to some, as land of religious diversity to some others and as land of Bollywood to entertainment lovers. Whether it?s the food, the diversity in cultures, handicrafts or business opportunities, everybody seems to have some or the other reason to travel to India. And the fact that the World Travel and Tourism Council considers India to be one of the top most tourist spot with the highest ten year growth potential (2009-18) [ www.wttc.org ], we have a reason to believe that India is only going to see more visitors. It is said that the Indian tourism brings a substantial share to the country?s foreign exchange earnings and if you closely examine it, most of that comes from the hospitality business in India. The revenue from the hospitality sector in India broadly comes from two sources: 1. Hotels: Which include lodging, attending business conferences and meetings. 2. Restaurants: Which includes all sort of eateries whether fine dining restaurants, quick service restaurants, takeaways or other forms of eating joints.Hotels and Restaurants after all are the prerequisites for any visitor, local or foreign. And focusing on the last bit, it?s hard to not miss out on the fact that not only the foreign visitors, but Indian visitors travelling across states and cities bring in a huge chunk of revenue for the country?s Hotel and Restaurant Industry. Therefore it can be said that the Tourism and the Hotel and Restaurant Sectors go hand in hand. Or rather, it can be said that the latter forms a prominent and an important part of the former.The market comprising of the foreign tourists is huge and is only growing year after year. The Foreign Tourist Arrivals standing at a figure of 4.15 Lakh in September 2012, registered a growth of a little over 3 percent compared to the corresponding month in the previous year. To
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prove the huge amount of foreign exchange that is added to the country?s reserves is the fact that the Foreign Exchange Earnings during September 2012 were almost Rs. 6,650 Crores! The rise in incomes coupled with fascination to travel to a new country is a considerable reason to believe the growth of foreign visitors to India. Similar reasons can be attributed to upsurge in the domestic visitors too. India is believed to be a country with the fastest growing middle class, and applying the general principles of economics with respect to availability of leisure time and disposable income, travelling is now a necessity for many. Visiting the dear ones, exploring your own country, taking a break from work, searching for business opportunities, there are reasons galore for Indian citizens to look to travelling. Thanks to this upsurge, the hotel rates in India increased by almost 12 percent in the first half year in 2012!
Restaurants Industry: A source for bread for many it is clear that the Tourism and the
hospitality industry are highly interrelated but not only that, the hospitality or the Hotels and Restaurants sector is substantially linked with other industries in the economy like agriculture, transportation and construction which can be easily reasoned. To add to that the sector creates the maximum number of jobs than any other industry in the economy. After all it has place for all kinds of people, no matter how unskilled or specialized, which can be easily sampled in any hotel or a restaurant. Typically a hospitality unit such as a Hotel or a Restaurant consists of various departments which work in close tandem to provide the combine service a customer enjoys. There is facility maintenance and direct operations which includes bartenders, kitchen workers, servers, housekeepers, porters, etc. Apart from that there is the obvious and more prominent Human Resources department, people taking care of the marketing and the management. Not only this, the employment generation potential has not gone unnoticed. The World Travel and Tourism Council says that India?s Travel and Tourism sector is soon going to be the second largest employer in the World. It will be employing more than 40 lakh persons by 2019.
What’s enhancing the business lately?
The tourism can be divided into various categories depending on the purpose of the visiting tourists. We have all known adventure tourism, heritage tourism, rural tourism and pilgrimage tourism; the heritage tourism being the most important driving factor in the Indian tourism sector
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because of the country?s rich heritage and ancient culture that is known Worldwide. But what is catching up more lately is the medical tourism. It is said that medical tourism is a sunrise sector in India because of a large number of foreign visitors coming to India for medical purposes. With good quality medical services at rates cheaper than those in other countries, India seems to have become one of the most preferred medical tourist destinations. Not only this, domestic tourists also avail these facilities especially if they can afford the super specialty hospitals which are known for guaranteed treatment in most cases. That?s the reason you see so many guest houses and B&B facilities (Bed & Breakfast) around hospitals these days. According to a RNCOS report titled „Booming Medical Tourism in India?, it is expected that the country will experience a Compound Annual Growth Rate of 27% during 2011-2015 in this sector. Another form is the wellness tourism which is more or less a subset of the medical tourism. Since India is known for Ayurveda, Yoga, Naturopathy and spiritual philosophy, our country is one of the most sought after wellness destinations which attracts tourists from world over and from around the country to various Ashrams and centers which have been established to promote the natural way of health and healing. Also, with the India Inc. brimming with opportunities, a trend which was well existing before has become stronger. It is the MICE tourism, which is basically an abbreviation for Meetings, Incentives, Conferences and Exhibitions, that is the fastest growing concept in the industry Halls in hotels are almost perpetually booked by companies for such events and this brings in the business travelers. Some top hotels cater to these needs thus facilitating conduct of domestic as well as international business meets.
Approval of Hotels
The nodal authority for regulation of Hotels is the Hotel & Restaurant Approval & Classification Committee which is a division of the Ministry of Tourism. It approves the projects on a 5 yearly basis. Once the hotel becomes operational, an application for classification has to be made whether or not all the rooms have been completed or not which again is valid for 5 years. Apart from the necessary prescribed documents, the following local approvals are required from: • Municipal Authorities • Concerned Police Authorities • Airport (for projects located near Airports)
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• Municipal Health Officer • Fire Service Department • Bar License The approvals shall depend on the classification of the Hotels in “Star Category” or “Heritage Category” Necessary Licenses for a Restaurant. A restaurant apart from requiring a license under the respective state?s Shop and Establishment Act will require the following licenses among others: • Food Safety License from FSSAI (Food Safety & Standards Authority of India) • Health License from the Health Department of the Municipal Corporation • Eating House License from the Police Commissioner • Liquor License from the Excise Commissioner • License for playing music from the Phonographic Performance Limited • NOC from the Fire Department
Some Important Associations you can be a part of if you operate in the Industry:
1. Federation of Hotels and Restaurants Associations of India: The 3rd largest Hotel & Restaurant Association in the world, FHRAI is the apex body of four regional associations representing the Indian hospitality industry. Aiming to promote and protect
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the interests of the Hospitality industry, FHRAI keeps its members wellinformed about latest trade information and trends, statistics and other studies.
2. Hotel Association of India: The Association aims at projecting the industry?s role as a contributor to increasing employment opportunities and sustainable economic and social development. It?s objective is to raise the standards of hotel and build an image for the industry both outside and within the economy. 3. National Restaurant Association of India: The NRAI is the leading association for stand alone and chain restaurants and offers individual and corporate memberships to them. Having a pan India presence with over 1000 members, it aims at representing, educating and promoting the independent restaurant owners and operators. 4. International Hotel and Restaurant Association: This International organization monitors issues that are raised by major international organizations involved in tourism and lobbies for better recognition of the hospitality members Worldwide. The membership is not only open to the National Associations for Hotels and Restaurants in various economies but individual restaurants and hotels as well. Foreign Direct Investment: The Indian Government allows FDI up to 100% under the automatic approval route in the Hotels Industry. The investment is available for construction and development including that of hotels and resorts, recreational facilities and infrastructure. For this purpose the term hotels includes restaurants, beach resorts and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Not only this, 5 year tax holiday is available for organizations which set up resorts, convention centres or hotels at specific destinations.Major names in the industry: Several players, national and international have established a strong
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foothold on the Indian platform for Hotels and Restaurants. International names like Accor, Amanda, InterContinental, Hilton, Marriot, Starwood, Satinwoods and the similar continue to woo the customers whether Indian or visitors to India. But on the other hand, Indian Companies in the industry are equally well established and in many a case doing better than their international counterparts. The Indian Hotels Company, East India Hotels, ITC, Leela, Asian Hotels have all kept the visitors in awe. Where the restaurants are concerned, the Indian brands and stand alone restaurants co-exist in harmony with international food chains like Domino?s, McDonalds, Pizza Hut, KFC, Costa Coffee and now Starbucks also
Important Developments that are hoped to boost the industry:
• The Indian Company ITC launched its hotel “Great Chola” in Chennai with an investment of over Rs. 1,200 Crores which is touted to be the World?s largest LEED Platinum Green Hotel. • The KEF Company plans to set up a luxury hotel and a super specialty hospital in Kerala with an investment of Rs. 1,600 Crores approximately. • Bengaluru based Hyagreev Hotels have entered into a JV with the Japanese Toyota Enterprises. • FHRAI has signed four memorandums of understanding with its counterparts operating in USA, Europe, Middle East, United Kingdom and China to exchange expert solutions regarding the industry. • USA based Wyndham Hotels will increase its properties in India to 70 in number by 2016.Government?s Initiatives which will have a direct impact on the Hotels and Restaurants Industry • The Maharashtra Government will set up an international cruise terminal at the Mumbai port which is expected to bring the European and the American tourists to India. • The Gujarat State Government is whole heartedly trying to boost tourism in the State and has allocated Rs. 400 Crores for the purpose. The Planning Commission has also approved a grant of Rs. 1,200 Crores to promote coastal tourism in Gujarat. • The Incredible India Campaign started by The Ministry of Tourism which is already playing a huge role in development of the industry is hoped to continue bringing more tourists to India
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because of the way it promotes the Indian culture that leaves a lasting impression on the minds of people. Other campaigns started by the Government like the “Colors of India” and “ Atithi Devo Bhava” are also doing well. • The Central Government allows the visa on arrival for tourists from Countries like Finland, Luxembourg, New Zealand, Japan and Singapore which removes unnecessary hassles for these tourists in terms of obtaining a visa. • The Government has introduced a new category of visa altogether, called the „Medical Visa? or simply M-visa to promote medical tourism Given the enthusiasm of top players in the Industry, of the Government to promote the industry and of the tourists to visit India is proof enough of the bright future this Industry has. Setting up a new Hotel might be a herculean task requiring a lot of investment but starting a restaurant offers huge earning potential even for those who want to start small.
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CHAPTER 2
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2. The market size of the country’s restaurant sector
The market size of the country 's restaurant sector is Rs.247, 680 crore ($48 billion), which makes it 24 times bigger than the film industry and places it $9 billion ahead of the telecom sector. And, it is projected to swell to Rs.408, 040 crore ($78 billion) by 2018 at a compounded annual growth rate (CAGR) of 11 per cent with the organised sector expanding at 16 percent.
The National Restaurant Association of India (NRAI) and management consultancy firm Technopak have presented this buoyant picture in the India Food Services Report 2013, which was released in the Capital by Union Commerce and Industry Minister Anand Sharma.
The report estimates that the industry, 70 per cent of which is in the unorganised sector, provides direct employment to 4.6 million people. Besides, by lifting demand for real estate and food products, it creates multiple job opportunities in ancillary industries such as construction, food processing, logistics and kitchen equipment. It also contributes up to Rs.11,900 crore as revenues to the Central and state exchequers.
Driving this recession-proof growth is a cocktail of factors listed in the report: swelling disposable incomes, rising population of younger people, widening exposure to new cultures and cuisines, growing propensity of eating outside the home, and the increasing popularity of takeaways and home deliveries.
There are shades of grey as well in this rosy picture despite the impressive figures (and the bulging list of private equity firms and venture capitalists investing in restaurant chains) that crowd the report. On the sidelines of the report's release, NRAI president Samir Kuckreja pointed out that the restaurant industry is "overtaxed and overlicensed".
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With no political unanimity over a uniform goods and service tax, patrons of restaurants in the organized sector have to pay VAT (10-15 per cent on food across states, and up to 70 per cent, as in the case of Andhra Pradesh, on alcohol) and service tax (4.94 per cent), which is charged even on takeaways and home deliveries.
Dhabas don't pay any tax (some of them which have turned air-conditioned have just come into the service tax net) though they form the bulk of the unorganised sector, which account for 70 per cent of the restaurant market. The NRAI has been lobbying with state governments to rationalise taxes and offset the losses by making dhabas pay VAT.
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CHAPTER 3
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3. Executive Summary
Purpose of the Study
The Federation of Hotel and Restaurant Industries in India (FHRAI) engaged HVS International to research the restaurant industry in India and identify both global and domestic food trends. 165 questionnaire responses from independent and hotel restaurants in India provided the statistical basis for analysis of operations and financials of the existing restaurant industry in the country. In addition, a large cross section of professionals involved in the industry was consulted for their views. The report presents the results of the analysis and includes the following:
z
Background Scenario and numbers which includes an analysis of the demographic changes occurring in India and their potential impact on the restaurant industry.
