On India’s burgers, pizzas and cafe latte market – VII of VII : Ten take-aways

So what’s the future of the Quick Service Restaurants or fast food services market in India?

Here are 10 take-aways from the operations of the 7 biggest players in this market viz. McDonald’s, Pizza Hut, KFC, Subway, Domino’s Pizza (these 5 are American), Café Coffee Day & Barista Lavazza. Let’s call these seven “chains”. The chains account for about two-third (~1900 out of 3000) the number of outlets in the organized QSR sector in India today.

1. What’s the right menu for India ?

The chains have learnt the menu game i.e. they know what works in India : have a menu that is 60-70% Indian (Exception: KFC has a near all-American menu. Will they adapt yet, considering the Yum Brands company wants to be more aggressive in expansion here than even Pizza Hut? ).

2. How important are low prices ?

The chains each have a few low-priced products (in INR 50-75 range) (e.g. Sub of the Day, McAloo Tiki , McSserves, Veg Single Pizza , Lava Cake & Capuccino) to enable bring in the footfalls.

3. Will the chains bring in menu innovations ?

Since the economy has been in poor shape, the American players are facing stagnation at home and in other developed markets. A common response to this crisis has been menu innovation.

Menu innovation is sometimes leading the players to enter adjoining categories e.g. McDonald’s has entered coffee with McCafes (taking on Starbucks) and Domino’s has entered into sandwiches and pastas (to take on Subway and McDonald’s). Menu innovation is also helping grow the business in non-traditional day parts e.g. coffee is enabling McDonald’s to get into breakfast and pastas is enabling Domino’s Hut and Pizza Hut expand their sales at lunch (pizzas are eaten most at dinner, I understand).

Sooner or later, the above menu innovations will find their way to the India market too.

4. Have fast have the roll-outs within India been ?

The city roll-outs have not happened at the speed the market demands.

While the chains have been in India for 10-15 years, only two of them viz. Café Coffee Day and Domino’s are in more than 50+ cities. (currently CCD is in 128 towns and Domino’s is in 62). The other five brands are currently only in 25-35 cities.

Interestingly, even Yum Brands, the company that owns KFC, Pizza Hut & Taco Bell, and which intends growing fivefold to 1000 outlets by 2015, says they will be only in 62 towns.

Clearly, most companies are currently looking at what the marketing community refers to as Tier I, II & III towns, there are just 8, 26 and 33 of them respectively, a total of 67.

Tier 4 towns number a whopping 5,094 and hold 47% of urban India’s population. These each have less than 500,000 people. The TV advertising of the players, not to mention their print and other media has already spilled into these towns too and created a demand for pizzas, burgers, café lattes et al. Real estate / lease rental costs are lower here too. Yet the chains (other than CCD) are not opening locations here yet. Maybe supply-side bottlenecks, I imagine.

In contrast, in the U.S., as long ago as 1995, ‘slightly more than half the population lived within a 3 minute drive from a McDonalds’ (From the book McDonald’s Behind the Arches by John F. Love, Bantam Books, 1995).

CCD in Rourkela

Just last week, CCD set up it’s first outlet in the Tier 4 town of Rourkela in Orissa State.  This is a cosmopolitan town with convent schools and clubs (know this town since I have family there). Yet it got it’s first-ever fast food restaurant- the above CCD outlet – only now. My sis-in-law’s verdict after visiting this outlet: “Amazing”.

Here’s another report of McDonald’s entry in a Tier 3 city, Amritsar.

5. Is there a skew towards the metros ?

To further understand the metro skew of the chains, consider :

– The top 8 metros a.k.a. Tier 1 cities, which have 29% of the urban population and 39% of the disposable income, account for three-fourth of all outlets of the players.

– Delhi/NCR, Mumbai and Bangalore together account for over half the outlets.

– And if you love Barista Lavazza, you MUST choose Gurgaon for a residence; this town has 25 Barista cafes! Anyone know why ?

6. Why are some chains seemingly more aggressive in their roll-outs ?

CCD & Domino’s seem to have been more aggressive (in 100 + and 50+ towns respectively).

Why is this so ? What’s common to CCD and Domino’s ? Is it that both are in the hands of ‘reasonably resourced’ Indian entrepreneurs (V.G. Siddharth and Bhartias respectively)? Or is it that both companies, being funded entities, now need to show rapid growth per se ? Domino’s Pizza India has announced an IPO (their India master franchise has).

McDonald’s India plans have not been particularly aggressive.

Perhaps the parent McDonald’s company is allocating capital across markets and India can’t or won’t justify a higher investment.Each India outlet entails an investment of INR 30 million.

However, Yum Brands seems to be about to embark on a saturation strategy visavis the top tier cities (1000 outlets in 62 towns by 2015). So one can expect competitors like McDonald’s to go into higher gear too.

Subway is privately held and entrepreneurial, it could well emerge as the dark horse in terms of expansion if it puts together a decent India organization, it’s the newest entrant among these players and has been in a learning mode.

7. How important is India to the global operation ?

Interestingly, for all the five U.S. chains, India occupies a similar position in terms of number of outlets.  The India operation in each case is around the 15^th percentile position i.e. only in 15% countries, are there more outlets than in India.

The best country ranking is from Domino’s Pizza, whose India operation is the 6^th largest within their network.

And for Italy’s Lavazza, which bought out Barista, this is the only country where they have a coffee retailing operation, elsewhere they are  into coffee wholesaling.

Can CCD really ever put up 5,000 outlets in India, the once-stated potential? What constraints does it face in making this happen?

Can it really put up 200 outlets overseas? What would be it’s value proposition vis-à-vis a Starbucks and other chains? One has to wait and watch.

8. What low-hanging opportunities are the chains missing ?

Given the high real estate costs in metros, there is an opportunity to increase home delivery to existing users while keeping outlets increase to a minimum.

Given the early stage of the market, there’s also the opportunity to increase usage per customer through breakthrough CRM.

One can switch consumers from other brands, the market is large. 2 of 3 urban Indians order food from outside and do so 5 times a month. 80% eat out at least once a month. Those who do, do so on an average 6 times /month, up from 2.7 times in 2003.

On the above opportunities, these brands are just started getting there. Many of the players websites are out of date (Web 1.0) and loyalty club type initiatives are at infancy.

9. What of the smaller chains ?

There are many other smaller players in the fast food space; this site itself lists over 160 of them, all say they are looking for franchisees.

There’s an opportunity for cuisine-wise, State-wise chains. E.g. we have Jumbo King Vada Pao and Goli Vada Pao operating in a few cities in Maharashtra, with about 40-50 outlets each. Such chains can succeed by growing along and around the bus stands and railway stations of all leading towns.

However, operating i.e. scaling and controlling a successful franchising business is challenging. CCD, the country’s largest chain,has only company-owned outlets (it only leases the location).

10. Nutrition and environment are twin challenges

Historically, QSR brands (most famously McDonald’s) have had to face concerns over the nutrition and environment.I believe these issues will continue, and only increase, be it India or elsewhere.

On nutrition, the industry can be expected to give ever-healthier menus and have nutrition labels on each item.

As regards the environment, QSR brands will I believe move towards abandoning the use of plastics. They will also lead from the front in going green. This industry is a major consumer of poultry and meat, which are a major cause of global emissions.

The savvier QSR brands will take the lead in promoting healthier menus and eco-friendliness.

Tagged as: fast food restaurants, QSR restaurants