In the late 1930s, two brothers started operating a small restaurant in San Bernardino, California. The restaurant offered a menu of 25 items consisting mostly of Barbecues, catered by a group of staff called 'carhops' widely known for bringing food to people in their cars. After a few years of successful operations, the two brothers realized that most of their profits came from selling Hamburgers and not the add-on services or items they were offering. So they decided to trim their menu further and started serving an even simpler menu consisting of Hamburgers, Cheeseburgers, Potato chips & Apple pies. The plan worked and soon potato chips gave way to french fries and milkshakes replaced Apple pies. The carhop drive-in restaurant model was phased out for a more cost effective self-service model. And with this the world's first Mcdonald's outlet was born.
Although Mcdonald's today is one of the largest restaurant chains in the world, the company serves as a reminder of how you could create a successful brand by understanding your consumers and streamlining your operations accordingly.
Dangee Dums does not sell hamburgers & French-fries. It's in the business of selling cakes, chocolates and other bakery products through its retail outlets located mostly in Ahmedabad and Surat. It wants to become a one stop solution for chocolate aficionados who want to treat their taste buds with the finest quality chocolate in India. The company talks about providing a sensual atmosphere to its customers i.e. a mixture of Belgian cafe and a chocolate factory which apparently also serves as their differentiation.
Its major products include:
Dangee Dums tells us that majority of their customers are retail consumers who buy their products from their self-operated outlets. It started its operation with just one outlet in Ahmedabad by selling cakes with a minimum tag of Rs 1200 /kg when other retailers were selling at Rs 500 to Rs 600/kg. It restricted itself to a minimum 1 kg variant which ultimately led to operating losses that were unsustainable as it stood. The company then started to offer food items in addition to cakes & chocolates and eventually managed to scale up its operation to 81 outlets all owned and maintained by Dangee Dums. Although the shops are bought on lease, the expenditure they incur on renovating each store is significant. Renting these spaces is also an expensive affair. It has also recently started offering Ice-Cream in its retail outlets and with this they are betting big on capturing the ice-cream market in Gujarat. However we are not sure the likes of Vadilal & Havmor will allow for such a thing to happen.
The following table highlights the installed & utilised capacities of Pastries and Ice-Cream.
Its top line (revenue) has been growing at a CAGR of 60% YoY (Year on Year) but its PAT (Profit after tax) has struggled to keep pace raising concerns about its ability to remain profitable. Perhaps it's quite evident why. The company pays about 4.5 Crores in rent. If you are operating 81 stores, you will have to staff them adequately as well. Employee expenses also run up to about 4.5 Crores. The company has borrowed significantly to fuel their expansion. You have to pay interest on it and so that's going to affect the company's profit margins. All in all they have managed to become profitable this year due to the fact that they still continue to sell their products for a premium. But for how long? That's the million dollar question.
Then there is the matter of trade receivables. With revenues of 36 Crore we are not quite sure how the company has receivables of about 4 crores, when the company has clearly mentioned in its prospectus that
"The major customers of the company are retail consumers and our products are sold from our self-operated outlets. As of now, no business house/ wholesaler/ distributor is our customer and all our customers are retail customers"
So if all the company's sales are to retail consumers, why are they selling their cakes on credit you ask? Well, we are wondering the same thing. Last year this number stood at about 77 Lakhs. A sudden increase to 4 Crores is slightly alarming.
The company now wants to fulfil 3 objectives
At an issue price of Rs. 74, the company wants to raise about 20 Crores in total by diluting around 27% of their stake. At this price, the PE translates to about 50. We don't know what's a good company to compare this with, but we think we can say with some confidence that this issue is in fact very pricey.
And also the market for cake, pastry and Ice-cream in the country is highly competitive with several players present in various segments. So it will be quite interesting to see how the company plans to expand, maintain profitability and live up to the expensive issue price.
We wish Dangee Dums the best of luck in its future endeavour.
Review & Analysis by Pawan, IIM Ahmedabad
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