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Analysis of responses collected via the questionnaire representing a snapshot of trends in the Indian restaurant industry.
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A summary of key emerging global food trends as well as international restaurant chains that provide franchise opportunities for operators in India.
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A guide on how restaurants are valued and guidelines for conducting a feasibility study before opening a restaurant.
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Real life restaurant case studies on both successful and not so successful restaurants.
Conclusions for each of these sections are summarized below and discussed in greater depth throughout the report. The reader is advised to read the entire report for a comprehensive view.
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Based on projections extrapolated from the Third Economic Census conducted in 1990, we estimate that there are approximately 500,000 restaurants in India in the organized sector. This figure is expected to rapidly increase as a result of the changes in demographic and economic factors which are having a significant impact on the restaurant industry in India. Increasing urbanization and rising disposable incomes are characteristics that are common across several emerging economies, particularly in Asia. However, the pace at which this has taken place in India in the last few years is likely to continue over the next decade and will outpace most other economies in the region. In particular, Merrill Lynch estimates a growth in urban consumption at potentially 20% per annum in nominal terms (16% in real terms) for at least the next 5-7 year period. In addition, higher disposable incomes among consumers particularly in the top 25 cities and the trend towards eating out are combining with growth in organized retailing to fuel growth in the foodservice sector. There are 10 million households in India with average 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 emerged as a trend, which is prevalent within this elite group. Two of out of every five households in this group eat out at least once a month. There are 100 million 17-21 year olds in India, and six out of ten households have a child that was born in the post-liberalization era and has grown up with no guilt of consumption. Sales by Indian food service companies totalled Rs 350 billion in 2002. The organized sector is responsible for approximately Rs 20 billion worth of sales. Indian consumers spend only 2.4 percent of their food expenditure in hotels and restaurants (including on premises and take-out sales). American consumers, by comparison spend 46 percent of their food expenditure on awayfrom-home meals. These demographic numbers represent a young nation which has an increased propensity to spend in restaurant and other food service sectors.
Analysis of responses
An analysis of 165 responses out of 1100 questionnaire sent nationwide revealed some interesting statistics:
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z
A majority of respondents (53%) were restaurants that achieved an average check of between Rs 200 and Rs 400.
z
The total number of employees employed by 66% of the restaurants is under 40 with only 3% respondents employing more than 100 employees. The sample therefore represented midsize restaurants, which are a majority in the country.
z
With regards to questions on tip and sharing of tips, 83% of the respondents do not levy any service charge on the restaurant bill. In comparison, 77% of the respondents do not charge a service charge in banquets. A majority of the respondents (60%) have tip pools.
Emerging Food and Restaurant Trends
Some of the emerging culinary trends internationally include the popularity of health foods, use of fresh and authentic ingredients, acceptance of new fusion concepts and establishing of the chef entrepreneur. In India multinational restaurant chains had to make a downward price revision and offer more vegetarian toppings to increase sales volume. This led to a dramatic improvement in their performance. They are also adding more spicy items in their menus to satisfy Indian taste buds. International and domestic multi-unit restaurant groups are expected to drive the expansion in the restaurant industry in India. Among the leading trends in this regard would be the expansion of quick service Asian restaurants, fusion concepts, restaurants with a focus on entertainment, and ethnic and regional cuisine restaurants.
Restaurant Valuations and Feasibility Studies
There have been very few restaurant transactions that have taken place in India till date, largely because the restaurant business has not yet evolved into a mature business. However, we foresee a fair bit of activity in this area in the future: changes in market trends and competition, spurred by a huge expansion in the food service industry in all major metro cities, would cause many
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restaurants to change hands from one operator to the other. Restaurant valuation is a specialised art and appraisers of restaurant real estate normally consider three approaches to value: the cost approach, the sales comparison approach, and the income approach. Each approach has its own strengths and weaknesses, depending on the age and condition of the improvements and whether the building is occupied by an operating restaurant or is vacant. The cost approach is used to estimate the cost of purchasing a site suitable for restaurant development and building a restaurant on the site, including the cost of landscaping the site. The sales comparison approach considers recent sales of restaurant properties that are comparable to the subject restaurant property in location, size, and brand affiliation (if the restaurant was in operation at the time of sale). The income approach considers the actual or projected rental income that could be generated by a restaurant business occupying the building. A feasibility study is much more than a site-location study - this approach involves gathering and analysing a great deal of information, from demographics to design, which helps the operators make a better informed decision about the potential success of a specific concept at a certain location. In order to establish the feasibility of the proposed restaurant, one must first estimate the development costs of the project. By analysing both development cost figures and current market conditions, and by making adjustments for the specific characteristics attributed to the proposed restaurant (such as location, size, facilities, class and so forth), one will be able to derive an appropriate construction cost estimate for the restaurant. This investment has to be compared with the returns being indicated by the income and expense statement to evaluate whether or not the restaurant envisaged is financially feasible
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Restaurant Case Studies
Four real life case studies are presented with the attempt to highlight critical factors that determine the success or failure of a restaurant. For each case study, we interviewed the entrepreneur and asked him/her to identify the key lessons learnt in running a restaurant. We describe the experience of each entrepreneur, together with their perceptions of where they were right, or where they went wrong. Two case studies represent entrepreneurs who believed they had the right idea as well as the resources to make a success in the restaurant business, and they succeeded The other two cases highlight some of the factors that did not allow the restaurant to succeed and both of them had to close down. The studies give the factors, which led to the success of these enterprises
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CHAPTER 4
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4. Background & Scenario
Significant economic & demographic facts
India has arrived on the global roadmap. It is the only country that has experienced acceleration in growth rates of per capita income over the past decade. Almost all other economies have shown growth rates lower than India's through the decade. Also, India's per capita income growth over the past five years (1997-2002) has outperformed that of other developed and major Asian economies, save China. India's per capita income grew by about 19% in 1997-2002, second only to China, whose per capita income grew by 39% during this period. The only other emerging Asian country that compares with India's growth rates is Korea, which has grown around the same rate as India. Taiwan comes fourth with a growth rate of 13% during the period. During 1992-2002, India's per capita income grew by 46% - a rise of 980 basis points (9.8%) from the 36.5% growth rate observed during 1982-92. On the other hand, China has shown a decline in growth rate over the decade by as much as 700 basis points (7%). And countries such as Thailand and Hong Kong have seen a fall in growth rates by as high as 6,200 basis points (62%) and 5,100 basis points (51%) respectively. Increasing urbanization and rising disposable incomes are characteristics that are common across several emerging economies, particularly in Asia. However, the pace at which this has taken place in India in the last few years is likely to continue over the next decade and will outpace most other economies in the region. In particular, Merrill Lynch estimates growth in urban consumption at potentially 20% per annum in nominal terms (16% in real terms) for at least the next 5-7 year period. What explains this phenomenon? The answer lies in the demographic shift that is taking place in India. To put it simply, India is producing a much larger number of young people entering the job market compared to other Asian economies. The number of working-age adults in the country is rising at a fast pace. While this is true of China as well, the pace of increase is faster in India than in China. Thus, even with China's vigorous population policies, its per capita income growth is not rising as fast as India. The restaurant industry is an important component of our nation's economy, and employment
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opportunities in this sector should continue to grow in the future as a direct result of the demographic changes taking place. Indian consumers spend only 2.4 percent of their food expenditure in hotels and restaurants. American and British consumers, by comparison, spend 46 percent and 29 percent respectively, of their food expenditure on away-from-home meals. This indicates that there is significant scope for the growth of food service sector in India in the years to come. A number of factors are driving increased foodservice sales in India:
Growth in personal income- The increase in buying power of Indian consumers is driving
the growth in the foodservice sector. Apart from the growth in per capital income, as per figures given above, there are other important factors also contributing to this kind of consumption. Just 2.4 percent of Indian households earn 50% of India's GDP. The top 3.9 million households have an average household income of approximately $35,000 per annum. According to the National Council for Applied Economic Research (NCAER), as indicated in Table 4-1, high income households in urban India grew at over 21.5% on a compounded annual growth basis between 1995-96 and 1998-99.
Table 4-1 growth in per capita income by income classes
Income Class* Average Annual Growth in per capita income
(CAGR in %), 1995-96 to 1998-99 Urban Lower Lowermiddle Middle Uppermiddle High 9.9 21.5 8.6 14.3 9.3 18.6 0.9 5.3 7.7 7.8 5.6 6.6 -10.8 Rural -4.5 Tol -5.5
* Inflation adjusted, comparable over time
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Source: NCAER
The consuming classes consist of 40 million income-earners 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). Consumers are also migrating up the income chain - from the "have nothing" to the "have some" to the "have more" to the "have lots" and, finally, "have all". These numbers for different income groups are given in Table 4-2.
Table 4-2 No of Households by income classes
No of Househol ds 2 Million 10 Million 40 Million 100 Million 30 Million Have More Have Some Have Nothing 200 700 1,500 6,000 4,000 16,000 Have Lots 12,000 46,000 Have All Category Annual Monthly Income USD 30,000 Income Rs 115,000
Conversion rate of 1 USD = Rs 46 was used for this table.
Shrinking household size- The size of the Indian household has declined over the last few
years (from 5.9 people per household in 1990 to 5.5 people in 1998). The total number of
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households in India has increased by less than 3 percent per year from 1990 to 1998; however, the number of households in middle, upper and high-income segments has grown by 12% annually. Approximately 23.6 million households have been added to the high, upper and middle income segments of Indian consumers from 1990 to 1998. These households have higher disposable income per member and have a greater propensity to spend on food.
Urbanization- Most high income Indian consumers live in urban India. Approximately 50
percent of households in the high, upper and middle income groups reside in urban areas. Over one-third of urban Indian consumers reside in less than one percent of the total number of cities in India. The percentage of Indians living in cities has increased from 19.9 percent in 1980 to 30.5 percent in 2000.
Growing number of women in the workforceThe number of dual income households where both husband and wife work is increasing. Over 16 percent of the population of Indian women work full-time and spend most of their time away from home; this has been an important factor influencing the trend towards more meals away from home.
Emergence of the Liberalization ChildrenThere are a 100 million, 17-21 year olds in India, and six out of ten households have a "liberalization child" (Post 1991). This is a generation that was born in the post-liberalisation era and has grown up with no guilt about consumption.
The rise of the self employed- The proportion of self employed in urban India has risen to
above 40%, replacing the employed salary earner as the new "mainstream market". A Hansa Research Group study shows the even in the 'creamy layer', comprising the top two social classes in towns having a population of 10 lakh plus, in urban India, 40% of chief wage earners in
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households are shop owners, petty traders, businessman and self employed professionals. Unlike the salary earner, the self employed use products much more to signal success.
Menu diversification- High-income Indian consumers are seeking variety in their choice of
food. Urban Indian consumers are aware of various international cuisines (Continental, Chinese, Mexican, Italian, Thai and Japanese) and an increasing number are willing to try new foods.
Super Rich Defined
The Media Research Users Council (MRUC) undertook a study of the incomes and spending patterns of households and called it The IRS Platinum. The data collected was then analysed by the Communication Channel Planning (CCP) division of Initiative Media. IRS Platinum defines super rich as any household that has a colour television, refrigerator, washing machine and a car. The study was restricted to Mumbai, Delhi, Ahmedabad, Bangalore, Chennai, and Pune - the cities having a high proportion of households that satisfied the above criteria. These towns account for 39 percent of all the super rich households that reside in urban India today. It is interesting to note that metros such as Calcutta and Hyderabad are missing from the list. These cities would have definitely qualified by the normal demographic parameters. They missed out since the penetration of one or more of the listed durables was low in these otherwise large metros. A sample of 5,226 households was surveyed by ORG-MARG on behalf of MRUC to understand the lifestyles of the affluent, with media and consumer habits of such individuals and their households. Only 3.4 percent of the households in those six metros qualified to be included in the Platinum category. The average monthly household income (MHI) of a Platinum household is Rs 23,000. And, interestingly enough, every month, 60 percent of this amount is spent to maintain the life and style of the household.
