 "<b>Vivek Singla:</b> Not an appetising proposition")
India is the second-most populous nation and we love hanging out with family and friends. Doesn’t matter if it’s a fast food joint or an upscale diner, a cup of coffee or a round of beer, indulging in eating and drinking is a favourite pastime for many. So logically, the food and beverage services sector should always stay buoyant irrespective of the economic cycles, making for an excellent investment theme. Well, not quite.
Consider this: India’s biggest quick-service brand, Jubilant FoodWorks, which runs the Domino’s Pizza franchise, has been struggling with falling margins and sagging same store sales for years in a row. Café Coffee Day (CCD), the largest home-grown café, has barely turned in any profit over the years. Speciality Restaurants, the top casual dining chain and operator of brands such as Mainland China, Sigree and Hoppipola, is bleeding.
The story isn’t any better with the private equity companies. A few famous names that have been funded by them include Blue Foods, Olive Bar & Kitchen, Vasudev Adiga’s, Sagar Ratna and Moshe’s. Reports suggest that either these brands are performing subpar or that issues have cropped up between the original and the financial sponsors. At any rate, successful exits have been hard to script.
One issue is the high operating cost, namely rental and labour. The other pain point is the lower revenue efficiency in India. This becomes evident when compared with restaurants from smaller countries around the region. As seen below, the revenue run rate for Indian brands is around $200,000-500,000 per outlet per year. On the other hand, their Asian counterparts report much higher $700,000-$2.5 million per outlet per year.
Bear in mind, the international brands drive most of their revenues from their respective domestic operations, in countries whose combined population is a mere 25 per cent of India’s. Also, while the price points for casual dining in developed Asia (Japan, Singapore and Hong Kong) are understandably high — in the $15-20 per ticket bracket — those in developing Asia (The Philippines, Thailand and even Taiwan) hover around $10-15, about the same as seen in India. Outlet areas of 200-300 square metres tend to be of a similar order, too.
It is in fact the weaker turns (number of times a table is served per day) that cause the food joints to report lower revenue productivity in India. It’s not unusual for daily turns to hit 4-8X in mature markets and 2-3X in other emerging markets. Even on slow days, the international chains can manage 1-2X rotations a day. This is about the best that most Indian chains are managing during peak weekend periods.
But why are the turns so poor in India? This has more to do with consumer behaviour than anything else. Most Indians consider home-cooked to be the only healthy food. The ubiquitous dabba is a uniquely Indian concept. Add to this, the self-carried tiffin boxes, the office canteens, the mom-and-pop stores and you have a formidable competitor to the organised eat-out market. This, too, in metros and Tier-I cities. In Tier-II and Tier-III cities, the working class has ample time to go back home during lunch hours, in sharp contrast to the trend in other parts of Asia, where people eat out daily.
Consumer attitude is a long ingrained habit, which can only change over time. This is also a significant threat to the successful scale-up of online food delivery companies. For them, the issue is not so much the onboarding of restaurants. Because compared to a typical manufacturing set-up where variable costs can touch 70 per cent of sales, a restaurant’s variable costs such as food and utilities are much smaller. It is fixed costs in the form of staff, rent and overheads that can exceed 50 per cent of the top line. Hence, there is strong incentive for a restaurant to partner with third-party delivery outfits that can help it leverage the hard burn rate. So long as the demand is incremental, it won’t mind paying the 15-20 per cent commission, especially when it doesn’t even have to invest in the delivery network itself.
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But building a sustainable and profitable habit formation on the part of the consumer may take much longer. For one, the Indian patron is famous for being thrifty and considers it her fundamental right to free delivery above a certain order amount. Even if the order value is below the minimum threshold, the delivery fees in India are generally routed back to the delivery executives as perks and don’t necessarily go back to the corporate account. Second, the post-discount average order values of $5-7 and the pure delivery take rates of about $80 cents in India are much lower — each about a fifth of those observed in the US. For reference, Zomato’s mid-year blog explained how its delivery partners were still losing about 25 per cent per order despite being extremely cost savvy and handling e-commerce and grocery orders to optimise utilisation during lean phases. Hence, profitable deliveries may not be on the horizon.
All this is not to say that food services is a bad sector. But so far, there have been more disappointing stories than otherwise. It is up to the investors to base their return objectives and timelines appropriately. Caveat emptor!
The author is senior vice-president with a private equity firm. The views are personal