Greasing restaurants with funds – By S.V.Krishna (Guest Author))

Remember those greasy and sweaty (yet tasty) quick service restaurants or Darshinis that sprouted in Bangalore during the late eighties. I never really enjoyed jumping in to the queue to purchase my food coupon in those sticky food dens.

Still it served its purpose- I could have a quick snack after school. It was a time when entrepreneurs- from Mangalore- were able to open one restaurant and in a couple of years scale the model up within the city.  By the end of the nineties the Darshinis and Sagars were all to common here. These entrepreneurs were content and I wonder if they ever knew what VC funding was.

I was out the other day in a food court and I saw a couple of old restaurants like the Taj and New Krishna Bhavan experimenting with the fast food or quick service model- were even an element of branding comes in to play. I was curious about this development and I met one of the owners of such a restaurant to find out how these dirty old dens became conscious about brand and image.

Then I almost choked, as I swallowed the roti that he served me. Don’t worry the food was great- it startled me because he said he was VC funded. Come on! What was the world thinking?

Suddenly grease seems to taste like cream to angel investors and VCs. I hear these entrepreneurs talk about business models when previously they would only be talking about the flour and the dough in store.

To make matters worse- I found 5 such investments in restaurants and interest is growing. Strangely I have lost my appetite again- I begin to wonder will money be burnt or will it find itself in a bottle of red wine.

Only time will tell what business models will work- I know that VCs have taken a stand on casual dining, QSRs and fine dining.

Then I can tell you that it is a bet that they can take because Indians are eating a lot and statistics show a rise in consumption inside the urban Indian’s stomach. For a short period of time all these business models will only grow and VCs can expect a return. But will the sum affect be the creation of a national chain. That is a foresight left to the entrepreneurs and not the VC’s.

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Costly to miss the ‘tech’ business in organised retail – The Editor

Deep slumber will kill anybody in times of competition. Indian retailers and technology companies better wake up soon because I observe that Wal-Mart, in India, is picking up the pace in netting all their potential Small and Medium businesses or ‘suppliers’- as we call them in retail parlance- in to adapting their retail supply chain technology called ‘Retail Link’.

This not only builds Wal-Mart’s supply chain, but Indian SMEs get a foothold in to becoming global suppliers to the largest retailer in the world.

Wake up Indian retailers

Personally, I feel this was the way to build any retail business, which our home grown retailers ignored. There was too much money spent in building the front end brand, without really offering quality to customers. What consumers got was the experience of modern retail discounting, but they were denied of the experience of low price plus quality.

So the argument about middleman being the scourge of organised retail- often cited by big Indian retailers- is doused by Wal-Mart, which is creating a silent revolution among its Indian suppliers. It is the technology stupid! Nobody wants to miss out on the organised retail business which is going to be at least $ 60 billion by 2015 and the total retail market’s size is estimated to be $ 600 billion in the same period.

Believe in sharing

We at Viedea know of several technology companies, even with their small size, who understand that the retail business is of technology integration which facilitates the ability of the warehouse and the supplier to deliver in to the store on time.

It is time that Indian retailers worked with retail technology providers constructively, may be even forge a partnership or engage them to build proprietary software that can be integrated with vendors for best practices.

What is unfathomable in my mind is the pace at which Wal-Mart is building the supplier base; it will certainly gobble Indian retailers if FDI opens up in this country in organised retail. This is impressive on Wal-Mart’s part because it realises that if India needs to be big on the balance sheet at Bentonville- USA then Indian suppliers have to comply with their processes completely or be dumped.

They are eager to teach some other aspiring Indian about compliance issues. Indian SMEs are averse to change, but when forced upon- they will innovate. By following such action Wal-Mart has been able to maintain strict control over purchase orders, inventory keeping and logistics management.

They have passed this value to consumers. These processes flow like a river between the suppliers, warehouses and the cash and carries – all thanks to technology.

Taking the fight to Wal-Mart

TCS, Oracle and SAP have been coaxing Indian retailers to implement their software or partner with them, but Indian retailers do not want to let data flow through such technology because it allows an insight in to cash management, which is a dark secret that is only in the diaries of promoters.

Now you do not want vendors to create a furore for untimely payment if everything is on record, do you? This is where Wal-Mart wins, while the others loose. Will Indian retailers wake up to the need of technology integration? Do call us if you want to be awakened.

Gucci and Me – Namit Goel

I have asked myself this question lately, how did premium fashion brands use online private sales to make this concept the latest shopping trend in India? Brands have struck the right chord with bargain-hunting fashion aficionados who wish to own prêt-a-porter at a very low price and also sell off their excess inventory by tapping the aspiring market. What more, since it does not have a negative impact on the brands’ image from a consumer standpoint, a variety of luxury brands ranging from apparels, home furnishings, bags and shoes can be bundled and sold quickly. It is however a private club and you need to be invited.