Well-heeled Capital of India
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As per the study, every second Platinum household is in Delhi. Mumbai comes next, but the probability drops down to one out of five. It is true that today, Delhi is, by far, the city of the super rich of India. The city's Platinum households have an average income of Rs 24,450. Mumbai earns the highest (Rs 31,970) and Bangalore earns the least (Rs 20,180). The chief wage earner of the family is highly educated. In terms of occupation, he is predominantly a businessman in Mumbai, Chennai and Ahmedabad. In the other cities he is either an officer or an executive at a senior level. Moreover, eighty-eight per cent of Platinum households' adult members have a college-level degree. In these households the housewife is also highly educated (68 per cent are at least graduates). However, in spite of their high education, only 17 percent are working, either full-time or parttime. The average household size is 4.5, which reflects the nuclear structure of the families. 85 percent of this elite group has its own house and is gradually going in to buy its second TV set. Almost all the households in this group have a cable and satellite connection.
If you have it then spend it
The interesting part is the information that IRS Platinum provides on the monthly family expenditures. The patterns are indeed very revealing. On an average 61 percent of MHI is spent to maintain the life and style of these elite households. It rises to 69 percent in Ahmedabad and drops to 56 percent in Chennai. The expenditure is tracked across 20 heads ranging from the monthly electricity bill to the amount spent on last eating out. On an average, each head accounts for about 5 percent of the total expenditure. The highest amount goes for monthly provisions accounting for almost 17 percent of the total spend.
Chennai is the surprise package
At city level certain interesting patterns emerged. Chennai had the highest average monthly telephone bill. Its residents spend the maximum on personal care products as well as on cosmetics. Likewise, they spend the maximum while eating out, on alcohol and beverages, on buying gifts and also on charity and donations. Bangalore pays the highest monthly rents, and spends the highest among all cities on maintenance and on travelling and conveyance. In terms of occupation, it is the reflection of the Indian economy with 44 percent focussing on the manufacturing sector. Within this, engineering goods alone account for 8 percent of them.
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This is the largest skew across all the three sectors put together. Financial services including banks (5.5 per cent) and the current favorite, IT and software (4.2 per cent) stand out amongst the rest. In terms of their media habits, as expected, almost all the Platinum households can be easily reached through either the print or the television. Radio has lost out (25 percent), but of those tuning in, almost 90 percent are tuning into FM. However, unlike the West, predominantly they tune in at home. But the surprise package is Internet. It has already overtaken Radio (30 percent). Platinum households are spending more time on the Internet than on reading.
Number of Restaurants in India
It is difficult to assess the number of restaurants in India. They receive their licenses from the local municipal authority, which is mainly a licence from the point of view of health and hygiene. In certain bigger cities, there is also a requirement of a license from the local police for starting operations. Restaurant establishments in semi-urban and rural areas, which may also include road-side restaurants and dhabas on inter-city roads and highways, may not be possessing any license, from any authority. It is, therefore, difficult for anyone to compile statistics of all the restaurants in India. We believe that the best effort in this regard has been made in the government census. We have figures available from The Third Economic Census which was conducted in all cities/union territories except Jammu and Kashmir during 1990, along with the house listing operations of the 1991 population census. We have not been able to access the economic census which may have been done in 2000, as part of the population census of 2001. The economic census of 1990 divided hotel and restaurant enterprises in two categories, Own Account Enterprises (OAE) and Establishments (Estt). The figures of the two categories have been separately given for rural and urban areas. Table 2-3 reflects the break-up of hotel and restaurant establishments for rural and urban India. Table 2-4 reflects data relating to the statewise distribution of hotel and restaurant enterprises in the country.
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The eating out culture
Eating out has evolved into a popular trend among Platinum households. Two out of five such households eat out at least once a month. This is highest in Bangalore (43 percent) and lowest in Pune (33 percent). It is estimated that Indians spend Rs 350 billion annually on eating out. Moroever, of this Rs 350 billion, the organised sector accounts for only Rs 20 billion, suggesting a tremendous potential for growth in this area. An analysis of National Accounts Statistics data with regards to private final consumption figures (PFCE) reveals interesting insights as well. The national accounts provide disaggregated data for 37 consumption categories. Although the overall PFCE is available for 2001-02, the disaggregate data is available up to 2000-01. There were only nine PFCE segments that have recorded continuous high growth performance and include hotels and restaurants. Another survey that captures eating out habits is the Readership Survey. The survey helps in identifying certain trends as regards the use of restaurants and frequency of their use. The results indicated that Bangalore scored the highest in terms of the percentage of respondents eating out more than once a week followed by Kolkata and Chennai. On a broader level the all India average of respondents rarely eating out was 70%, once again indicating the potential that exists for the food service sector in the country in the years to come.
Table 4-3 Geographical Distribution of Hotel and Restaurant Enterprises
Own Account Enterpris Establishme State/UT Andhra Pradesh Arunachal 69,979 446 26,504 96,483 1,029 1,475
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es
nts
All
Pradesh Assam Bihar Delhi Goa Gujarat Haryana Himachal Pradesh Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh West Bengal Others Total 68,179 1,719 702,178 26,508 94,687 1,766 376,128 3,485 73,911 28,760 102,671 39,248 47,828 2,174 2,222 1,010 589 34,811 10,006 29,426 261 85,563 4,096 24,412 63,660 52,237 100,065 794 3,100 619 949 2,968 5,322 1,629 1,538 7,931 60,093 71,472 3,214 11,145 34,429 94,522 27,483 98,955 12,005 39,822 10,917 1,740 14,759 11,971 14,713 26,718 21,599 61,421 10,642 21,559 1,189 2,929
12,945 27,704 5,426 17,397
18,007 52,818 6,694 16,700 14,820 44,246 398 659
36,637 122,200 1,254 5,350
1,078,30
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“All great deeds and all great thoughts have a ridiculous beginning. Great works are often born on a street corner or in a restaurant's revolving door.”
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CHAPTER 5
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5. What is my Restaurant Worth?
This section examines how to value a restaurant business including its real estate and personal property. It may be noted that few restaurant transactions have taken place in India till date, largely because the restaurant business has not yet evolved into a mature business. However, we foresee a fair bit of activity in this area in the future: changes in market trends and competition, spurred by a huge expansion in the food service industry in all major metro cities, would cause many restaurants to change hands from one operator to the other. Another important factor affecting real estate and restaurant valuation in most developed countries is the presence of large, well-established chains whose financial statements and restaurant sales are accessible and therefore aid the valuation process immensely. We believe that the need for valuations will also be driven to a large extent by real estate investment trusts as and when they begin operating in the country, and a small percentage of their holding could be restaurant real estate.
Restaurant Valuation
Restaurant operators often need to know the approximate value of their restaurant business and/or real estate and personal property, even if they are not currently contemplating sale of the business. Knowledge of value becomes important for a variety of reasons. Some of the reasons include refinancing of the real estate; dissolution of a partnership or sale of stock representing a majority or minority interest in the business; insurance settlement after a fire or natural disaster; and settlement of an estate upon the death of an owner Restaurant value can be separated into at least three components, which include the value of the business (business enterprise value), the value of the personal property (furniture, fixtures, and equipment), and the value of the real estate. Real estate value can be broken down further to leased fee value (value to the landlord of the lease encumbering the property), leasehold value (the value of the tenant's interest in the lease), and the value of the simple ownership interest in the real estate. In the United States, approximately one-half of the restaurants occupy a leased building and land, and slightly less
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than one-half own the building and land. In India, the historical trend was that the majority of restaurants owned the building and land, but with the advent of large number of shopping malls in metro cities, this is fast changing.
Business Value of a Restaurant
The table below shows a statement of income and expenses for a hypothetical restaurant. In this example, the value of the leasehold interest in the real estate has been removed by subtracting rent paid to the landlord from income. The remaining earnings - before income taxes, depreciation and amortization (EBITDA) - equal Rs 1,930,000. This is the cash flow available to cover a return of and on the investment in personal property, and a return to the business component of the going concern value of the restaurant. The return requirements for the non-real property components are typically significantly higher than the return to the land and building. As the net income allocated to the personal property and business is received by the business owner after all occupancy costs have been paid, including rental income attributable to the land and improvements, the risk of the operator is significantly higher than that of the landlord.
Table 5-1 Statement of Income & Expense My Restaurant
SALES:
Amt
Gross
Food Beverage (alcoholic)
Total Sales
10,000,000 3,500,000 13,500,000 36,986 125 296
74% 26%
Sales per day Covers Per Day APC
COST OF SALES:
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Food Beverage (alcoholic) Total Cost of Sales GROSS PROFIT (Total Sale minus Cost of Sale)
3,500,000 1,050,000 4,550,000 8,950,000
35% 30% 34%
OPERATING EXPENSES: Salaries and Wages Direct Operating Expenses Music and Entertainment Advertising & Promotion Utility Services Repairs and Maintenance Administrative & General 270,000 540,000 270,000 540,000 2% 4% 2% 4% 2,025,000 1,080,000 15% 8%
Total Restaurant Operating Expenses Franchise/Management Fee Licenses Insurance 4,725,000 0 270,000 0 35% 0% 2% 0.0%
Income before Occupancy Costs 3,955,000 29%
Occupancy Costs Earnings before Taxes, Depreciation & Interest
2,025,000
15%
1,930,000
14%
The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. Put simply, it is the net operating income divided by the sales price or value of a
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property expressed as a percentage. Investors, lenders and appraisers use capitalization rates to estimate the purchase price for different type of income producing properties. A market cap rate is determined by evaluating the financial data of similar properties which have recently sold in a specific market. Capitalization rates for a restaurant operator's invested capital typically fall into one of three ranges: for an efficient, profitable operation with new equipment, good location, and expectations of strong annual growth in revenue, a capitalization rate of 13% to 19% is appropriate. Stable, mature restaurants with a track record of steady cash flows, but annual growth in sales attributable to inflationary menu price increases, may use cap rates ranging from 15% to 25%. Capitalization rates for restaurant businesses with declining revenue may range from 20% to 30% in order to cover the increased risk. The following table indicates the value range for the hypothetical restaurant business based on the three scenarios listed above. The values shown include the depreciated value of personal property, which must be subtracted from the total capitalized value to isolate the business value.
Table 5-2 Statement of Income & Expense
EBIDTA Capitalization Rate Optimistic Scenario (Growing) 1,930,000 16% = 9,190,476 = 12,062,500 = Value
Median Scenario 1,930,000 (Stable) Pessimistic Scenario (Declining) 1,930,000 27% 21%
= 7,148,148
The personal property within a restaurant consists of its furniture, fixtures, and equipment (FF&E). On average, restaurant equipment has a useful life of ten years. In the example above, we will assume that the original value of the furniture, fixtures, and equipment was Rs 20,00,000 and it is now seven years old, or 70% depreciated. On a straight-line basis, the value in use of
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this personal property would be: Rs20,00,000 x 70% = Rs 14,00,000, Rs12,062,500 Rs14,00,000= Rs10,662,500 depreciated value in use Subtracting the depreciated value in use of the furniture, fixtures, and equipment from the three values indicated in the table above, the value of the business ranges from Rs 5,748,148 to Rs 10,662,500. There are other variables to consider in the valuation of the restaurant business, such as the immediate need for capital improvements, which may also need to be deducted from the capitalized value of the business and personal property. This approach uses only one year of cash flow, which does not account for future variation in cash flow. However, the above method of valuing a restaurant business will give a "ball park" indication of value.
Estimating the Value of Land and Improvements
It is also important to value a restaurant's real estate and improvements, i.e., the building, landscaping, and parking lot. Restaurant improvements are typically designed to accommodate a specific concept or type of restaurant, and may require extensive remodeling to suit the needs of a different owner or tenant if the original restaurant operator vacates the property, even if the improvements continue to be used as a restaurant. The value of the improved site and restaurant building components may be higher or lower than the original cost to purchase and prepare the site and build a restaurant building, depending on the age of the improvements and whether the building is occupied by an operating restaurant business. Appraisers of restaurant real estate normally consider three approaches to value: the cost approach, the sales comparison approach, and the income approach. Each approach has its own strengths and weaknesses, depending on the age and condition of the improvements and whether the building is occupied by an operating restaurant or is vacant. The cost approach is used to estimate the cost of purchasing a site suitable for restaurant development and building a restaurant on the site, including the cost of landscaping the site. The sales comparison approach considers recent sales of restaurant properties that are comparable to the subject restaurant property in location, size, and brand affiliation (if the restaurant was in operation at the time of sale). Adjustments are made to the sales prices of the comparables to account for differences between the comparables and the subject property. The income approach considers the actual or projected rental income that could be generated by a restaurant business occupying the building.
