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The Beer Cafe Report Card - What's New?

Nobody before betting on beer as much as The Beer Cafe did. And it has been at it for a good five years, painstakingly adding one cafe after another. Today, after 40 cafes spread across Delhi NCR, Mumbai, Bengaluru, and a few other cities, the company says it has had enough. There is a natural limit to the number of beer cafes this country can take. At least for now. So The Beer Cafe is doing the next best thing it knows. It is getting into the beer business. If you indulge Rahul Singh, the founder of The Beer Cafe, he’d tell you it is the next best thing. After all, how difficult can it be? He already owns the real estate, now he just needs to bottle his own beer, get people drunk, and roll in money. But is it that simple?

“A beer brand is the most obvious extension of The Beer Cafe,” says the 48-year-old Singh. In his office in Gurugram, cramped with book and beer shelves, Singh apologises for the bad coffee. “Beer is our forte,” he says. “It only makes sense to start making one now.”

That could be true. Except it isn’t. Beer isn’t the company’s forte. Building restaurants is. And for a while, even this hasn’t played out well.

The dining business in India faces multiple issues. There is not one problem but a whole bunch that hinder the growth and scaling of businesses—high rentals, inept pricing, changing regulation and laws. Pressured by these, many dining companies have had to shut shop over the years. The Beer Cafe is no different. Post the 2016 Supreme Court-mandated liquor ban near highways, the company had to close nine outlets. In the process, it lost about Rs 8 crore ($1.1 million). In the year ended March 2017, the revenue of BTB Marketing, the company name of The Beer Cafe, stood at Rs 78.1 crore ($10.7 million) with losses of Rs 21.6 crore ($2.9 million), according to RoC documents sourced from Paper.vc. In the current financial year, Singh claims that his company has turned profitable, but says there isn’t much more room for growth. “After all, how many The Beer Cafes can I open?” he asks.



And so, the allure of beer.


The company’s beer will be called Indie18. Indie for the music, and 18 for the 18 years of Generation Z. Singh says, for a start, The Beer Cafe will import the beer from Europe. The sourcing has already been figured out but Singh doesn’t want to give away too much, except that the launch is sometime in February 2019.

I will never set up my own brewery. First, it involves high capital expenditure. Second, a political decision can finish my business anytime.

RAHUL SINGH, FOUNDER AT THE BEER CAFE

In more ways than one, The Beer Cafe is going the Starbucks and the BrewDog way. Just in reverse. Starbucks started as a retailer of coffee beans and later, shifted focus to cafes. BrewDog, owner of the top-selling craft beer in the UK, first took the market by storm with its beers, following up with bars. Services complementing products.

One can argue that making and selling beer isn’t a 21st-century problem. Our ancestors did it. And their ancestors before them. The question is whether making their own beer is really a way out for BTB Marketing? There is no dearth of competition; the craft beer segment is getting increasingly crowded with a new company entering the space every few months. And then, there is this whole other task of marketing and selling it.

Chug, chug, chug

The last two years haven’t been easy on the estimated $57 billion food services industry. First, it was demonetisation in November 2016 that reduced footfall in restaurants. In the first week, business at certain outlets was down by as much as 50%. It has been two years since then but the misfortunes of restaurateurs haven’t ended.

Immediately after demonetisation, the industry was hit by the highway liquor ban, which was partially lifted later. Another nail in the coffin was the goods and service tax that removed input tax credit in its revised norms, thus increasing the costs of restaurants. Like they say, bad luck comes in threes.

To arrest the last of these hiccups, restaurateurs have repeatedly requested the government to re-introduce input credit tax, but their demands have fallen on deaf ears.

But, this malaise hasn’t just sprung up over the last two years. These recent complications come over and above prevailing issues like real estate. “We have first-world rents and third-world sales,” says Singh. “At least 25% of my revenue, if not more, goes into the rental expense, which ideally should be a single-digit percentage.”

There are pricing problems too. “A lot of restaurants outprice themselves and, hence, the business gets limited to only a few markets,” says Gaurav Marya, chairman at franchise solutions company Franchise India Holdings Ltd. Franchise India manages more than a hundred food and beverage brands. “Additionally, there are restaurants which are predominantly dependent on high youth spend,” he adds.

It’s tough to run a restaurant, tougher when you are selling alcohol. There are liquor laws; one for each of the 29 states. Restaurants selling alcohol can’t stock liquor, and neither can they exchange the stock between two outlets. Every outlet needs a separate licence. Consequently, every The Beer Cafe restaurant has different products and a different menu card that changes every month. There are some legal surprises, too, such as the highway ban or calls for complete prohibition in states like Bihar and Tamil Nadu. If nothing else, there are sudden dry days for reasons like state elections.

In such cases, dining companies usually look for alternate ways to earn a buck—adding new restaurant brands (in different segments) to their existing portfolios, overseas operations or launching a product that complements the existing services.


Out with the cafe, in with the beer


The Beer Cafe launched with an idea to be a neighbourhood chain. “Like a Cafe Coffee Day, but for beer,” says an industry executive, who has worked closely with Singh. In the five years since its launch, The Beer Cafe has managed to open 40 outlets in 11 cities and plans to close this year with 12 more. “I could have opened 100, had the law been less complicated,” says Singh, with a tinge of regret that he couldn’t anticipate the struggle against some troublesome laws.

