There is a serendipity in deal-making once one summarises the events that lead to its closure. Today, as I announce our investment into Haazri, that is how I feel. My first interaction with Haazri was unbeknownst to me, during the long hours that I spent at Yash’s office ordering numerous cups of the chai that almost immediately gave me a kick. I profusely praised Yash’s peon assuming that it was his magical hands that had prepared the perfect cup of chai every time, when in fact the magic was happening downstairs, at Haazri’s kiosk in the Naman Midtown lobby.
It was at an IIM-Indore event that I realised my praise had been misdirected. Haazri was pitching at this event and had brought in batches of their freshly prepared chai for the investors to enjoy as a part of their presentation. I immediately recognized the flavour and feel of the chai. It was intriguing how the young founding team – Dhruv Agarwal, Karan Shinghal and Arjun Midha had cracked the code of making the exact same awesome cup of tea without having any previous experience in the food industry. To test the product further, I invited them to our office for a follow-on presentation nudging them to bring a batch of their tea. They arrived with a thermos full of the chai that I had grown to love. It tasted the same and gave the same kick which was hard to replicate; I was hooked.
What I found interesting about Haazri’s business model was their approach to standardize and limit each menu item right from the outset. For example, ingredients for the chai are individually weighed at a central warehouse and distributed across their stores, which are then used to make a single batch of fresh chai. Perishable items like milk are procured directly from brand distributors and delivered straight to the store, thereby ensuring that there is no adulteration. A similar practice is also followed for the food items on their menu.
In fact, the founders have gone a step further to train the staff on when to add specific ingredients using a stopwatch. This ensures that there is no alteration in taste and that the final product is identical to the last, every single time. I have studied and invested in many food plays in the past; my family also owns a couple of restaurants & cafes, but rarely have I ever found the level of preparedness that the Haazri team displayed. In their quest to provide the exact flavour & texture of tea to the nth customer, they have developed robust SOPs which have had an exponential effect, something that they themselves could not have imagined. For example, since each food preparation comes with the raw ingredients weighed and individually packed at the central warehouse, the founding team keeps a tight lid on pilferage. They make sure that the number of packets consumed from the inventory either lead to a sale or have a solid alibi. When there is a discrepancy, the founding team investigates and penalises the store staff responsible, thereby letting them know that they are always watching. This level of granular control is what made me jump out of my chair and pursue them further.
The Haazri team maintains a limited menu of food & beverage items which reduce wastage, inventory, staff requirement & sophistication. Additionally, it reduces the capex investment per store to the sub 5 lakh range (including rental deposits). The low capex, opex and wastage significantly improve their bottom line, allowing them to provide items at a fraction of the cost of Chaipoint or Chaayos but at a slight premium to the roadside food & tea vendors – a premium that people are willing to pay for standardised items with better hygiene. The more we dug into Haazri, the more we realized that this fits perfectly into our fund’s investment strategy. Therefore, we decided to start working with them to gain a better understanding of the team.
First, we asked them to explore a B2B option for small offices that in our opinion run an inefficient pantry and delivered substandard products. With Haazri’s low-cost base and fresh standardized products, they could easily replace the live tea & coffee services, or machines. They made an earnest effort towards this approach and have more than 50 B2B partnerships onboard today. This avenue helps them pay for the stores fixed costs and provides a fixed base revenue each month.
Then I asked all three founders to join me in Kolkata where I had convinced the founders of Wow Momos and Chaibreak (an AIV investee), to share their experiences on finding a niche, building a bootstrapped brand and continuing to innovate & dominate their respective niches. While there is no better teacher than experience, learning from the experiences of others comes in at a close second. I am thoroughly indebted to Sagar Dariynani, Muftir Rahman, Aditya Ladsaria and Anirudh Poddar for taking out the time to guide these young entrepreneurs because these interactions led to a positive change in Haazri’s founders’ attitude towards their business.
Once the boys were back from Kolkata, we were ready to issue Haazri a term sheet. The team decided that the company should raise enough capital to be able to open 20 new stores in the next 12-15 months and produce an MRR of Rs. 2 lakhs from each store, so that they could break even at both a store and central level. The founders immediately subscribed to this advice and were excited about the scale that Haazri could generate. However, the DNA of the company to provide products at a slight premium to the roadside vendor but at a fraction of the cost of competitors was always a priority for us as well as the founders. Our research indicated that people in our target market were increasingly concerned with what they had been consuming and didn’t mind paying a slight premium for the guarantee of a standardised, hygienic product.
The investment committee was happy with the work we had put in so far and suggested that we add a coffee option to go along with the tea so that it catered to the larger palate of the target market. I pursued a vendor from Bangalore to provide the raw material that would allow Haazri to sell filter coffee without having to build the complex infrastructure that is required to deliver the perfect taste of filter coffee. The investment committee was happy with the terms of investment and gave their approval. We were all ready to roll.
After a couple of days, our team noticed that the margins had started to plummet. Since Haazri was on our weekly tracker, we investigated the matter further immediately. This revealed that the founders had expanded their menu options based on customers’ feedback. The number of menu items skyrocketed from under 10 to over 30! Deeper questioning revealed that the founders were trying to increase revenues per store by providing more items. My counter view for them was that: while it is easy to maintain the new menu for 4 stores, it would be a nightmare when they achieve scale, running 25-30 stores. They would either have to raise prices or suffer major losses. So, the founders and I concurred on eliminating the menu items that weren’t selling and introduce new ones.
Their fear that the revenues would drop after this change was quickly dispelled as Haazri’s revenues & margins per store improved within just a couple of weeks. This short experiment convinced the founders even further on the value of staying close to their DNA. Besides the objective of opening 20 new stores, this round aims to build Haazri’s management team to prepare them for rapid scaling. We are looking for a Marketing Head to build a digital presence for the brand through a quirky marketing campaign and an Operations Head who has the experience of selecting, opening and successfully operating multiple stores. The job descriptions for these positions are almost ready and we will share them soon but if you know someone who could be apt for these roles, please do refer them to us.
In addition, Haazri is on the lookout for store locations within Mumbai’s Metropolitan Region. The ideal location would be in a corporate tower; food court, lobby or next to a cigarette vendor’s store. You can reach out to my team by emailing us on portfolio@artha.vc with leads.
In conclusion, I am excited to add Haazri to the Artha portfolio and see a bright and exciting future for them. Now let’s get back to work!
83/2018