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Cost Approach
The first method of valuing restaurant real estate presented is the cost approach. New restaurant buildings and the underlying land are often purchased by individual investors or REITs (Real Estate Investment Trusts) at a price that reflects the cost of purchasing a vacant parcel of land and constructing, and equipping, a chain-affiliated restaurant on the site. Investors often prefer chain-affiliated restaurants because chains have a track record of past success and ample financial data upon which the investor can base the decision to purchase. Typically, investors purchase restaurants in order to lease them to operators. These sale/leaseback transactions are considered financing vehicles, as opposed to "arm's-length" real estate sales transactions. The purchase price is negotiated based on the rate of return required by the investor and the amount of rent the operator of the restaurant business can afford to pay, based on the sales expected to be generated by the restaurant business operation. The price paid is an "investment value" rather than a "market value" because the terms of the purchase are tailored to meet the requirements of an individual investor, and are not necessarily a reflection of what a "willing buyer and willing seller" would agree to in an open market. Because a new restaurant building is usually designed with a specific concept in mind, it is appraised as a "going concern." The appraiser of restaurant real estate most often will provide the client with an opinion of the "value in use" of the property operating as a specific brand or concept. "Value in use" for a restaurant is based on the premise that the value of restaurant real estate is dependent on the restaurant business producing a revenue stream great enough to cover the return on capital invested in the land and improvements. Until such time that the restaurant operation reaches a stabilized level of revenue, the highest value indication, when a building is new, is often derived using the cost approach, and is identified in the industry as the "full value" of the land and building. After a restaurant property is four years old, the cost approach begins to lose its validity. Restaurant properties are purchased in the re-sale market for two main reasons including anticipation of rental income in the future to the owner of the property (rent to the landlord), and occupancy by an owner/operator of the restaurant. The income approach carries more weight than the cost approach for these properties.
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Sales Comparison Approach
A second method, the sales comparison approach, or market approach, attempts to value the subject restaurant real estate based on the selling prices of similar properties. This approach is the least reliable of the three valuation approaches when applied to restaurant real estate, because it is almost impossible to find a sale of a restaurant property that is truly comparable to a subject property. This is true even if the comparable's concept and chain-affiliation are the same as the subject property and the comparable is in the same geographical area as the subject property. Many subjective adjustments must be made to the sale prices of the comparable restaurants to arrive at an indication of value for the subject property. Typically, the appraiser makes adjustments to comparable sale prices for differences in conditions of sale, location, access, visibility, and volume of business generated by the restaurant compared to the subject property. However, it is very difficult, if not impossible, for the appraiser to truly identify the reasons, concerns or attractions that motivated the buyer and seller to make their purchase and sale
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decisions. This is the greatest weakness of the sales comparison approach. In addition, allocating the sale price between real estate, personal property, and business value is always problematic. Nevertheless, the sales comparison approach is used by appraisers to derive capitalization rates to be applied in the income approach to value, and to provide a range of values for the subject property that can be used as a test of reasonableness for the values indicated in the cost approach and the income approach. Allocations of sale prices are problematic because business value can make a significant difference in the sale price of an operating restaurant. For example, say that two identical fast food restaurant buildings (same square footage and seating capacity) are situated on plots of similar size in a city in USA in front of a neighborhood shopping center. One of the restaurant buildings is occupied by a McDonald's restaurant, and the other building is owned by an independent restaurant operator and is called "Smoking Pizza." The McDonald's property sells for $1,800,000 and the other property sells for $750,000. Assuming both restaurants are in operation at the time of sale, the sale price represents a "value in use," which may be higher or lower than the "market value" of the real estate if it were to become vacant. The difference in sale price may be attributed to business value over and above the value of the land, improvements, and FF&E (furniture, fixture and equipments). This is an important consideration in valuing restaurant property for ad valorem property tax purposes. An assessor is typically instructed to exclude business value so that only the value of the real estate, and in some states personal property, is taxed.
Income Approach
A third approach to valuing restaurant real estate is the income approach. In this approach, the appraiser assumes that the property is rented to the restaurant operator at market rent, even if the property is owned by the operator and no rent is paid. This assumption is made in order to isolate the income to the land and building from income attributable to the investment in furniture, fixtures and equipment (personal property), and the return to the restaurant operator for taking the risk of running a business (business value). The economics of the restaurant business dictate that an operator cannot pay more than 8% of gross revenue in occupancy costs and still have an
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adequate return of and on the investment in FF&E, and an equitable return on the capital invested in the operation of a restaurant business. Typically, rent on the land and building ranges from 7% to 10% of the gross sales of the restaurant for fast food or quick service restaurants. It could be slightly higher at 10% to 12% for more upmarket restaurants. There may be different variations but overall rent should be in this range if the restaurant operation is to be successful over the long term. There are exceptions to this range, as in the case of a food court in a retail mall. Percentage rent in a food court can be as high as 10%-15%, but this is mitigated by the large volume of customers generated by the mall retailers and the fact that the restaurant operates in a small space and shares a large dining area with the other operators in the food court. Valuing the land and building in use as a restaurant requires knowledge of market rent for similar type properties in the restaurant's neighborhood. If there is no lease encumbering the property, the appraiser assumes that the restaurant is leased at a market rent. If the property is encumbered by a long term lease at below market rent, with no additional rent based on a percentage of the restaurant's sales, the value of the land and building may be negatively impacted. If the operating restaurant is paying rent based on a minimum rent plus a percentage of gross sales, the income approach to value may indicate a value for the subject real estate, which is higher than the cost to buy the land and build a restaurant on it. On the other hand, if the restaurant has ceased operation and is no longer a going concern, the "going dark" value of the vacant restaurant building may be far lower than the "value in use" when the restaurant was in operation. When the income approach is used to value the land and improvements of a proposed restaurant, the value derived depends heavily on the projection of the restaurant's stabilized gross revenue estimated by the appraiser. Because the real estate's "value in use" is directly related to the potential revenue generated by the restaurant, the indication of value is only as reliable as the projected restaurant's food and beverage sales. The projection of stabilized gross sales can be estimated with relative confidence in the case of a chain-affiliated restaurant with a past operating history in multiple locations. However, projecting revenue for a new restaurant concept requires experience in the restaurant business supported by market research in the area where the restaurant is to be built. The combined "value in use" of the land and restaurant building can be approximated by capitalizing the net income stream that would flow to a hypothetical landlord, after the deduction
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of vacancy and credit loss, and management expenses, assuming the building and land is leased to the restaurant operator at market rent. The key determinant in calculating the value of the subject property is the selection of an appropriate capitalization rate.
Complex Valuation
After each of the three approaches to value has been considered, the appraiser reconciles the three indications of value, or range of values, to reach a conclusion of value for the subject property. The weight given to each approach to value may vary depending on many factors including the age of the improvements, whether the property is vacant or occupied, the length of time the restaurant has been in operation, the creditworthiness of the restaurant operator, and the availability of comparable sales of similar restaurant properties. In conclusion, the valuation of restaurant real estate and business value is complex and dependent on many variables.
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CHAPTER 6
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6. Conducting a Feasibility Study
As the costs of opening a restaurant and running it profitably continue to climb, restaurateurs need to be as certain as possible that the kind of operation they envision has a very good potential for success at a particular site. One way to find out is to conduct a feasibility study. A feasibility study is much more than a site-location study - this approach involves gathering and analysing a great deal of information, from demographics to design, which helps the operator make a better informed decision about the potential success of a specific concept at a certain location. To guide operators through this analysis, we have put together this section which offers a stepby-step process for market research techniques to determine whether a proposed site is suitable for a restaurant and, if so, which combination of restaurant characteristics offer the best chance for success. Obtaining the information is relatively easy, but turning it into conclusions about the site and restaurant concept is a much more difficult task. A restaurateur's judgement, personality and standards of excellence can make an enormous difference in whether a restaurant sinks or swims,
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and all of those qualities are difficult to measure.
Reasons for going into the restaurant business
Please tick off whichever of the following are the reasons you know will make you successful in the restaurant business.
z
I like food.
z
I make a great Biryani.
z
My parents always wanted me to be a great chef.
z
My spouse is a great cook and will be the chef.
z z z
I know someone named Querishi who will be my chef. I have this secret recipé I got from a restaurant in Europe. I know why other restaurants didn't make it. There's this restaurant down the street that went broke and the rent is only…. Most restaurants don't open for breakfast.
z z
z z z
I will specialize in (fill in the empty space). Everybody likes Mughlai (or insert your own cuisine choice) food. I will beat the competition with lower prices.
z z
Running a restaurant is no different from any other business. I grow special herbs in my garden.
z
I will not allow tipping.
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z
I was successful in an export business.
z
I took a Cordon Bleu course by correspondence.
If even a single one of the above reasons is your prime motivation for going into the restaurant business, you may be in trouble from the start. In a free enterprise society, it is anyone's right to go into business just as it is often their privilege to close up shop - sometimes in bankruptcy. One business where going broke is easier than any other is the restaurant business. Walk down any block in any reasonably large town in the United States or in Europe where the restaurant market is mature and where restaurants are likely to be and you will probably see one or more buildings with signs in the window proclaiming "Opening soon under new management" or "Closed for renovations". The chances are that, before those signs appeared, a restaurant operated unsuccessfully, and another one is going to open there soon. The restaurant business in most cities is spread so thinly that for any new restaurant to open, another one must have gone broke. However, there always seems to be another entrepreneur to take over and risk life savings in the restaurant business.
Investment cost
To put up a restaurant building on owned land can cost anywhere from Rs 1,00,00,000 to Rs 5,00,00,000. Even taking over leased premises, purchasing necessary restaurant equipment and furniture (FF&E), and making leasehold improvements can require as much as Rs 10,00,000 to 10,000,000. In our survey, the median amount spent of FF&E was Rs 20,00,000 with the median for total restaurant investment being Rs 45,00,000. If you have to finance 70% to 75% of that, the debt service charges (interest and repayment of principal) may put you in the poorhouse before you can start making a reasonable return on your own investment.
Return on investment
Successful restaurants, very successful ones, might make as much as 20 paise profit on each sale of one Rupee. A reasonably successful one might make 10 paise. The average restaurant that
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manages to survive might make 3 to 5 paise; but when that 3 to 5 paise is related to the amount of money the owner invested, it might end up being less than the amount that could have been earned in interest by leaving the money in the bank. And money in the bank requires no hard work, long hours, or high risk.
High risk
The risk in the restaurant business is high. In North America, about one-third of all restaurants in business today will turn over within a year. Within three years, 50% of them will be out of business. Only 20% will survive to their fifth anniversary. In India we are not so thinly spread at this point in time and there are a lot of opportunities for well-researched concepts.
The independent restaurant operator has even more of a struggle than the operator who is part of a chain or franchise. Also if you have a dream of owning your own restaurant and letting someone else run it for you, beware! More than one absentee owner has gone broke because he or she has allowed the manager to lose money. Other absentee owners think that the restaurant makes money out of liquor so the food operation doesn't matter. A liquor license is not a right to print money. For example, "salting the bar" is a classic rip-off by bartenders who bring in their own bottles of liquor, sell the contents, make no record of the sales, and pocket the cash. You will never know the difference if you are not around to see what's happening.
What kind of restaurant is for you?
One of the earliest decisions you are going to have to make is the type of restaurant you wish to operate.
1. Family or Commercial
Family restaurants in India are generally multicuisine type with a medium price range. If they have a liquor license, it is usually restricted to beer and wine. Décor is bright. Parking is a now a necessity since customers (the family unit) generally arrive by car. Price range of the menu items
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has to appeal to the average family income. Location is important as it should have proximity to a residential area or shopping complex. Operating hours are generally from noon to midnight. Staff are generally friendly and efficient, but not necessarily highly trained. Investment is medium to high.
