Indian Fast Food’s Slow Road to Growth

Indian quick service restaurant chains are struggling to scale despite a large and growing food and beverage market,     Even as multinational restaurant chains record a brisk pace of growth in the country, a host of Indian startups are struggling to build a chain of quickservice restaurants.  When Kiran Nadkarni, one of the country's earliest venture capital investors, turned an entrepreneur in 2005, all eyes were on the startup he founded—quick service restaurant (QSR) chain Kaati Zone.  At that time, international brands such as McDonalds were expanding across India and the time seemed ripe for an Indian QSR to take root. But, despite being in the business for around eight years and receiving venture funding in 2007, Kaati Zone is beginning to scale up operations only this year. It turned profitable six months ago, for the first time since it launch.  "I did not bargain for the long gestation period," Nadkarni, Kaati Zone's chief executive officer admits. This is a sentiment echoed by Gaurav Jain, co-founder of another Bangalore-based QSR Mast Kalandar, a chain of vegetarian restaurants serving north Indian food. "QSR does not scale up overnight like technology. It has to be built up brick by brick and customer by customer," says Jain. The slow growth is surprising, considering the large market that these startups are catering to. The Indian "eating out" market is estimated at around 33,000 crore by retail consultancy Technopak Advisors. The organised sector is valued at about 8,000 crore and growing by 20-25%.  However, these quick service chains that offer Indian food are finding that it is not easy to adapt Indian cuisine to the fast food model. Indian food, which is cooked through complex processes and has several ingredients, is not easily translated into the assembly line production model.  Other issues include high real estate costs, time taken to perfect back-end operations, lack of cold storage facilities and lack of supply-chain infrastructure in the country. "It is impossible to build a quick service restaurant chain in five years, look at Jubilant Food, they took 15 years," says Nadkarni, who is of the opinion that such long haul businesses require patient capital.  "The main challenge was that I had to bootstrap; raising venture capital was a challenge." But there is now a gradual change in investor sentiment. Last year, food and beverage businesses received $256 million of funding, while this year there has been $43 million invested across two deals according to research firm Venture Intelligence.  "In most retail models, including quick service, time and effort is needed to perfect the basic unit model," says Kanwaljit Singh, senior managing director at Helion Venture Partners, who invested in Mast Kalandar in 2010. Kaati Zone raised funding in 2007 from Accel Partners, Draper Investment Company and Helion Venture Partners' Managing Director Ashish Gupta, who invested in his personal capacity.  "We had little experience in QSR as a fund. We also did not know the time required for QSR formats to scale," says Prashanth Prakash, Partner at Accel. "As a fund, we underestimated the complexity of this business." This has not stopped other funds from investing in such startups. Earlier this year, IncuCapital, a subsidiary of IndiaCo Ventures, made a seed investment in J&R Hospitality Management. It operates Steammo, which is planning to launch steamed quick service food through branded kiosks.  In October last year, Sequoia Capital invested $5 million in Pune-based Faaso's, which primarily serves wraps. The company was launched in 2003 by IIM-Lucknow classmates Jaydeep Barman and Kollol Banerjee, who admit that their first outlet was a failure. "We ran out of money in four months," Banerjee says. "But we made all our mistakes then and have not replicated them as we have grown." The entrepreneurs ran the company as a part-time venture and were holding full-time jobs until 2010. Faaso's now has 11 outlets in Pune and 13 in Mumbai and they hope to take the count to 70 by year-end. GV Ravishankar, managing director of Sequoia Capital India, says venture funds are attracted by the opportunity of backing early players in a green field sector. "Along with the global players, there will be a handful of Indian QSR brands that will dominate in 10-15 years' time. If we can get in early enough, returns will follow."  Investors also say that in India, a typical sub-$5-million VC investment can go a long way in scaling up. Helion's Singh says that the market is showing early signs of scalability. "The investment community is excited by this and is taking their positions."  One such QSR, which is ahead of the curve in terms of number of outlets, is Mumbaibased Goli Vada Pav, founded in 2004 by Venkatesh Iyer and Shivadas Menon. The company, which had fewer than 25 outlets in 2007, mostly in Mumbai, now has over 140 outlets spread across Maharashtra, Karnataka, Andhra Pradesh, Tamil Nadu and Madhya Pradesh. Iyer attributes this to their complete focus on the humble Mumbai street food, vada pav, and the use of technology.  The company, which raised funds from VenturEast last year, has a central kitchen, where machines are used to make various types of patties, which are then frozen and transported to the outlets. "We also changed our strategy. We realised focusing on Mumbai where vada pavs are ubiquitous is wrong. We started growing when we started focusing on markets where they are not available," says Iyer, whose outlets are mostly franchisee-owned.  Ramesh Srinivas, KPMG's executive director for consumer markets, says franchising could be a quicker route to expand as owned stores require heavy infusions of capital. But the challenge is to build a brand that will attract franchisees. "It is a big risk for franchisees when they go for an unknown brand. Once the brand is established, then scaling up will be much faster," Srinivas adds.  This is the route that Kaati Zone, which has changed store formats from the dine-in model to smaller format outlets, food court counters and kiosks, has been following since 2011. "A franchisee can invest 8-10 lakh and get a return of 8 lakh over a period of 15 months," says Nadkarni.  Sequoia's Ravishankar says there is much to be gained from studying the model of Café Coffe Day (CCD), one of the most successful Indian quick service chains. In 2002, the company had just 35 outlets, which grew to around 150 in 2006 when Sequoia invested in CCD's parent Amalgamated Bean Coffee Trading Co. Now the company has over 1,200 outlets. "It takes time for customers to recognise the brand. For CCD, once they built the brand and got the capital, the scale up was quick," says Ravishankar.  Mast Kalandar, which is targeting revenues of 50 crore in FY 2012-13, and Kaati Zone intend to reach the 100-outlet mark in a year's time. Kaati Zone's Nadkarni says now there is no stopping the scale up. "If I don't add 400-500 stores in the next few years, I would have failed," says Nadkarni.