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Making retail funding a success for F&B players

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Funding can work magic for F&B players provided the valuations are realistic, investors have reasonable expectations and the investor-investee relationship is based on mutual respect and acceptability – this was the view of the panelists participating in a session titled “How to Get Funding for Your Foodservice Business” at Food & Grocery Forum India 2012 being held in Mumbai.

The participants in the discussion included names such as Dheeraj Gupta, Co-founder, Jumbo King Foods; Sanjay Coutinho, CEO, Om Pizza & Eats; Rishi R Tej, Co-founder and CEO; Sheer Capital Advisory; Rahul Chowdhri, Director, Helion Ventures; and Charanpreet Singh Narang, Brand Head with Mirah Group.

Gupta of Jumbo King Foods, which runs 45 stores specializing in vada pao, said the opportunity for F&B brands specialising in Indian food is huge. “About 20 lakh units of vada pao are consumed every day in Mumbai alone! The market for them is currently where the market for burgers was in America in the 1950s – nobody could think McDonald’s would one day become so big.”

Jumbo King Foods has already taken funding twice from investors. “Investor money is like dowry money – it gets spent very fast,” said Gupta. “It is very important for valuations to be realistic. Unreasonably high revenue projections too create bad blood between investors and retailers later. Once funding has been received, retailers also have to maintain discipline in expansion. Until some years ago, organized retail in India was not being touched with a barge pole by the investors, but things have changed.“

Citing the benefits of getting funding from investors, Coutinho of Om Pizza & Eats said that they offer F&B operators valuable inputs and expertise that can help them in their business. “The entire funding story of F&B chains started with Domino’s growth story in India, but there is a lot more to the QSR market than pizzas alone” he said, adding that there are also a lot of things that can go wrong with funding. Investors have to learn to be patient for returns. They may fund a company with a lot of expectations, but deliverables and the market scenario are critical. There is a fine line between period of funding and return on investment.” Coutinho said it is important for retailers to be open and transparent with the investor while receiving funding.

Narang of Mirah Group said Indian economy is growing and the eating-out habit of people is increasing. In such a scenario, any good idea in the F&B space that is scalable is highly likely to get funded. “It makes more sense in F&B space to dilute equity to raise funds rather than take debt,” he added, saying that Mirah Group has until now arranged funding through internal accruals alone. “It takes a lot to make an idea feasible on the ground. It makes sense for us to invest and scale up a format that has already been proven.”

Tej of Sheer Capital Advisory said they typically look at a 10 to 20 year investment horizon in India and try to get in early into a concept so as to ensure better returns. According to Dheeraj of Jumbo King Foods, an entrepreneur has a certain vision for his business but he should have the maturity to accept advice of investors. “But sometimes investors too get overboard in offering advice. It is like a marriage – there should be mutual respect and understanding,” he added.

Coutinho of Om Pizza & Eats said that funding is a partnership between retailers and investors. “Investors want to have a say in everything so there is a clash. Promoters have to be more receptive to advice that will help their business. Investors should understand that promoters have a lot of credibility and they should take care that they first understand the business for some time rather than start giving advice from day one. What is needed is ‘controlled passion’.”

Dheeraj of Jumbo King Foods said that the problem with investors arise when the projections do not match the actual numbers. If the retailer is meeting the expectations of investors in terms of numbers, they tend not to meddle much in the business. “India has not yet reached a stage where you can get investors to invest at the concept stage itself. Retailers need to put in their own money to create a proof of concept. F&B category business needs time to grow. First, you have to put your own money into creating a proof of concept and then ask for money from investors to build proof of scale,” he said, advising retailers not to seek funding too early otherwise they will end up giving too much of the company away to investors.

Tej of Sheer Capital Advisory said: “To fund a retailer, we look at the debt to EBITA ratio. It if is more than 5, we think the company is over-leveraged. Equity is expensive as investors expect a return of around 30 percent on an average. So initially retailers should go for banks. Once critical mass has been reached, then they should go for equity dilution.”

-Sanjay Choudhry

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