2. Cafeteria
Cafeterias require large traffic volumes. Location is critical to encourage this volume. Shopping centers and office buildings are good locations. Self-service is typical in cafeterias with menus somewhat limited but covering soups, entrees, desserts, and beverages. Cafeterias often require large preparation areas. Staff are minimally trained. Beer and wine may be offered. Speed of service is essential to handle the traffic volume. Hours will depend on the location (for example, school, office building). There are some examples of these in Mumbai and Bangalore.
3. Gourmet
Gourmet restaurants generally require a higher investment than the others discussed so far. They require an ambience and décor that costs money. This type of restaurant caters to those who require a higher standard and are willing to pay for it. Success depends on establishing a reputation that will attract repeat business. Prices are higher because of the investment required and because of the reduced seat turnover. Food and beverage offerings must be carefully selected because of the clientele. A good variety of wines is essential. Staff must be highly trained. Even though the lunch trade is important to such restaurants, the evening period is often where the emphasis is placed, with leisurely dining an advertising feature.
4. Ethnic
Ethnic restaurants feature the foods of a specific region or country. Ethnic restaurants can run the gamut from family restaurants (e.g., Chinese) to gourmet (e.g., classical French) cuisine. Décor fitting the ethnic motif is important, as is menu design, staff uniforms, and training.
To be successful, ethnic restaurants must serve authentic food, which means food preparation
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staff must be well trained and knowledgeable. Price range can be from budget to elevated. Beer, wine, and liquor may or may not be served. Investment may be high because of décor and trained staff. Location can be variable, and the emphasis is on evening meals, although luncheon business with lower prices is not precluded.
5. Fast Food
In India, fast food restaurants have mushroomed in the past 20 years, in keeping with the greater mobility and changing lifestyles of the urban consumer. Franchising is prevalent in this type of restaurant. These restaurants can be eat-in or take-out, or a combination of both. The menu is limited, and prices are relatively low. You can choose one particular kind of food to feature. For example, ethnic food of one type or another can be sold in a fast food format. Because of low prices, a high traffic volume (pedestrian and / or automobile) is critical.
A fast food restaurant has to stay open long hours, and generally seven days a week. Alcoholic beverages are not usually offered. Staff training may not be highly critical unless it is a franchise operation where the franchisor generally sets standards of service and food quality that must be maintained at all times.
Your menu
The type of restaurant you plan to operate can dictate in part the type of menu you must have. This is particularly true of ethnic restaurants where the people you serve expect to see certain familiar items on the menu.
Commercial and family restaurants also tend to offer common items that customers expect. However, even in cases where your restaurant type dictates certain menu items, you still have flexibility in other menu items. For example, even a seafood restaurant has to offer alternatives such as chicken for those who are not seafood eaters.
1. General menu requirements
In general terms, your menu needs to be balanced, nutritious, and varied. This balance must also
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consider what your customers are likely to want, and not just what you think they should have.
Important aspects of menu composition are the texture, flavor, and color of food, complementary food items (potatos, vegetables, salad), garnishes, aroma, taste, and appearance. The way you put together all these tangible and intangible ingredients is going to decide, in large part, whether or not you will have customers.
2. Menu presentation
Your written or printed menu creates the first impression about what you offer, your range of offerings, and your selling prices. This may well attract customers into your restaurant; but it is the sense of satisfaction, of having received value for money from your food offerings, as well as the service received, that is going to bring customers back.
Keep this in mind when you choose your menu design, printing type, size, and colours. You want a menu that reflects the style and theme of your restaurant. For example, some smaller restaurants with menu items limited by season, availability, etc., find it easier to write the daily menu on a blackboard. This way, customers are not irritated by being told that an item they want is not available that day.
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3. Effect of menu on pre-opening decisions Your menu will affect a number of your major pre-opening decisions. Some of the more important ones are listed here.
1. Location
Your menu can dictate your location, and vice versa. For example, if you are going to open a Mediterranean restaurant, it might not work too well on a busy road. You might be wiser to consider locating it in an area where there is a large upwardly mobile population to draw on.
2. Building
Your menu can affect the size of building you require. A short-order take-out restaurant will require considerably less space than a sit-down restaurant. But even sit-down restaurants require different amounts of space.
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A cafeteria that has a limited menu may require less food preparation area than a gourmet restaurant with an extensive menu. This, in turn, affects seating area. A cafeteria may only require 10 to 12 square feet of seating area per customer, whereas a fancy dining room may require 15 to 20 square feet.
3. Equipment
Your menu directly affects your equipment needs and thus the investment required. Generally, the more extensive the menu, the more varied your equipment will need to be. If all you are selling is burgers, hot dogs, fries, and soft drinks, your equipment requirements are minimal compared to a restaurant with 20 or 30 menu items requiring a variety of different cooking methods and possibly even some specialized equipment.
If your investment budget is limited, you will probably have to simplify your menu to fit what you can afford to invest in equipment, furnishings, décor, and table settings.
4. Service
Your menu, combined with the type of restaurant you plan to run, usually dictates the level of service you will offer. In a cafeteria, or fast food take-out restaurant, the customers expect to provide their own pick-up service.
Thus, your menu has a direct impact on your labor cost. For example, fast food restaurants have menus that allow them to employ lower-skilled employees who are often hired at minimum wage, whereas a gourmet restaurant's menu will require employees who have more experience, knowledge, and skills in food preparation and table service and who expect to be compensated with higher pay.
5. Purchasing methods
Your menu has a direct impact on your purchasing requirements and practices. For example, if you plan to serve seafood, you must consider how each type of seafood is to be ordered. In other words what grade, size, and specific cut is needed? How will seafood be purchased (fresh or
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frozen), and how will they be stored before using?
6. Food cost
The largest single cost for a restaurant is the food. Your menu reflects directly on this cost. Food cost is the price you pay for food in relation to the price you sell it for. The ratio of food cost to retail sales is expressed as a percentage.
7. Alcoholic beverages
Finally, depending on the laws in your area and for your type of restaurant, your menu is going to dictate the kind of alcoholic beverages you serve. For some restaurants, this is not a problem. People do not generally expect to buy alcoholic beverages in a fast food, or deli, or limited menu restaurant. A fine dining restaurant on the other hand may require a fair variety of wines.
Finding a Site
Once you have settled on the type of restaurant you wish to have, the organizational form it will have, and the advisers you need, you need to seek out a suitable site. It is assumed that the general location of your restaurant has been selected. In other words, you have made a decision about the general area in which you wish to do business, and you are 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 restaurant's décor, menu, and prices to fit that site. The other alternative is to know in advance exactly what type of restaurant you want and find a site that fits.
a. Importance of site
Site selection can be critical. The objective in site selection is to find a spot that will bring in the greatest number of customers at the lowest cost to you. Sites are often selected because of their
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proximity to where the restaurant owner lives or because the premises happens to be vacant or the price attractive. Do not fall into this trap unless you have subjected the site to some suitability tests.
1. General suitability
A practical general rule is to select a site that suits the needs of the customers who are the market for your restaurant. You need to be sure of the specifics of the restaurant you are interested in to understand its particular site and market requirements.
2. Site specialists
If you are unfamiliar with the market requirements of your particular restaurant, you may want to use a site specialist. The services of site selection companies include analysis of population density, customer profiles, access and traffic flows, the drawing power of other restaurants in the area, visibility of restaurant and signs, the average sale you should have per square foot or seat, and the effect of any nearby competitors or potential new competitors. Note, though, that assessing a commercial site is both complex and tricky. It is more art than science, and even the specialists can go wrong.
b. Visibility, Accessibility and Suitability Three extremely important aspects of a good site are visibility, accessibility, and suitability. Each of these will be briefly discussed.
1. Visibility
Visibility of the restaurant may be more important to the customer who arrives at your front door by automobile than it is for the pedestrian, but even for the pedestrian it is important.
2. Accessibility
A second factor in site location is accessibility, again particularly for those arriving by
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automobile. An ideal situation is where flow in traffic and around the site reduces the effects of such things as right turn restrictions that prevent the motorist from easily approaching the restaurant.
3. Suitability
Even with good visibility and easy access, the suitability of the site is a critical factor. For many restaurants, the greatest site limitation is space for parking. The space required for parking is usually greater than that required for the building.
c. Downtown and shopping centers
You might also want to compare the pros and cons of a downtown location or a shopping centre or mall in the suburbs.
1. Central Business District (CBD)
In a Central Business District there are generally more potential customers than in a suburban area. However, what is critical is whether or not these potential customers can be part of your market. If not, then your market must be from people outside the area, in which case traffic and parking considerations are critical. Also, in a downtown area you can expect higher rent and operating costs.
2. Major shopping malls
Major shopping malls are distinguished from neighbourhood markets. Shopping malls serve communities of 50,000 to 500,000 people, and are generally between a 10-minute and 40-minute drive from residential areas.
3. Neighborhood Market
Neighborhood shopping centers serve local populations from 50,000 to 200,000 people and are either within walking distance, or a few minutes' drive, from the majority of the population. Your market is generally limited to those living in the immediate area and because parking is often a
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problem you may have to rely on the walk-in trade. Not all restaurants are suited to that.
Renting premises and equipment
As a restaurateur, chances are you will start your new business in leased or rented premises. The last thing you should consider doing when starting a new restaurant (unless you have a lot of money to invest) is buying land and/or an existing building. In fact, some money lenders will not lend to new restaurateurs for the purchase of such assets.
Generally, most first-time business owners invest far too much money in bricks and mortar (the building) when they should be leasing that asset, particularly in the early days. To a lesser degree the same is true of equipment and fixtures. It is in these early years that the risk is often the greatest, and you may not be able to afford the heavy debt load that owning land and / or a building and expensive equipment obliges. Even if you are investing your own money, you may want to keep some of it in reserve for meeting the losses in the first few months.
Advantages of leasing:
Some advantages of leasing are:
a.
Under a lease arrangement you have the obvious advantage of not having to provide capital to buy the property. Any capital that you might have is then available for investment elsewhere.
b.
Your borrowing power is freed up to raise money, if required, for more critical areas of the business.
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c.
Lease payments on a building are generally fully tax deductible. .
Any leasehold improvements that you make to the building are generally amortized over the life of the lease rather than over the life of the building. The lease period is normally less than the building life, thereby providing a tax saving?
Disadvantages of leasing:
Some disadvantages of leasing are:
a.
In a lease arrangement, any capital gain in the assets accrues to the landlord and not to you. In a similar way, at the expiry of the lease, the value of the future profit of the business that you have worked hard to build up does not benefit you unless the lease is renewed.
b. The cost of a lease may be higher than some other form of financing.
c.
It may also be more difficult for you to borrow money with leased premises if there are no assets (other than a lease agreement) to pledge as collateral.
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Market analysis
Every restaurant must be concerned with its market. The word "market" is defined in terms of people, their money, and their desire to exchange it for your food and service. A restaurant's market is generally limited to a particular area (e.g., an area or a city), and it may be further limited by such things as competition and customers' preferences. Market analysis is based on the assumption that your restaurant must be developed around the customers' wants and needs in order to satisfy those customers. Customers are, therefore, the reason for being in business.
a. Market Analysis
Before you open a new restaurant, have a survey done. This survey will ultimately serve to determine if your sales goal can be met, and it will aid in your financial planning. For a large restaurant, you may need to use a specialist in market research to provide you with pertinent market information and to develop a specific market forecast and action plan to serve that market.
b. Market Research
In other cases, in-depth market research may be necessary to support your sales projections, to demonstrate that there is a large enough market to provide you with sufficient customers, and to show potential lenders that your sales projections are realistic.
1. Identify your trading area
In market research, you need to define your restaurant's trading area. The definition of your trading area will show you how many people live and / or work within it. That does not mean these people will all be customers of your restaurant. Only a certain proportion of them are potential restaurant customers, and because of competition from other restaurants in your trading
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area you can only expect to obtain a share of that market.
2. Analyses the competition
For example, if a trading area with a target population of 50,000 can only support two restaurants of your kind, and there are already two in the business, you would have to seriously consider whether a third could survive. Alternatively, if the two already there are surviving only marginally because of poor management or other reasons, you could possibly move in and take away sufficient business to thrive.
