Betting big on the food business

Betting big on the food business

Bangalore-based Kiran Nadkarni was a venture capital investor for two decades before he became an entrepreneur. He had helped launch ICICI Venture Funds Management Co. Ltd (then Technology Development and Information Co. of India Ltd) in the mid-1980s and started his own fund, JumpStartUp Fund Advisors Pvt. Ltd. And, just as India’s private equity business started accelerating three years ago, he quit the industry to start a fast-food chain. He founded East West Ethnic Foods Pvt. Ltd—better known by its brand name Kaati Zone—which got an undisclosed seed investment from Erasmic Venture Fund in late February. “We want to make it international," he says.

Since 2003, these investors have put approximately $200 million (about Rs800 crore) into various types of companies which are in the food business. These deals rest firmly on glowing statistics: The food service industry is expected to grow 48% to Rs2,700 crore in the next two years after growing at a rate of 21% from 1993 to 2003, according to industry reports. This includes retail chains such as Nirula’s (Nirulas Corner House Pvt. Ltd), casual dining outlets such as Blue Food Pvt. Ltd’s Copper Chimney, wholesalers and manufacturers such as frozen dough and dessert supplier Bakers Circle (India) Pvt. Ltd, and manufacturer suppliers such as spice grower Vallabhdas Kanji Ltd. These entrepreneurs and investors are expecting increasingly better conditions for both ends of their income statements—investments and revenues.

In the long term, food service businesses will see expenses go down as infrastructure develops, particularly vendor and distribution networks. And private equity investors are also expecting infrastructure developments to provide more opportunities, especially in retail, at airports and malls.

More importantly, the entire chain will see revenues rise as consumers continue to dine out and order in. Naresh Malhotra, previously CEO of Amalgamated Bean Coffee Trading Co. Ltd’s Café Coffee Day and now operating partner with venture capital firm Sequoia Capital India, says Indians will increasingly stop cooking and hiring cooks in the next three years. “The concept of servants will disappear," he says.

“At a macro-level, every fund will say ‘we are doing domestic consumption and we are doing infrastructure’," says Deepak I. Shahdadpuri, managing director of Beacon India Advisors Pvt. Ltd. “The question is how you play in that space. And that will be very significant in the next decade."

But, their efforts to develop tomorrow’s infrastructure are facing various bottlenecks. Food service businesses have to tackle back-end issues, unlike their counterparts in countries such as the UK or the US.

International brands saw the potential in India’s food service industry early, with many opening their first stores in the mid-1990s. The road hasn’t been easy.

McDonald’s India, for example, took six years to develop its supply chain all the way to the farmer. “Iceberg lettuce didn’t exist in this country," says Amit Jatia, managing director and JV partner, McDonald’s India (West and South). And it won’t be until 2010 that the brand can completely stop importing French fries, and get 100% of its potatoes from Gujarat.

They also had to figure out how to transport products that needed to be kept cold, and are still working on creating that distribution network as they move into smaller cities. “In other markets, you have a strong demand from the grocery sector. In India, that did not exist, and still does not," Jatia says.

India’s entrepreneurs and investors say building a supply chain, and harnessing suitable and affordable real estate, has been an overwhelming task.

But Dev Lall, chief executive officer of Bakers Circle, says Indian entrepreneurs had been “thinking too traditional". He looks to The Pizza Company in Thailand and Jollibee in the Philippines, which have both given “McDonald’s a run for its money".

Lall, and all food service entrepreneurs, say creating an end-to-end supply chain takes up the majority of their time. “The key for consumers is quality at a budget price, food safety that shows and innovation on the product, and all these things are not possible unless you fix the back end," says Ashish Kapur, managing director of Chinese food chain Yo! China, which is owned and operated by Moods Hospitality Pvt. Ltd.

Each upcoming business is experimenting with various models for maintaining consistency across restaurants, irrespective of whether they are franchised or company-owned, and supplying their kitchens. Getting some of this right will be crucial to winning the race.

Franchisees, for example, often don’t want to buy standardized products from the brands when local suppliers are cheaper, and this disrupts consistency. “These are typical teething problems no different than in other markets," says Nicholas Bloy, founding partner and director of Asia private equity fund Navis Capital Partners. Navis is known for its investments in Mars and Skygourmet and Nirula’s, which has franchised outlets. “Franchising should work in theory but, in practice, it depends on complying and enforcing."

In terms of supplying their kitchens, most firms help develop local vendors (including housewives), and supply them with recipes and sometimes, even the standardized ingredients. Some use a central kitchen called a commissary from the beginning, while others evolve into that model once they have enough restaurants to support high costs. Café Coffee Day would give recipes to vendors across the country. But now that it has 550 cafes and 900 express counters, it is looking to switch to a commissary model.

Once firms decide how to prepare the food, the next obstacle is distribution. Lall of Bakers Circle supplies frozen dough to Subway and, among other things, had to build a factory and buy trucks. He was later pushed into other kinds of distribution, such as meats and cheeses, simply because he had the means. Hong Kong-based Harsh Sabale, founder and head of Lauris Capital, who was also with Navis during the Mars and Skygourmet and Nirula’s deals, says that when it comes to distribution, “India is four different countries."

Despite the burdens of scaling, India’s food service entrepreneurs are currently executing massive expansion plans, including in small towns. Lall attended Delhi’s Aahar 2008 food fair to access small town hotels and chains. Samir Kuckreja, CEO and MD of Nirula’s, says he has a commissary kitchen in Noida, and is now looking to bring in vendors as the brand spreads to the south and into smaller towns. “It’s a big change from even a few years ago," he says. Kuckreja is looking at four prospects in Jaipur alone. “Today, there are a lot of players in the smaller towns."

Despite these developments, private equity investors see these deals as longer-term investments for their portfolios. But the majority look forward to returns much higher than the typically quoted average of 30%. As Bloy says, “There will be real winners and losers."

Namitha Jagadeesh contributed to this story.