NARA ALIGNMENT & COMMUNICATION PROGRAM
THE PROBLEM
The organized portion of the Indian food market is currently valued at $13 billion but is expected to grow to $28 billion within the next five years.
Parag Saxena, the founder and CEO of New Silk Route, the well-known Indian private equity firm, identified the trends in the Indian market that are fueling this growth.
He says he is betting on:
- The undoing of the joint family structure.
- Women entering the work force with less time to prepare food.
- People migrating to urban locations.
New Silk Route is not the only PE who has taken an active interest in the trends driving the rapid growth of the Indian restaurant industry. The collective PE restaurant investment approaches Rs3,000 crore or approximately $500 million.
Pankaj Karna, managing director of Maple Capital, believes the restaurant sector is a long term play for PE. “PE guys are typically looking at making a minimum of at least 3x in a four-year time frame. There’s a certainty in cash flow if the model is right and the growth is there. This should allow private equity to make fair returns.”
What appears to be an unprecedented business opportunity for private equity is, however, turning out to be a bitter disappointment for many.
Apparently, PEs and restaurant promoters are not easily partnered. After investing Rs100 crore for 80% of Vasudev Adiga’s restaurant empire, New Silk Route apparently tried to oust the promoter and ended with the Company Law Board appointing an administrator to run the business.
India Equity Partners invested Rs180 crore for 70% of Sagar Ratna’s restaurants and has ended up in court with the promoter who claims that IEP is inept at running the business, while IEP says Sagar Ratna is violating a non-compete clause.
Having invested Rs100 crore in Nirula’s, Navis Capital felt that the promoters could not meet their ambitious expansion goals and sold out of their investment in 2013.
Promoters needed PE capital to grow. PE came in with the understanding that the path to that growth flowed through processes, standardization, and corporatization - essentially, organizing the unorganized. A critical factor in this transition is promoter buy-in. At both Sagar Ratna and Adiga’s, even as PE started improving systems, their relations with the minority promoters began to deteriorate. The capital invested by Private Equity was still capital, and the restaurant concepts designed and executed by the promoters were still serving customers. The new business combinations, however, did not work.
THE SOLUTION
STEP ONE: Warren Buffet, the founder and CEO of the legendary Berkshire Hathaway, is the most successful private equity investor in history. Here’s what he has said is his secret to success: “We try to buy not only good businesses, but ones run by high-grade, talented, and likable managers. If we make a mistake about a manager we link up with, the controlled company offers a certain advantage because we have the power to effect change. In practice, however, this advantage is somewhat illusory: management changes, like marital changes, are painful, time consuming, and chancy.”
NARA’S ROLE: Financial investors entering the Indian restaurant market have often looked only at the promoter’s business and not at the promoter himself. Nara Hospitality Business Consultants looks below the apparent business into the heart and head of the promoter. Then Nara evaluates the potential for the creative side to work independently of, but in constant coordination with, the aggressive and the guiding side of the business. Informed selection of the right promoter is the first step on the ladder to success when investing in the Indian restaurant market.
STEP TWO: Most Berkshire CEOs allocate their own capital and expand their business whenever they can, but the guidance of this function is in Warren's hands. This unique management structure has led to superior investment and management successes and has proven to be Buffett’s finest cultural and structural strategy.
NARA’S ROLE: The Navis Capital experience of not being able to communicate to Nirulatheir allocation of capital program led to a complete breakdown of the business combination. Nara Hospitality Business Consultants has designed, and will manage, the execution of a master allocation of capital program. It is imperative for the promoter and the PE fund to work on a realistic plan; a plan that can and will be executed successfully only if it is followed through using Nara’s unique daily disciplined approach to execution, information sharing, monitoring, and adapting.
STEP THREE: Successful restaurant companies are more than one dimensional purveyors of food to the hungry. They are complex organizations layered with core beliefs, values, and ideologies. Too often private equity does not see down into the soulof the company they are investing in and miss the essence of the restaurant company's competitive advantage.
NARA’S ROLE: By applying its proprietary analytical tools, Nara Hospitality Business Consultants uncovers the soul of a restaurant company. We reveal the part of the business that is its grounding reality and key to success. After documenting the soul of the business, we help both the PE and the promoter perceive their business in a different light, shedding more clarity on the underlying factors that affect both stability and growth. We utilize a structured process that incorporates the essence of the soul, ensuring that the creative side of the business works well with the aggressive and guidingsides.
STEP FOUR: The recent battles that have erupted between many financial investors and restaurant promoters all have exactly the same cause; poor communication. Promoters did not fully comprehend the investors goals, and the investors were never clear on the exact nature and capabilities of either the promoters or the restaurant companies they founded.
NARA’S ROLE: Nara Hospitality Business Consultants will work with the promoter and the financial investor to create a realistic plan; a plan that can and will be executed successfully only if it is strictly followed using a daily disciplined approach to execution, information sharing, monitoring, and adapting. A daily rhythm of reporting and communication in a set format of not more than 15 minutes a day will ensure that the company is monitoring all its metrics, addressing its challenges, deciding its course for the day and, more importantly, keeping the channels of communication open between the promoter, CEO, and the financial investor. As simple as it may sound, a daily habit is difficult to adopt. An external player, the referee, will ensure this daily habit is followed.
This system offers complete freedom to the promoter to focus on creating, the CEO on executing, and the financial investor on monitoring and guiding. The work of each principal is brought into alignment with the efforts of the other two on a daily basis. Thisalignment eliminates the planning, re-planning, sorting out differences, assuming, and other time wasting activities that usually consume institutionalized companies.
NO GAME WITHOUT A REFEREE: Private Equity Funds and alike are great investors. Promoters are great restaurateurs. When they get in a big game together, however, they need a referee to look after both their interests so that the game might reach a satisfactory outcome. This is the role Nara Hospitality Business Consultants play. We are the referee, the interpreter, the communicator, the keeper of the rules. Our systems smooth the creation of complex business combinations, creating ALIGNMENT in all spheres of the business by insuring that diverse principals communicate constantly, openly, and honestly.
The exploding restaurant industry is currently the greatest economic opportunity on the Indian Sub-Continent. Financial investors understand this, and restaurant promoters understand this. If they can learn to communicate effectively, they can harvest this historic bounty.
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