It works like this; private shopping sites buy excess merchandise directly from premium brands and designers; then they mark up the price for a profit and offer them at a heavy discount only to approved members. This membership is available by invitation from current members who have registered online or by applying online and then being subjected to a wait list. The product catalogue is then exclusively mailed to the approved members according to the buyers’ interest and buying behavior. This is gauged through social networks such as Facebook and Twitter. Since the merchandise is available for a limited time period during a sales event, I found the shopping experience to be fun, exciting and fast-paced. I saw deals on products disappear fast. It sounds like a very good business model, but sheer shopping popped another question in my head. If the idea is to make it available only to a limited range of members, how does this business scale and make money?

To find answers to my question I called up one of these websites and they told me that the number of members is not important; it’s all about having the right members who are passionate about the product offerings and are willing to buy them. I feel the answer to my question can be found in value added features that private shopping sites offer. These sites have started monetizing and increasing the business through viral invitations where each member will earn reward points per new member brought in. There are special clubs for premium members who have a propensity to buy lots online and they will receive extra discounts. A well thought of technical representation of the shoppers, their demographics and economics will be streamlined at the beginning of the event to stimulate impulse purchases. Special social recommendation systems will be set in place to up-sell and cross-sell based on purchases and browsing pattern of the customers.

Of course, all these features will soon fade away as more competitors arrive; but it all depends who will aggregate a large spectrum of luxury brands and designers on to their side. I believe this space will be red hot soon and will see a series of fund raising transactions at a mind-boggling valuation, followed by a period of consolidation in 3 to 5 years time. Sounds like its deal time, doesn’t it. But it will be great to hear your thoughts about the same and I would suggest talk to your chic friends, they will probably know what websites I am talking about.

Find us an Indian McDonald’s – Uday Disley

I still remember, a decade ago, an English friend told me that he fell over laughing when he read an Indian newspaper carrying an article about a McDonald’s outlet opening up in India. He told me, sarcastically, ‘And that’s what makes news in your country’. This alien food concept (the humble burger) reached Indian shores 14 years ago and in a matter of a decade our equally humble Indian middle class is thronging to the nearest McDonald’s outlet. They did get something right? What is it that Indian restaurants are struggling with when they want to go national or even global?

Recently I was with a VC and we spoke about opportunities for investing in ‘Quick service restaurants’; he pointed out to me that the McDonald’s, outside Andheri station in Mumbai drew a large crowd. The same can be said about most outlets, of McDonald’s, in the country today. The company claims that it serves about 3-4 lakh customers a day, it currently has about 160 outlets and employs about 6500 people. That’s a remarkable achievement, given that bulk of the scaling up has happened over the last two years.

Yes we have seen many regional successes, but I fail to even find a pan India name that caters to India as a whole- not like a Saravana Bhavan or Kailash Parbat- which are very ethnic. It intrigues me that Indian start-ups are not able to figure out what formats work, what food has mass appeal, what price point they should sell at or is it the supply chain or the backend which they cannot replicate nationally. The consumer interest has been established, all consumer reports would tell you that we Indians have been spending more and consuming more (fast food included). The problem doesn’t seem to be with the investors, as there is plenty of interest (at my firm Viedea we are asked all the time). I believe the problem lies somewhere in between judging what appeals to the Indian consumer (pan India), the time to scale and the amount of investment required. Our analysis has been that it takes a good 4-5 years to know if a concept is worth scaling to 100 plus outlets (assuming that one has the right team, good backend and some investor has agreed to stick around for that long).

If I take the average investment per outlet to be Rs 2 Crore (ignoring the low cost models for this) and if a concept incubation period of 10 outlets takes over 3-4 years, you are talking of Rs 20 crore. Going beyond the proof of concept, to establish serious scale can take 8-10 years if not more. Afterall, McDonalds with its deep, deep pockets took 14 years to reach the scale they have today. The “waiting period”- which means most VCs need to pay back the people that back them in 5-7 years- falls outside the window that they can afford in one investment cycle.  Therefore any serious VC looking at this sector is more attracted towards proven concepts and late stage opportunities (which are not many in any case). To find investors who are willing to fund the next Indian ‘McDonald’s’ success story needs a champion as mad as “Lawrence of Arabia”, but like Lawrence found out everything in the Asian world is very regional. I certainly want to debate that and hope there is someone who can prove Mr Lawrence wrong.

Technology’s Rural Bricks – Aravind G R

If the multi-layered supply chain for food is the reason why we have such high inflation, then the cost of setting up a successful financial supply chain in rural India is an even harder nut to crack because it is expensive to the consumer. We at Viedea believe that a technology based retail franchisee model, which sells multiple products and services of India’s financial institutions, to be the answer. But what kind of technology and distribution model works best? This is a million dollar question for a country where only half of the rural population has bank accounts.

Several industries have evolved several models to reach the elusive villager. We have listed some of them below and have tried to assess them on their ability to become an efficient financial supply chain.