In the legal mayhem, scaling is an uphill task. But, Singh has a vision—130 The Beer Cafe outlets in the top 30 retail cities by 2023. After that, it’s a blind alley. “Opening 100 restaurants in India is feasible, the next 100 is back-breaking,” says a former venture capital firm executive, asking not to be named. “And that’s where growth goes for a spin.”

Enter Indie18, BTB Marketing’s plan-B. An imported beer in four variants that Singh expects will account for 50% of his company’s revenue by 2020. And eventually be bigger than his restaurant business.

I will not be making the best beer in town, just the beer that Indians can drink. And I won’t call it a craft beer like others do without any actual definition.

SINGH OF THE BEER CAFE


The so-called craft beer business—India doesn’t have a definition for craft beer—has been on the rise in India, and is dominated by B9 Beverages-owned Bira91. Over the last few years, there have been at least 20 new beer brands that have come up across the country, including White Rhino, Simba and Arbor. The market is getting crowded and The Beer Cafe, too, wants to wield a sword in this battle.

It may be a good move for Singh, who has been dealing with beers and craft beer disruption for five years now. He brags that he has unlearnt more than he has learnt from all the beer companies that have launched and expanded with The Beer Cafe over the years.

To start with, Singh, who is also the president of National Restaurants Association of India (NRAI), wants to sell Indie18 only in The Beer Cafe outlets, other restaurants and hotels, rather than through independent retailers or liquor shops. At least, to begin with. Getting your liquor placed in hotels and restaurants requires a lot of investment, especially in metro cities; every company has to discount the product and burn cash just to get visibility in restaurants. But Singh’s plan may work through his NRAI connections, as well as through his own outlets which he says were responsible for 40% of Bira’s sales in its first year. The Ken couldn’t confirm this claim independently from Bira.

Singh says that he won’t push his product over others’, and it will ultimately be the customer’s call. Well, he might not need to. A 330ml Indie18 will be priced at Rs 195 ($2.6) in The Beer Cafe outlets, sitting pretty between a Kingfisher at Rs 145 ($2) and a Bira Blonde at Rs 245 ($3.4).

By doing so, Singh can earn better margins than his competitors on certain variants. For instance, The Beer Cafe makes anywhere between Rs 210 ($2.9) and Rs 230 ($3.17) on a 330 ml Bira, depending on the variants. “With my own beer, the margins will be higher, at the company level, because I will save on the money paid by the beer makers to the restaurants,” he says, as he goes through this month’s menu card for a nearby The Beer Cafe outlet.

Price is right


The retail price of a 330 ml Indie18 bottle will be the same as Bira.

So far, so good. The tougher part will come later when Singh starts retailing his product. Distribution of liquor is a gruelling task. While the government is the sole liquor distributor in a lot of states, there are private distributors in others. Both are hard nuts to crack and need connections, in addition to investment to cater to state laws. The licence fees, excises, import duties, lower margins, and not being able to control the selling points are just a few of the stumbling blocks in the off-restaurant liquor trade.

There is another problem brewing in the beer industry. In 2016, for the first time ever, beer consumption fell 0.4% in 2016 and then, about 10% in 2017 because of state bans, high excise duties, and demonetisation, according to data from consulting firm Deloitte. For now, industry executives are convinced that this drop is in mass-market brands and not in the premium segment, of which craft beer is a small part.

Coming back to competition and retail, Singh would need money to sell and promote Indie18. And for that, sometime next year, BTB Marketing plans to be back in the market for a fundraise.

A valuation and an exit
In the last two years, BTB Marketing has had a hard time raising funds at a good valuation. “The highway liquor ban screwed us,” rues Singh. As did demonetisation. The food services market has been recovering since, with multiple investments taking place in the last few months.

Since 2012, BTB Marketing has raised Rs 84 crore ($11.5 million), according to data from Paper.vc. 40% of BTB Marketing is owned by venture capitalist Mayfield, while Singh holds a 45% stake. In its last round of investments, which concluded in March 2017, BTB raised Rs 10 crore ($1.3 million) from venture-capital firm RB Investments. Singh claims that the valuation of the company for that round stood at Rs 350 crore ($48 million).

Rs 3 crore

The amount of revenue earned by a The Beer Cafe outlet annually, as per current estimates from the company.

With its own beer brand, The Beer Cafe has more to leverage and will seek a much higher valuation and give its five-year-old investor Mayfield a good exit. Typically, venture-capitalists take an exit within five to seven years of investment. A person aware of the developments at The Beer Cafe said that Mayfield has already been looking for an opportunity to exit and the plan to launch Indie18 is a precursor to that. “It’s a valuation game. A product owner is bigger than a service provider. Plus, the craft beer industry is doing well,” he adds, asking not to be named.

Singh has a calculated answer: Valuation is a consequence. So does Vikram Godse, managing partner at Mayfield Advisors. “The craft beer business will be evaluated as a fresh investment as and when BTB Marketing comes up for a new round of investment.”

“As far as The Beer Cafe is concerned, going by its growth trajectory, we will re-invest,” he adds.

In the year ended March 2018, Singh claims to have achieved a milestone of Rs 100 crore ($13.7 million) in turnover. The next one is Rs 1,000 crore ($137.6 million), which can’t be crossed with The Beer Cafe alone; Indie18 is a ride to fast track this target. 2019 will see a new war break out between craft beer brands. In this crowded but growing segment, Indie18 will have its work cut out—to gain popularity, climb profitably, and fill the emptiness that The Beer Cafe never quite could.
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