3. Research the demographics
In addition to knowing the boundaries of your normal trading area, you also need to know as much as possible about the demographics of the people living and / or working there. Demographics are statistical information about people such as their age, sex, marital status, average family size, average household income, education levels, ethnic origin, and average annual spending on dining out.
If your restaurant is going to cater to the business clientele, then your demographic research must investigate such things as business hours, number of employees working in the area, and the dining pattern of those employees. For example, do they bring their own meals with them, eat at company cafeterias, or patronize local restaurants?
4. Find a gap If you find that you are going to be competing in a market that is successfully filled by other restaurants, you may have a problem. It is best if you can find a gap that is not being filled by others. Ask yourself what unique menu items or services you can offer that differ from what others are offering.
c. Market Segment
These questions are very broad in nature and need to be refined to produce more specific information that allows market segmentation. In other words, it is unlikely an individual
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restaurant will sell to a broad range of possible users or customers.
The product that you sell has a major impact in determining who your customers will be. For example, a gourmet restaurant will be patronized by a narrower segment of the market than a fast food restaurant.
1. Quality
Quality of food plays an important role. A standard commercial or family restaurant will cater to a different segment of the population than a restaurant appealing to a specific ethnic group or a health-conscious clientele.
2. Price
Price is also a factor in market segmentation and can, to a degree, dictate the market segment you are dealing with. But price alone may not be the only significant factor. A special segment of the market will pay a higher price for similar menu items if the service in the restaurant is better or if it comes with a reputed brand name. Sometimes if a hype is created, the same results can also be achieved. On the other hand, another segment of the market looks first for low prices and is less concerned about quality.
3. Competition
The existing competition may also dictate the market segment that you must concentrate on. For example, if your choice of location for a Mexican food restaurant is an area already well served by firmly established Mexican food restaurants, you may have to change your thinking.
d. Potential sales volume
The main purpose of this market analysis is to establish your potential sales volume. This will become the forecast for your initial income statements.
One way to do this is to convert a percent of your traffic count or trading area population into potential sales. For example, if 2,600 shoppers visit your planned location in the mall you might
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estimate that 5% of them could be customers for your restaurant and 5% x 2,600 = 130.
Your projected sale will have to be above your projected break-even sale point, which will be dependent on your investment and your monthly fixed and variable costs. If it is not, you may have to do your sums all over again. Or in some cases change your concept or drop the project all together.
The Competitive Market
An integral component of a market area's supply and demand relationship that has a direct impact on the performance is the current and anticipated supply of competitive restaurant facilities. To evaluate an area's competitive environment, the following steps should be taken:
z
Identify the area's restaurant facilities and determine which are directly and indirectly competitive with your restaurant.
z
Determine whether additional restaurants (net of attrition) will enter the market in the foreseeable future.
z
Quantify the number of existing and proposed restaurants available in the market.
z
Review the average per cover, number of covers, market orientation, facilities and amenities of each competitor.
This analysis will help calculate the total current market size in terms of number of people eating out in the area at each price point. As your restaurant is expected to compete with them for market share, based on your unique features and competitive strength, you need to calculate your restaurants penetration over its fair market share in order to arrive at the possible sales volume for the restaurant.
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Financial plan
Before you venture into the restaurant business, you need a financial plan. You use a financial plan just like a map when travelling by car; it helps you get where you want to go. A properly prepared plan will guide you in operating your restaurant and help you allocate your resources effectively and profitably; moreover it will allow you to raise the necessary funds to operate your restaurant successfully.
A combined market and financial plan (often referred to as a feasibility study or a project report by professionals who prepare them) is an in-depth analysis of the operational and financial feasibility of a new restaurant, rather than an entrepreneur's guess that a new restaurant will be economically viable.
A feasibility study, or plan, is not designed to prove that a new venture will be profitable. An independent plan professionally prepared by an impartial third party could result in either a positive or a negative recommendation. If you prepare your own plan, you should take the same hard approach. If the forecast results are negative, both you and any potential lenders of funds for your new restaurant should be happy the idea goes no further.
However, even if the forecast is positive, it is not a guarantee of success. A plan can only consider what is known at present and what may happen in the future. Since the future is impossible to forecast with absolute accuracy, and since so many unforeseen factors can come into play, there can be no guarantees.
In other words, a plan may reduce the risk of a particular new venture, but it does not eliminate that risk. Your completed market research results will form the foundation for your financial plan.
Financial Analysis
In a formal feasibility study for a major restaurant, you might need much more detail than has
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been suggested so far. In fact, the financial analysis section of a feasibility study is usually broken down into the following subsections:
a.
Capital investment required and tentative financing plan +
b.
Projected income statements for at least the first year and for as far ahead as five years
c. Projected cash flow statement for at least the first year and for as far ahead as five years
d. An evaluation of the financial projections and the economic viability of the new restaurant.
Since the preparation of the financial analysis can be a fairly complex matter that requires the expertise of someone with an accounting background, it is recommended that you use a professional consultant or accountant. Also, lenders from whom you wish to borrow money are more likely to be convinced to part with that money if the feasibility study is professionally prepared.
Finally, if the financial projections made by an impartial third party appear to be negative, it is better that you know this now rather than two or three years down the road after your restaurant is bankrupt.
Forecast of Income and Expense
In forecasting revenues and expenses for the restaurant, you need to identify your fixed and variable costs. The fixed component is adjusted only for inflation, while the variable component is also adjusted for the percentage change between the facility usage that produced the known level of revenue or expense.
Food & Beverage Revenue
Food and beverage revenue is generated by the restaurant and bar. Food sales also include the sale of coffee, tea, milk and fruit juices, which usually are served as part of a meal. If there is no
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service of liquor, beer or wines, the soft drink sales also would be included in this category. A beverage sale includes revenue from the sale of wine, spirits, liqueurs, and beer. These sales do not include coffee, tea, milk, or fruit juices, which normally are served with meals and, therefore, are considered food. In order to forecast the projected guest count visiting the restaurant you need to divide the week into weekdays, which include Monday to Thursday and weekend, which comprises of Friday, Saturday and Sunday. Your interviews with existing restaurant owners in the area will indicate the trends and the busiest days in the week. The guest count in restaurant parlance is called covers and the average per cover (APC) is simply the total sales divided by the number of guests. It is different from the number of seats in the restaurant. If the restaurant has 50 seats and serves 100 guests at lunch time because on the average every seat is used twice over, then it would have had 100 covers for lunch.
The sales forecast for the first few months may fluctuate either because it takes time for people to realise that the restaurant is open or because a large number of people are attracted to a new restaurant. 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 curiosity of customers. The forecasts for the first few months may seldom work out as per the plan.
Salaries and wages
This category includes the regular salaries and wages, extra wages, overtime, vacation pay and any commission or bonus payments made to employees. The entire restaurant payroll generally is included under this category.
Employee benefits
This category includes retirement and health insurance. Other items considered to be benefits are welfare plan payments, pension, accident and health insurance premiums, hospitalization and group insurance premiums. Also listed under employee benefits are education expenses, employee parties, employee sports activities, awards and prizes, and transportation and housing. We have assumed all employee benefits to be covered under Salaries and Wages. The employee benefit costs may also be greater for larger chain restaurants as they tend to have more rules
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abiding and generous HR practices.
Direct operating expenses
Expenses directly involved in providing service to the customer, such as uniforms, laundry, linen, china, and cleaning and paper supplies, are considered operating expenses. Also included are utensils, kitchen fuel, menus and drink lists, flowers and decorations, contract cleaning, auto or truck expense, parking, and licenses and permits.
Advertising & Promotion
This group of expenses includes selling and promotion expenses, such as direct mail and entertainment costs in promotion of business (including gratis meals to customers). Also, the cost of advertising through newspapers, magazines or trade journals, outdoor signs, and radio and television is included. Public relations and publicity (including fees and commissions to advertising or promotional agencies) and royalties are included in this category.
Utility services
This section is composed of the costs of all fuel except that charged to direct operating expenses in the account "kitchen fuel." Water, ice and refrigeration supplies, and the removal of waste are also included. The cost of oils, boiler compound, fuses, grease and other supplies, plus any small tools used in the operation or maintenance of the mechanical and electrical equipment, should also be charged to this account.
Repairs and maintenance
The following items constitute repair and maintenance expenses: painting and decorating; plastering; upholstering; m e n d i n g curtains; and maintenance contracts on elevators, signs and office machinery. Repairs to dining room furniture, refrigeration, air conditioning, building, floors, plumbing and heating are charged to this category as well. Repairs to dishwashing and sanitation equipment, kitchen equipment and office equipment are also included here.
Administrative and General Expenses
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This group of expenses is commonly considered as overhead and includes items that are necessary to the operation of the business rather than those connected directly with the service and comfort of the customer. This account should be charged with the cost of all printed matter not devoted to advertising and promotion, such as accounting forms, account books, restaurant checks, office supplies, cash register and other checking supplies, letterheads, bills and envelopes. All postage, except amounts applicable to advertising, should be charged here. The cost of telephone equipment rental, local and long-distance calls should be charged to this account, with the exception of calls chargeable to marketing. Other items charged to this account are data processing costs, dues and subscriptions and insurance costs (other than those included as employee benefits or fire and extended coverage on the premises and contents). Commissions on credit card charges collection fees, cash shortages, professional dues and protective services are also considered general and administrative expenses.
Restaurant occupancy costs
Rent, taxes and property insurance are occupancy costs. These are sometimes called "fixed charges", since they usually are determined by the financial set-up of the restaurant and usually not by the trend of its business.
Feasibility Analysis
In order to establish the feasibility of the proposed restaurant, you first must estimate the development costs of the project. By analysing both development cost figures and current market conditions, and by making adjustments for the specific characteristics attributed to the proposed restaurant (such as location, size, facilities, and class and so forth), you will be able to derive an appropriate construction or setting up cost estimate for the restaurant. This investment has to be compared with the returns being indicated by the income and expense statement to evaluate whether or not the restaurant envisaged is financially feasible.
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CHAPTER 7
7. The National Restaurant Association of India (NRAI)
The National Restaurant Association of India (NRAI) was set up in 1982 and is the leading association for stand alone and chain restaurants. We offer Individual and Corporate membership for all the restaurants. The association is headed by its President Mr. Samir Kuckreja, and two Vice President Mr. Vipin Luthra, MD the Palms and Country Club and Mr.Rajeev Panjawani CEO Travel Food Services, with other prominent members from leading individual domestic and international restaurant chains. Headquartered in Delhi, we have a Pan India presence with over 1000 members in 20 different states. The aim of our association is to represent, educate and promote exclusively the independent restaurant owners and operators in India. We also represent
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and lobby for the restaurant industry on various issues with the State and Central Government departments. We conduct regular training programmes for our members.
Objectives
?
To promote, encourage, support and execute schemes for the maintenance of high standard in restaurants.
?
To encourage ethical methods and practices in the restaurant industry.
?
To provide an institutional forum for education & training of the members.
?
To liaison with various local, state and central government about problems/issues that are being faced by our members.
Achievements
?
2011: Withdrawal of levy on prepared food products in restaurants by Union Government
?
Successfully got the extension of MCD/NDMC Health License and Police License from 1 year to 3 years for Delhi restaurants welfare . April 2008.
?
Favorable decision given by the Delhi High Court against the applicability of MRP provision in the Standards of Weight & Measures rules at restaurants in March 2007.
?
NRAI petition against the increasing license fees by music societies PPL (Phonographic Performance Limited) & IPRS (Indian Performing Rights Society) – pending in High Court. However the High Court has ordered for holding special events, the music societies would not charge from the petitioners more than 15% on the rates prevalent prior to Sep
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2005.
?
Got approval on the extension of restaurant timing from 12 a.m. to 1 a.m. both by Excise and Police department in Delhi in Oct 2004
?
Obtained exemption from the Delhi Pollution Control Committee for small restaurants who do not have the full fledged food processing units in July 2004.
?
Benefit
of
duty
free
import
of
liquors/alcoholic
beverages/capital goods extended to stand alone restaurants at 10% of the foreign exchange earnings of the preceding financial year in 2004.
