Venture capitalists investing more in restaurant chains
Shukti Sarma 22 February 2011

The latest foray in this sector is from TVS Shriram Growth Fund, which has invested an undisclosed sum in Indian Cookery Private Limited, promoted by celebrity chef Sanjeev Kapoor & Better Value Brands. But analysts say that there could be some hiccups in this line of business

Is 'dining experience' the emerging investment interest? With many venture capitalists taking the restaurant-chain route, it seems to be that way. But experts say it is better to keep a watch for possible pitfalls.

The latest investment in the sector comes from Chennai-based TVS Shriram Growth Fund, which has gone on to invest an undisclosed amount in Indian Cookery Private Limited (ICPL), the restaurant business promoted by chef Sanjeev Kapoor & Better Value Brands. This is TVS Shriram's second deal in less than three months, the first being an investment of Rs50 crore in Om Pizzas & Eats Private Limited, which is the franchisee of the international chain of Papa John's Pizza, Chili's Grill & Bar and The Great Kabab Factory.

 "The optimism among investors is because of the success of Jubiliant Foodworks, the franchisee for Dominos Pizza," said an analyst from Angel Broking Services.

Moreover, there is a growing demand among Indian customers for fine dining restaurants and gourmet food. Incidence of eating out among them is also increasing. No wonder, investors are viewing the restaurant industry as a viable place to be.

Last year, the Kotak Mahindra Capital-backed Jubiliant Foodworks' IPO (initial public offering) was a runaway success. Jubiliant Foodworks' scrip has gone up from Rs229 in February last year to Rs545.95 this year, marking a 138% increase.

This offering was followed by talks of an upcoming IPO worth Rs200 crore for Speciality Restaurants that owns Mainland China and the Oh!Calcutta chain.

However, some experts say that Jubiliant, and for that matter, other pizza franchisees could succeed because these outlets are mainly takeaway facilities. Takeaway restaurants are classified as a different category by Eurometer International. Unlike full service restaurants, they have minimal investments in real estate, provisions, staff and also low wastage.

Restaurants, on the other hand, suffer more because they have to keep more perishable items in store. Real-estate management becomes an issue in case of expansion. Many hoteliers agree that getting a viable location, especially in a busy city, is not a piece of cake.

The other high-profile investments have been that of Helion Venture Partners in Mast Kalandar, an Indian 'quick-serve restaurant' (QSR) chain in October 2010, and Hong Kong based Saif Partners increasing their stake from 12% to 20% in Speciality Restaurant. Matrix Partners invested in Yo! China, while Accel Partners invested in Kaati Zone, a Bengaluru-based quick service restaurant chain.

The market is abuzz about Indian Equity Partners investing some $100 million in BJN Group and Sagar Ratna.

According to National Restaurant Association of India (NRAI), investors are now serious about the potential of the restaurant market. It is said that the Rs43,000 crore restaurant industry is growing at 5% per annum, and of this, only 20% is the organised sector, which is growing at an incredible 20%-25% annually.

According to Eurometer International's 'Consumer Food Service in India 2010' report, the chain restaurant industry was valued at some Rs72,624 crore in 2010, and  will go up to Rs88,107 crore in 2011-2012.

And these new investments are apparently helping these restaurant chains strengthen their presence and aid their expansion. Mainland China already has a strong presence in India with 74 outlets, and plans to open 100 outlets by 2011-end. Like ICPL, Mainland China wants to go to places like the Middle East, Sri Lanka and the United Kingdom (London). These investments also provide them with the required logistical support and realty spaces. The promoter of Speciality Restaurants, Anjan Chatterjee, had admitted earlier that lack of logistical support had hindered his plans of expanding the Oh!Calcutta chain.

However, there is also the danger of a bubble being created. The number of QSRs, some reports claim, is increasing by 30%-35% annually. "If that is the situation, and if the restaurant euphoria gets too high, we will have a problem," said the analyst quoted earlier.

"While the restaurant sector looks promising, it is too soon to gauge the benefits. Moreover, there are many chains, but not necessarily all have been successful. It is especially true for lesser-known brands or those which do not have a pan-India appeal. And it is important to have a distinct identity and consistency in what they  offer-both in culinary matters and otherwise. We see a lot of overlap in that respect," added the analyst.

Moreover, niche restaurants require skilled staff: both in the kitchen and in service. Lastly, with the vast palette before them, customers are more inclined to experiment with different cuisines and different kinds of restaurants, and there are fewer chances of them sticking to one particular brand.

So let us wait and see how the buffet turns out to be.

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