BackInvestors lose appetite for restaurant business
As the online food segment finds takers, brick-and-mortar restaurant owners feel increasingly ignored
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As investors scout for the next big idea in online commerce, the brick-and-mortar companies in segments such as food retail are finding it tougher to get investor attention.
At least three companies in the restaurant segment, which have been trying to raise funds for the last six months or so, are finding it tough to close deals, according to several bankers aware of the transactions.
Among these is Azure Hospitality Pvt. Ltd, which runs restaurants under brands such as Mamagoto and Speedy Chow.
The company has been looking to raise $10 million for over a year, said two bankers, including one which had the mandate for fundraising. The deal, however, has still not closed.
Spring Leaf Retail Pvt. Ltd—owner of Mast Kalandar—has also failed to tie up the $15 million in funding that it mandated bankers for a year ago, said a third banker.
A similar story has played out with Prime Gourmet Pvt. Ltd, which runs American burger chain Johnny Rockets, added a fourth banker. The firm, which appointed bankers to raise about $10 million nine months ago is yet to complete the fund raising.
“Everyone is looking to invest in new ideas in the food space. The scaling-up in the online space is much faster and cheaper than a brick-and-mortar brand, and thus, the investor believes the future lies in the Internet space," said Hemu Ramaih, managing director at Shop 4 Solutions, a consultancy firm.
In an emailed response, Mast Kalandar operated by Spring Leaf declined to offer comments.
Emails sent to Azure Hospitality and Prime Gourmet on Tuesday night, seeking response on their fundraising plans, did not elicit any response.
In contrast to the brick-and mortar restaurants, those trying to build business in the online food segment have had better luck in drawing in investors.
In March, online food delivery marketplace foodpanda raised $110 million from existing investor Rocket Internet AG and new investors. The firm has raised more than $200 million since its launch in 2012. Earlier in February, TinyOwl Technology Pvt. Ltd, Mumbai-based food ordering company, raised ₹ 100 crore in its second round of funding from Matrix Partners, Sequoia Capital and Nexus Venture Partners. It had raised $3 million from Sequoia and Nexus in December 2014.
According to the fourth banker quoted above, quite a few companies in the traditional food services industry have been facing issues in fund raising.
To be sure, increased interest in online commerce-linked businesses is not the only reason for the lacklustre investor response to some of these firms.
A slowdown in the economy and high inflation over the last couple of years led to a fall in discretionary consumer spending across categories, including restaurants, which, in turn, has reduced the attractiveness of businesses in this segment.
“Last financial year, and especially the December quarter, has seen marginal growth for most of the restaurant businesses," said Ritesh Chandra, executive director and head-consumer group, Avendus Capital Pvt. Ltd.
The second investment banker quoted above said that while the industry has been struggling for growth due to sluggishness in discretionary consumer spending, there has been selective interest from investors. For instance, Faaso’s Food Service Pvt. Ltd, a fastfood chain, raised $20 million in a round led by venture capital fund Lightbox Ventures in February this year.
In addition to slow demand and high rentals, the increased of cost of hiring and training and investment needed for expansion may have also dented the profitability of firms in the restaurant segment.
“New stores in metros means huge costs on rentals, while opening stores in Tier II and III cities requires one to adapt to different price points, consumer taste and lower footfalls," said Chandni Sehgal, director of D’Essence Hospitality Advisory Services Pvt. Ltd, a hospitality consulting firm.
To be sure, the long-term potential of food-service industry remains strong. The industry is projected to grow to $78 billion by 2018 from $48 billion currently—a compounded annual growth rate of 11%, according to a report by consultancy firm Technopak Advisors Pvt Ltd. The unorganized sector holds 70% share of this market.
Ravi Wazir, a hospitality business consultant based in Mumbai, said around seven years ago, a lot of money suddenly became available to restaurant operators through private equity firms & high net-worth individuals.
“Every one was so bullish about anything to do with food and beverage that they began investing with little due diligence. However, getting a great return on every single location of a restaurant brand is a tall order, even for the most experienced operator. When investors found that their bets hadn’t necessarily paid off, they became cautious," said Wazir.
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