WHITE PAPER INITIATIVE
NRAI has released the WHITE PAPER on Restaurant Industry on May 1, 2010, along with Mindscape (research division of Technopak). This is the first extensive national level research/study on the organized restaurant business in India. The paper will be used to aid in creating national awareness about the industry, provide a fact-based support to industry needs and can be used by industry leaders to influence government policy.
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CHAPTER 8
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8. The Service Tax Confusion
In the 2013 budget, the finance minister announced that all AC restaurants will be liable to pay service tax. 40% of the bill value will be assumed to be for service and service tax of 12.36% would be applicable on 40% of the bill value. So technically, a service tax component of 4.944% will need to be added to the bill value. If 40% of the bill value was for service, then shouldn't the VAT be applicable only on 60% of the bill value? But No - customers will have to pay VAT on
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100%
of
the
bill
value
and
then
service
tax
on
40%
of
the
bill
value.
For most restaurants, which add tax (VAT of 14.5%) as a separate component this is not too difficult to administer. Their bill will now look like this:
For restaurants which charge a service charge (now a common practice atleast in casual dining/fine dining restaurants), they will charge the service tax of 12.36% on this service charge amount, plus charge service tax on 40% of the bill value.
So for a customer, the bill value will go up by about 5%. For the restaurants, this may work out well as they can charge the customer this additional service tax, plus claim inputs credits. Most restaurants now pay service tax on the rental. They can now claim some input credit for this. So this may not necessarily be a bad things for restaurants and my assessment is that customers will get used to paying this 5% additional tax.The only impact could be a macro-level reduction in consumption - i.e. consumers reduce their eating out frequency owing to the higher costs. I believe that this will only be ashort term behaviour.
For restaurants on the composite tax model, this will get a little more complicated and the government has not clarified how the service tax levy will work. The easiest way to do this would be for the government to say that the composite tax would now be increased by 40% - i.e. if it is 4% now, the new composite tax will be 5.6% out of which, 4% will be the VAT payable and the remaining 1.6% will be the service tax payable. It will be good to get a clarification on this.
I'm back
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My blog train got derailed a little bit over the last 2 months. While I can think of several reasons for my temporary pause in writing posts on my blog, the honest reason is simply laziness. It took emails from about a dozen readers enquiring if all was well and why I had stopped blogging, to wake me up from my slumber. With my post on the impact of inflation and increase in various input costs, I am hoping to restart posting regularly. Hope I don't doze off again.
PS: The pic above is from the telugu movie "Eega" (dubbed in hindi as "Makkhi" and also in several other languages). This is one of those movies I really enjoyed watching.
Impact of increasing food costs on the restaurant business
Over the last 3-4 years, food costs have consistently been spiralling upwards. Most food items
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are now atleast 15-20% more expensive than they were 3-4 years ago, with a number of products almost at double the prices (e.g. Paneer - I remember having bought Milky Mist Paneer at Rs.95/kg at Metro in early 2009. Today the price of the same is Rs.185). Same story with good quality branded ghee and several other products.
The impact of such high increases is severe on the restaurant business, especially the value for money affordable food joints. Let's assume a local north Indian joint. If the cost of the raw materials for a curry was 38 bucks earlier, the joint could price the item at around 100 bucks. The net sale price would be 96 bucks (after taking out 4% VAT). So the food cost would be 40%. Now if the cost of the raw materials go up by about 20% = 45 bucks. To maintain the food cost @ 40%, the new selling price would need to be 117 bucks. Now it would not be easy for the affordable food joint owner to suddenly increase prices by 17-20 bucks. This is just for a 20% increase in the cost of the raw materials. Given the prices have gone up by over 40% on an average, the local affordable & VFM food joints are no doubt in trouble.
What do I foresee for the industry in the next year?
I can see a lot of the VFM affordable businesses struggling to stay alive. The market will slowly start accepting increased prices, but a lot of the businesses may not be able to hold on till that happens. This is because of the high increase in the food costs, plus an equally high increase in labour costs. Rentals, utilities etc. have also been very high, but even there the increases over the last 3-4 years have been significant (e.g. LPG cylinders now sell at 1700 bucks. 4 years ago the prices were at the 800 bucks level). Most businesses can absorb high cost increases in one or two of the key factors. Today, all the cost factors are coming into play, and the prices can only be increased by so much and may offset one or two of the factors.
The ones who manage to stay afloat?
The businesses which manage to survive and sustain longer should be able to grab a larger share of the customer's wallet. While the increased sales will not lead to increased profits, it should
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help offset the increased cost of all the input factors.
So all the affordable VFM food joints need to get their seat belts on and survive the turbulence. As the famous dialogue in "The Dark Knight", the night is darkest just before the dawn. I sure hope that this is true for the restaurant business in India.
A big heartfelt thanks to all of you for getting this blog to cross a significant blogging milestone 100,000 page views. This gives me the energy and motivation needed to continue posting content that will hopefully be useful.
The Birth of Resto Fund: Your Opportunity to Run a Small Pizza Restaurant in Bangalore
This is not one of my typical blogposts, giving some gyan about the Restaurant business. This is
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about a rare opportunity for a passionate individual/team to set-up and run a small Pizza focused Restaurant/Cafe in Bangalore, thanks to the generosity of some well-heeled gentlemen, through an experimental initiative called "The RestoFund" to financially support passionate folks to become Restaurant Business Entrepreneurs. Here is a quick summary of the first opportunity offered through the RestoFund:
What you will get?
1) A 400 sft space on the ground floor in a prime location in Bangalore 2) Interiors, Furniture & Fixtures, the way you want it 3) All kitchen equipment needed for you to run a small Pizza & Ice-Cream joint including a fancy big Pizza oven 4) All statutory approvals needed to run a cafe/restaurant 4) Reasonable support to set-up and run your business both financially & operationally 5) All the money you need for doing the above (You are not dreaming), including a small fixed salary to support you financially coupled with an aggressive profit share
What do you need to bring to the table?
1) Currently based in Bangalore 2) Strong passion for running a small restaurant/cafe 2) Willingness to spend the time and effort required to make the business a successful one 3) Strong interest in cooking with some experience making Pizzas and Baking. If you are chef/cook in a restaurant/hotel currently, that would be a huge plus 4) High energy levels and an ability to convince us that you are right person for us to invest in
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How critical are the Interiors for a Restaurant?
Most people would agree that it is reasonably important. My assessment is that it is actually very critical – much more critical than you can imagine. Again the exact look and feel would vary depending on your concept and your price-point. The trouble with interiors is that getting a great look is very difficult and is not really dependent on the amount of money you spend.
As an analogy, I have seen several of my friends buying an apartment for 50-60 lakhs, paying about 5-8 lakhs additional towards VAT, Service Tax, Registration, Khata etc. But most of them spend as little as possible on the interiors (say 3-4 lakhs). I have a complete contra view on this. My recommendation would be that you spend a large amount of money on interiors, because that will determine your quality of life in the house you buy. If your overall budget is 60 lakhs, you should spend about 20% of the budget (about 12 lakhs) on the interiors.
On the same note, when you are starting a restaurant, be prepared to spend atleast a reasonable amount of money on the interiors. This is what your customers will see, use and end up making an assessment of your business on. Getting the right look, feel and ambience for a restaurant without spending a lot of money is not an easy task. You will need a good interior designer who can give you ideas after understanding your concept. A lot of times, I have noticed that interior designers opt for solutions that they are comfortable with and ones they have executed in the past. Eg. Most interior designers will push for a false ceiling with lights embedded into the false ceiling. While this gives a “No Nonsense” look to the restaurant, it reduces the height of your
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restaurant and may make the place look smaller. Creating a great look without doing false ceilings is tougher and the final outcome is a little bit of an unknown. Similarly, on the wall paneling. Most interior designers will push for a plywood based panel with laminate covering. It is possible to create a better effect with paint on the wall – again this is tougher, the final outcome may be an unknown and getting access to the right labour may be difficult for the interior designer. If you go and see a few places that the interior designer has done already, you will notice that most of them will follow a similar pattern. Eg. One interior designer may use glass extensively, another may use laminate based paneling extensively. In my experience, pushing a interior designer out of his/her comfort zone is not easy. Whatever ideas you talk about, the final design will boil down to something that they are comfortable doing.
So to find a good interior designer who will deliver what you are expecting, you will need to go and take a look at few of the interior works the designer has completed recently. If the theme fits what you have in mind, sign up the designer. There are several components that are part of the Restaurant Interiors. I will use the use the next several posts to detail out each of the components:
1) Furniture - Tables & Chairs 2) Lighting Works 3) Restaurant Entry Area 4) Walls & Ceilings 5) Flooring 6) Operations Related Stuff - Cash Counter, Hostess, Waiting Area, Side Stations etc. 7) Air Conditioning 8) Kitchen Entry Area 9) Blinds/Curtains 10) Painting Works 11) Rest Room & Wash Area
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TOP 10 RESTAURANT’S OF INDIA
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CHAPTER 9
9. Restaurant Case Studies
Introduction
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In this section we present four real life case studies in an attempt to highlight critical factors that determine the success or failure of a restaurant. For each case study, we interviewed the entrepreneur and asked him/her to identify the key lessons learnt in running the restaurant.
Below, we describe the experience of each entrepreneur, together with their perceptions of where they were right, or where they went wrong.
CASE STUDY 1
A restaurant which closed down
This restaurant was opened in Delhi by an entrepreneur who is about 50 years old. He worked in the hospitality industry for 25 years, his entire working career. Initially, he worked in a few family-owned restaurants based in Lebanon, Cyprus and England for about 8 - 10 years. After returning to India, he worked in the five-star hotel segment, both at the hotel and corporate level, reaching 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 restaurant of his own in November 2002.
Restaurant and Facilities
The restaurant was located in Connaught Place in New Delhi, the oldest and most prominent commercial area in the capital city. He rented the ground floor premises of a building, paying Rs 2 lakh as monthly rent for 2700 square feet of area. The restaurant had 120 seats and provided a mixed cuisine including Indian, Chinese and Continental. It was targeted at an upmarket clientele, served lunch and dinner, and had average cover revenues of Rs 120. The restaurant did not have a bar license and did not acquire one before the restaurant closed down. Apart from rent, there were fixed monthly expenses of about Rs 1.5 lakh on items like wages, electricity, water, telephone and so forth. Taking into account all variable expenses, the break-even point was determined at a sales volume of Rs 12,750 per day.
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The restaurant started well and achieved average daily sales of about Rs 15,000 during the period between November 2002 and February 2003. However, sales soon started to decline, reducing to an average daily figure Rs 5,000 in the months May-July 2003. The entrepreneur had the operation evaluated by a financial consultant and, based on the consultant's advice and own judgement, closed the restaurant in August 2003, 10 months after opening. He has not considered re-opening it at any other location, and has returned to being a consultant.
The restaurant had initial investments of Rs 40 lakh in décor, equipment and so forth. The entrepreneur also had a partner, a much younger person, who contributed Rs 5 lakh as equity. Both persons worked full-time on the venture, and were 'on the job' from 7 a.m. to 11 p.m. Taking into account the pre-opening expenses and financial considerations (bribes) and recurring losses to different government authorities, the two partners lost about Rs 60 lakh in their venture.
Reasons for failure
Mentioned below are reasons why the restaurant failed, based on the version provided by the main entrepreneur and our own analysis.
1. Soon after the restaurant opened, the Delhi Metro project was commenced in Connaught Place (CP), resulting in a lot of digging and disruption. The project forced traffic diversion within the CP area, and restricted the space available for parking. Lack of parking space around the restaurant became a very severe constraint. This prevented upmarket customers from coming to the restaurant by car. We feel that the entrepreneur could have known this in advance. The plan for the Delhi Metro was known before he opened the restaurant, and it was also known that the project would affect the CP area sooner or later.
Moreover, the CP area has suffered traffic congestion and parking-related problems for many years now, and these problems are known to the public. It is also known that some of the other traditional restaurants in this area have been losing sales over the last few years and some have closed down recently. Also, there are a large number of restaurants in CP and many offer cuisine similar to that offered by the subject restaurant. At the same time, it is also true that new food
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outlets continue to open in the area, but many of recent entrants are branded restaurants, and mostly in fast food.