Traditional channels

  • Consumer goods and telecom: These two categories, by far have the highest penetration. However, all ‘products’ pass through a multi ‘point’ distribution system and each ‘point’ needs investment and inventory management. Such a distribution system is too expensive for large scale financial transactions. For example, there is a 5 percent service charge on mobile recharges
  • Banks: Public sector banks, even with government pressures have not been able to reach below the taluk level. The same is the case for regional rural banks and co-operative banks.
  • Banking Correspondents (BCs): The RBI introduced the no-frills account designed specifically for rural masses, it is also mulling the idea of allowing petrol pumps, fair price shops, grocers, PCOs- including the government sanctioned Common Service Centre’s (CSCs)- to function as BCs. There are more than 30 million no-frills accounts that have been opened. However, a recent study found that only 10 percent of such accounts were functioning.
  • Micro Finance Institutions: Even though these institutions and groups have the reach, they are finding it hard to handle cash in remote areas because of theft and mismanagement.

Technology channels

  • Mobile payment: The largest mobile payment company, which has raised tens of millions over several rounds of PE funding, has so for been able to tie up with just one private sector bank. The promise that mobile banking provides is unmatched by any other form of technology used for financial inclusion. The mantra for mobile payment companies seems to be to build the user base (number of subscribers), but users are waiting for mobile companies to provide them access to multiple financial services before biting the bullet.
  • Electronic payment: It has limited takers in rural India owing to a myriad of factors like lack of connectivity and consistent power supply. Nevertheless, this network has been able to integrate multiple service and product vendors.
  • Combination of Brick, Tech and People (BTP): Companies like FINO are taking technology and cash to the door step of the villager. FINO claims to have reached over 15 million unbanked rural, urban savers and borrowers. However, the reliance on the cumbersome banking system seems to be the only negative factor in this model, since the end user still needs to have an ‘account’ with a financial service provider.

The right combination

The BTP model, is the most likely to work even without relying entirely on the banking system. The key is to place technology in the hands of people who reach the ‘unbanked’ rather than hoping that technology will directly reach the masses. This same person can be trained to sell multiple financial products including loans, insurance and mutual funds. The model may involve heavy investment in setting up ‘channels’ across thousands of locations to gain enough scale to attract financial institutions. Such retail franchisee system, where the franchisee shares the commission, has been a model that some companies have adapted. We also expect electronic or mobile payment companies, who have already partnered with several financial service providers to acquire or partner with BC’s or any such company that has setup distribution points in ‘unbanked’ areas. It is time for us to wait and watch whether such models turn out to be winners.

Retail debacle:

‘Bird of Gold’ with reference to the ‘Soney ki Chidiya’ , a mascot of sorts to the Pantaloon Group and title of the famed report by Mckinsey, perhaps was the defining phrase for the Indian retail story, until now!.

We were always being served by the local kirana shop (there is one such store for every 100 people) and then came the era of organized retailing. The promise of a bird of gold in the hands of the burgeoning middle class seemed so easy to catch, for all those who had deep pockets (capital). However, Subiksha and Vishal have recently announced closure of one third of their stores. Reliance, Tatas & Birla have almost shelved their expansion plans & are about to close many of their existing outlets. The third quarter results of listed retail companies also depict their precarious state of operations.

Declining margins may be attributed by some to increasing costs of debt & real estate (yes, most of the retailers had locked in their rates) but explaining decline in sales is hard. Same Store Sales growth (once you remove sales due to new stores added) reveals that the actual sales have not just slowed down, but declined. The Indian growth story was largely fueled by the increased spending by middle class hypothesis, this decline in sales should come as a serious blow to the ‘strong fundamentals’ theory.

‘Bottom of the Pyramid’ now seems like a mirage, but we believe it is not. The consumption story of India remains, but organized retail is loosing its part in it. The problem, as R Subramanian (MD, Subhiksha) puts it, ‘Indian retail was doing too much, too soon’. Companies poured in billions of rupees into building outlets at a frenzied pace. Reliance had plans of 2,000; Subhiksha actually opened 1,500 outlets in 2 years; Pantaloon opened dozens of new formats (including one which was supposed to sell candles). All of this ‘leveraged’ investment happened at the front end, whereas the modern format of retailing relies heavily on the backend (supply chains); except a few like Pantaloon & Reliance, none of the retailers invested & strengthened their supply chains. Now, Subramanian admits ‘It was no wonder that, for most new entrants, the expansion was a disaster waiting to happen’. These retailers who faced increased costs in goods, salaries and through inefficient supply chains; were pushed to increase the prices, thereby not delivering on their promise of being the cheapest seller. We started going back to our trusted old friend at the street corner shop.

The way out (is there one?) or the way going forward- Those who continue to deliver the promise of being cheap & efficient will continue to thrive on gold. Cutting costs and reworking their system is top priority for the retailers who are hurt. We believe that a sound retailing model should always be backed by support/supply system, without which the advantage of organized retail format is lost.

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