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Heavy private equity investments driving restaurant industry in India
Saturday, November 17, 2012 08:00 IST
Ridhima Kalra, Mumbai

The hotels & restaurants industry as of today is at the threshold of entering a dynamic market. That is primarily because the industry has witnessed significant growth in recent times thanks to factors such as rise in demand for a global menu, increase in disposable income, spiralling popularity of eating out as a regular form of entertainment and so on.

It is this movement in the market that has been attracting leading hotel and restaurant chains towards seeking a bigger share of the business pie. Another trend in this regard is that the industry is witnessing heavy PE (private equity) investments.

Investments

For instance, Azim Premji, founder, Wipro, has agreed to invest $25 milion in JSM Corp, which runs Hard Rock Cafe, Shiros and California Pizza Kitchen. TVS Capital also has two investments in the restaurant business - Om Pizza, which runs the pizza chain Papa John's and Indian cookery, which runs the Yellow Chilli chain of restaurants, started by celebrity chef Sanjeev Kapoor.

Meanwhile as India progresses demographically invoking its affluent and middle-class population to drive consumption, the whole phenomenon will enable the restaurant business to soar further. An industry as vast as this provides large direct and indirect employment, generates revenue for the government and also plays a huge role in promoting tourism.

The National Restaurant Association of India (NRAI), states, “It is anticipated that this industry would envision a rapid growth in the next five years, which would provide employment to about two crore people.”

Focussing on the current trend of future growth expectancy in restaurant business, a lot of brands are looking to expand while the time is right. Yum! Brands Inc., owner of KFC and Taco Bell, will invest $100 million in the coming 4-5 years to expand in India, resulting in the opening of 100 new outlets in the country this year.

Outlets

Fred DeLuca, president and co-founder, Subway, said the fast food chain plans to open 1,000 stores in India in the coming five years through the franchise route. Keeping the current scenario in mind, the restaurant industry is on the scale to accelerate to 45 per cent by 2015. And that's not all – Indian restaurant chains are also foraying into the international market. Saravana Bhavan, for instance, plans to open outlets in the US and Singapore soon.

In a telephonic conversation with F&B News, Gautam Shah, bar and beverage manager, Taj Krishna Hotel, Hyderabad, shared his views on the current trends within the restaurant industry. “The restaurant industry is now adapting the visibility of service (live cooking) as demanded by a lot of customers. They wish to see what they are consuming. A visual treat is becoming a trend within this industry,” he said.

He added, “The downfall in the tourism industry has directly and indirectly affected the restaurant industry. The inflow of customers has gone down owing to that. This also pertains to the business travellers booking the hotels for their conferences or meetings.”

When asked about the challenges faced by this industry, he said, “The growing number of competition and cost-cutting is posing a big challenge.”

Shift in menu

With consumers getting attracted towards more gastronomical choice of food, the casual dining players are also making a shift in their menu by providing various cuisines such as raw and rustic Italian, fine French, etc. Now the restaurants are also wooing in the customers by providing the appeal of 'street food' in hygienic conditions. Restaurants would have to provide a premium variety of cuisines to attract consumers differentiate themselves from other brands. At the pace this market is currently growing, established players would have to consistently innovate or expand to hold their market position.

Revival

Another trend which the market is facing today is the revival of North Indian fine dining restaurants. A lot of restaurants seem to have perfected the art of creating a cuisine incorporating the Westernised palate, but what has been left behind is the very essence of the Indian palate, which has now been recognised by a lot of companies. There are many who prefer eating outside what they eat at home just in a fine-dine setting and a glamorous environment. The trend which had taken a backseat owing to experimentation of new cuisines has come back with a bang.

With consumers becoming more health-conscious and in total control of what they intend to consume, the restaurants would now keep in mind the gluten-free and the specific food allergy-conscious crowd. Each state/country has a local delicacy which restaurateurs need to bank upon, since locally-grown food with a story to tell is becoming a fast-growing trend. With Indian companies making international forays, the industry is progressing towards the forecast growth.

Restaurants today are facing major issues when it comes to government policies or taxes being levied on them. The licensing fee for restaurants open till 1 am has been increased and the government has also enforced this increase on family restaurants open till midnight. Regarding this law, NRAI has made a suggestion to the Excise Department to provide family-styled restaurants the option to operate only upto midnight, and be allowed to pay their licence fee in retrospect (i.e. the old fee structure).

Service tax

In other regulatory arenas, there is also the levied service tax of 12.36 per cent on 40 per cent of the invoice to only partly or fully air-conditioned restaurants with liquor licences. The restaurants which do not fall under this category cannot collect service tax. For them the service tax is in discretion with the customers' choice, but many do not adhere to this due to indifference shown by the consumers.

Another enforcement which was levied on the restaurants was that effluent treatment plants (ETPs) to be a must for any restaurant providing a seating capacity of 36 and above.

At present 70 per cent of this market is dominated by unorganised players but the trend is moving towards an organised market intended to grow 20-25 per cent per annum. Quick service restaurants (QSR) are growing exponentially. Recently, US-headquartered QSR Subway opened its 300th outlet in India with a plan to open 700 more in the country within the next five years.

The core area of concern for the organised sector lies in having to meet big expenses while maintain consistency in their price to compete with the traditional sector. Any restaurant's biggest challenge is to maintain food homogeneity and food safety while also offering standardisation in food offerings. A good food supply chain also plays a crucial role in this industry, a restaurant needs to constantly standardise their menu besides reducing their costs. To grow as a business and to simulate demand restaurants are now introducing value-for-money meals and stepping up the advertising and marketing initiative.



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