2. The entrepreneur feels that, because of parking problems and other factors, CP has become downmarket as a location for restaurants. Although there are upmarket customers at lunch time, these are few in number; the majority of persons lunching in CP are middle to junior-level professionals. Also, many of the customers that visit CP's restaurants from elsewhere come by buses, and are obviously low spenders. Their average spend tends to range between Rs 35 to Rs 50 per cover, and hence they often prefer snacks over full meals. It is known that fast food restaurants and ice-cream parlours are doing very well in the CP area, compared to fine dining restaurants.
3.
We also feel that the entrepreneur should have, or could have, studied his market better. A
survey of existing establishments should have been done, as also a detailed study of the customer profile. Having been in the industry for a number of years and with wide contacts, he could have had access to restaurant owners and managers in the CP area. He mainly went by his own view that CP is a large commercial area and is visited by a large number of upmarket shoppers. He should have commissioned a professional feasibility study for his project.
4.
The entrepreneur himself says that he could have, instead, taken up space in a residential
shopping center in Delhi, or in one of the shopping malls or multiplexes in neighbouring Gurgaon or Noida. He also feels that he paid too much rent and could have taken a much cheaper place at another location. The high fixed cost led to early failure and closing of the restaurant. 5. Considering his costs and other factors, the entrepreneur believes the main reason for his failure 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 particularly so after the commencement of the Delhi Metrorelated work. The entrepreneur's experience brings to mind a saying oft-repeated by teachers, trainers and consultants to the hospitality/foodservice industry: the first three requirements for the success of a hospitality enterprise are location, location and location.
6.
He is bitter about having to bribe government departments, saying that he paid about Rs 4
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lakh through various channels to get started. 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 entrepreneurs know about it.
7.
The entrepreneur also feels that he spent extra on everything: the décor need not have been
so fancy; he need not have hired such expensive, qualified staff, but should have settled for lower wages at all levels. His head chef came from a five-star deluxe hotel. Having been used to fivestar set ups in his career, his ideas of suitable salary for the manager and staff were also inflated. Moreover, he feels that he bought too much inventory rather than buying for the shortest time period possible. He was left with a lot of inventory of dry items after he closed.
8.
He also did not have enough or perhaps no financial backup; having spent the money he
could afford in the first instance. Whatever backup he had was put into the enterprise when losses started. He reached a stage where he could not fund the losses and was forced to close down.
What are the lessons to be learnt from this case study? It is the usual scenario of going by hype and being convinced that "I know best". There was lack of study and market research. It was also a classical case of spending too much and being confident of success. The entrepreneur did not imagine that sales would go down so soon after opening and he would need to put in more money, which he eventually did not have
CASE STUDY 2
The restaurant that failed twice
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The entrepreneur is 55 years old, and holds a graduate degree. During the early days of his career, he managed an agency for two-wheelers and four-wheeler commercial vehicles in Jallandhar. Presently, he produces bakery and confectionery products in his factory in Okhla, New Delhi, something he has been doing for the last 15 years He supplies to the retail market, to hotels and restaurants, has a wide range of products and a good reputation. He also runs an agency for some machinery as a side business, from the same premises.
First Restaurant Project
Being in the bakery business, the entrepreneur was very keen to have a retail confectionery counter-cum-restaurant of his own. Having travelled to Europe several times to acquire bakery machinery, he discovered that the new trend at bakery eat-ins was to make the confectionary behind the retail counter. Its fresh-from-the-oven appeal created a sales attraction for take-home purchases by customers. The entrepreneur thought that the same concept would do very well in a major Indian metro - customers would like to visit and buy from a confectionery outlet where products are being made fresh, partly within their visible range. The success of outlets such as Hot Breads, which work on the same concept, reinforced the entrepreneur's confidence in this particular foodservice idea.
The entrepreneur also had access to the machinery which had been sent by his England-based collaborator to India for an exhibition. In fact, the collaborator was willing to give the machinery to him without cash payment, andjoin him as a partner in the new restaurant venture, his share being the cost of the machinery. The two partners selected a site in the shopping centre in East Patel Nagar in New Delhi and hired a space of 1800 square feet. There was a Domino's Pizza outlet next door. The total capital investment was Rs 75 lakh: Rs 30 lakh from the English partner and Rs 45 lakh from the Indian entrepreneur. This was entirely spent on décor, equipment and some pre-opening expenses. Operational costs included Rs 65,000 per month as rent, which was to be increased to Rs 85,000 after six months. The entrepreneur employed 20 persons on a monthly wage bill of about Rs 65,000. Accounting for another Rs 25,000 for electricity, the total operational costs came to Rs 90,000 per month, which was, of course, in addition to the food cost. Break-even sales were
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calculated at Rs 12,500 per day. The entrepreneur hired a manager at Rs 12,000 per month; he had earlier worked in Wimpy's and Hot Breads. The manager created a team of his own choice. Since the entrepreneur had other businesses as well, he visited the restaurant for about 2 hours every day and trusted the manager to run the shop professionally.
The restaurant remained open from 8.30 a.m. to 10.30 p.m. It had a comprehensive range of about 125 products and apart from counter sales, it also had a restaurant with 25 seats. Being a bakery and confectionery there was much emphasis on breakfast-time sales. A baker was sent by the English partner from England to stay for the first 20 days and he trained the staff in the craft. Since the entrepreneur himself is a strict vegetarian, he ordered that all products must be strictly vegetarian and even the cakes were made without eggs. Apart from the wide range of bakery and confectionery products, the restaurant also included pizza, soups and sandwiches in the menu.
The restaurant did not do well from the very beginning. The break-even sales of Rs 12,500 was not reached on any single day. Most customers were from nearby residential homes and there were no walk-in or transit customers who usually come to the shopping centres from other areas. The highest sale was Rs 10,000 for a few days, but it eventually trickled down to Rs 5,000 per day. The entrepreneur closed the restaurant exactly 12 months after it was opened.
Second restaurant project
The entrepreneur was still convinced about his concept of bakery-cum- restaurant. He thought that the location in East Patel Nagar was not suitable and the concept would succeed in a better locality in Delhi. He hired a place in the East of Kailash Community Centre, opposite a cinema hall. There was a Nirula's across the street. One again, he rented out 1800 square feet of space, and opened a similar restaurant with another name, five months after he closed the first restaurant.
All machinery and equipment were transferred from the earlier restaurant to the new one. The Englishman remained his partner and they spent another Rs 15 lakh on interiors. The rent was Rs 75,000 per month on a graded scale, to go upto Rs 1 lakh per month after six months and Rs 1.25 lakh per month after 12 months. Other operational costs remained more or less the same as in the
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first restaurant, with slight increases. The breakeven sale was calculated at Rs 16,000 per day. The product range was extended and he included non-vegetarian products along with the strictly vegetarian items. Cakes and pastries made with eggs were sold. Buffet lunch and dinner, at a reasonable price of Rs 65 per head, were also on offer.
In addition to the cinema, Lady Shri Ram College, a well-established girls college, was close, at a walking distance. The college also had a hostel. Moreover, with the restaurant being situated in a community center having a large commercial area, and some residential colonies nearby, there seemed, from the entrepreneur's viewpoint, a large and varied enough target market to tap into.
Having learnt from his previous experience, the entrepreneur tried to do things better this time. He made some pre-opening advertisements and his market research team visited nearby houses and shops. He also devoted more of his time to the project.
However, the restaurant did not succeed. In the first month, the sales were Rs 20,000 per day mainly because there was a good Hrithik Roshan movie playing at the cinema. However, sales started to drop off from second month and were down to an average of Rs 7000 per day during the summer of 2001. The entrepreneur realised that he would have to spend more money in advertisements and also put in place staff, equipment and two-wheelers for home delivery. He had, by this time run out of money, as the little reserve funds that he had were used up to cover the losses of the past few months. He had no other sources of funds. He, therefore, had to close the restaurant 14 months after it opened.
Reasons for failure
1. The entrepreneur did not engage anyone for a feasibility study or a market survey to assess the restaurant concept i.e. the right location for the concept, the potential clientele, the product range for that location and that customer profile, and so forth. He believed that he knew this business very well, because of his bakery manufacturing experience, and was convinced of his concept.
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Moreover, he could not wait to get started with is restaurant project. He did not make a project report, or even take the help of a chartered accountant or financial consultant, for expense and earning projections.
He now says that the location of the first restaurant was not appropriate. This kind of product range will succeed best in a place which has good retail shops in close proximity, which are visited by more upmarket customers. Some such customers could walk in for snacks and drinks and take away some fresh bakery and confectionery. There were no such retail outlets around the restaurant in East Patel Nagar. Hot Breads in G.K. II has an upmarket fabric shop next door, which regularly receives a large number of relatively higher-income customers including diplomats. There are other upmarket retail shops in close proximity to Hot Breads, which are also well-frequented. Moreover, Hot Breads, which also has outlets in Chennai, has acquired a brand image.
2. Unlike Greater Kailash-II, which is a prosperous south Delhi locality, East Patel Nagar is mostly middle-income. East Patel Nagar's residents are not used to Western-style confectionery and are usually not willing to pay a price for it. They are more the type to go in for Indian fast food. The entrepreneur thought he would be able to generate their interest in a new product range. Not only this, he felt his restaurant would even transform eating-out behaviour in this locality. This failed to happen.
3. The entrepreneur realised that his insistence on totally vegetarian items in the first restaurant was wrong. Although there may be a small percentage of people who may insist on vegetarian confectionery, a large number of people want proper cakes and pastries with a proper recipe which may include use of eggs. He lost a number of customers on this account. 4. In the new location, he did get the advantage of the cinema, but it was an average, even below-average cinema which did not get the better movies. Its visitors were typically from the middle and lower income groups, who were not inclined to spending money at a restaurant after having bought movie tickets, and preferred to return home. Also, most of the cinema-goers were not attracted by western-style confectionary and food items. Furthermore, because of conflicts among the cinema's owners, very little was being spent on its upkeep, which adversely affected
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the cinema's market perception.
5. Moreover, there were no retail shops in the locality, and the banks and offices that exist there did not provide him any significant business. Another target market- college-goers from LSR, also failed to appear. In both restaurant projects, he was wrong on the choice of location. The entrepreneur says that in East Patel Nagar he would have done better with an Indian fast food restaurant. The second restaurant was also in an unsuitable location, according to his post-closure 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 product range.
6. He feels his biggest mistake was to spend all his funds on equipment and interiors and not retain funds for operational losses and additional expenses. He ran out of funds within a few months. In the second restaurant, he was keen to spend money on advertisements and a home delivery system but did not have any funds left with him. The entrepreneur now feels that he should have only spent 50% of his funds on capital expenditure and expenses and retained the balance 50% as reserves.
7. Moreover, his concept should have been either a confectionery store, or a restaurant. It was a poor mix of the two. As he had expertise in making bakery items, he should have just had a small counter-based store, in an area of 300 to 500 square feet, with limited staff. The number of such small stores could have been increased in the city, based on the success rate. Trying to run a 25-cover restaurant with a confectionery shop involved too much space and operational expenses, and did not have the USP of either a good confectionery counter or a good restaurant. The entrepreneur's view that the European style bakery and restaurant will attract customers did not work well in his chosen locations.
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CHAPTER 10
10. RECOMENDATION
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Through, secondary data collection it is recommended that restaurants will be profitable if they have proper quality of goods, perfect ambience according to the changing trend, décor, music. Which people demand and proper customer attention. Restaurants are also recommended to follow certain CSR & ETHICS for developing good market image they are:-
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To give proper attention to customers. To change the price structure. Food service should be given quickly by maintaining quality of food. Restaurants should take initiative to feed poor, by giving excess food left by customer. Giving employee discount. Also giving discount to employees family.
These following activities are recommended to increase the sales and maintain good market image & position.
BIBLIOGRAPHY:91 | P a g e
? Federation of Hotel and Restaurant Associations of India: The FHRAI ? Forbes India Magazine- 2013 ? Good Food Magazine India ? Food and Nightlife Magazine -India
WEBLIOGRAPHY:? WWW.WTTC.ORG ? WWW.FHRAI.COM ? ?
WWW.WIKIPEDIA.ORG WWW.NRAI.COM
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