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growth 2015-09-07

Are Investors and Restaurant Brands Happily Married?

Investing in restaurant business has become part of the big money play. With gross margins going up to 60 per cent upwards, investors are today hungry for the brands that sell well.

By Deputy Features Editor
Are Investors and Restaurant Brands Happily Married?

Why a surge of new entrepreneurs and venture capital? For starters, the food service industry is big business, and investors understand it. The price-to-earnings ratio (P/E ratio), which is a ratio of a company’s current share price compared to its per-share earnings (profit), is considered a reflection of how the stock market values a company’s ability to grow and generate profit. When you compare the P/E ratio of other consumer businesses with major food service companies, the answer becomes more obvious.

And today, investors want to personify it. “We look at products where the gross margin on the product is upward 60 per cent, vector margin 20 per cent at the corporate level and if not at the corporate level, at least at the store level,” shared Rahul Rai, Partner & Senior VP-Investment, Rabo Equity Advisors Pvt. Ltd.

Eating out has become a fashion, and investment in this segment is the part of the scene of big domestic consumption. Today, 50 per cent of Indians are eating at least 8 times every month which is leveraging great growth for restaurants luring investors to own that brand which has grown three folds in last few months.

Though the trend of investing in a restaurant began a decade back with celebrities, business men, and Page3 people investing in the brand of their choice, but as the industry grew, it saw almost 35-40 per cent growth year- on-year with normal people turning out to be angel investors looking for a bigger pie of the market.

“Restaurant sector has received the maximum number of attention from the investor so far. In fact, there have been 50 investments in the space in the last 8-10 years, which is almost $500 million,” shared Rai.

Big transactions

In the last two years, food service industry has seen lots of scalable models getting investors’ attention, food-tech players getting thumps up from angel and PE investors who are hungry for more of these brands. Restaurant chains like Indigo, Mamagoto, Carl’s Jr, Chaayos, and Maroosh have raised a fair amount from the investors who believe in the scalability of these brands. Fresh concepts, good supply chain, flexibility to move the brand at any location and lastly, the ability to retain the staff is what make the brands preferred by investors.

“The proof of execution in the past is the key determinant in investing in this business. The clarity of positioning the value chain is very important, if you do not know who your target audience is, how an investor can rely on your brand,” said Raghav Verma, Co-founder, Chaayos.

Adding on the same lines, Hemendra Mathur, MD, CF India Investment Advisors said, “We also look at flexibility of the brand and I think it is becoming even more important in today’s environment where concepts are changing gradually. If the brand is adaptable to different locations (high streets, malls, college canteen, corporate offices, railways stations) it can sell anywhere.”

According to Business Insider report, more than a dozen restaurant brands have debuted in the past year to meet a growing appetite for ‘fast-casual’ restaurants feeding the young and more affluent diners willing to pay more on fresh, high quality restaurants that they have been getting at traditional QSRs and fine-dining chain.

“The F&B industry is badly fragmented into segments; I believe the consumer story in this country is unfolding which is going to be very exciting,” pointed Pramod Arora, Director, F&B Asia Ventures (Everstone Capitals).

Thus, we can see that with fresh concepts emerging and fine dining limiting the scope of expansion as compared to other segments where number is not a hindrance, investors today believe in not merely a partnership but rather a brand which can give them scalability and hence, fast casuals and quick service restaurants may get more investments in days to come.

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