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BW Businessworld

Fast Food On Fast Track?

International food chains are attracted to the huge Indian market, but they face challenges they didn’t expect

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A US fast food brand recently forayed into India to grab a slice of the growing burger and fast food market. With that, it joined the race to compete with global brands already in the country, including McDonald’s, KFC and Pizza Hut, all of which have been in India much earlier.

“The market seemed extremely attractive to us and we wanted to woo the customers here,” says one of the directors on condition of anonymity. However, little did they guess that the going would not be as easy as it seemed. It isn’t just the plethora of players operating in India but the huge challenge from local vendors. “Today, we feel we were not adequately prepared to tap the market at this point in time,” says the director.

Counter Culture

This perhaps explains the anxiety of several international fast-food chains that are in India with aggressive expansion plans to keep pace with the growing appetite of the quick service restaurant (QSR) market.

Carl’s Jr, Fatburger, Johnny Rockets, Burger King, Wendy’s and Barcelos, for example, have recently set shops in India, while in the non-burger category, Johnny Rockets started its operations in January 2014 and Dunkin’ Donuts in May 2012.

But that’s not to say the going is better for those already present in the market. To keep pace with the ongoing competition, they too have re-strategised their business approaches while focusing on quality and profits.

According to a study cited by industry body Assocham, the QSR sector in India, which currently stands at over Rs 8,500 crore, is expected to touch the Rs 25,000-crore mark by 2020. While the numbers are catching the fancy of established foreign players who obviously see a significant business opportunity here of billion-plus, what they fail to realise, from the disadvantage of distance, is that the domestic market is also seeing a problem of plenty.

Rob Young, chairman at Australia-based firm DC Strategy — a franchising and International consulting group — explains that global food chains entering India with its diverse culture make decisions on the basis of speculation rather than ‘actual fundamentals’. Also, the Indian franchisers who partner with foreign multinational QSRs don’t themselves have enough knowledge about the vastness of the Indian market. “It’s one blind man leading another,” says Young.

“The fundamental success of Indian QSRs lies in offering a menu that is diverse enough to appeal to a cross-section of customers pan-India, catering to their cultural and taste preferences,” says Rajat Wahi, partner and head of Consumer Markets at KPMG. After all, the Indian palate is habituated to desi food, and although it is influenced by the West, it doesn’t completely move to a fare that is offered by foreign players. “What’s more, the burgers and fast food that the local restaurants offer are extremely price competitive to be affordable for the pockets of domestic customers,” adds Wahi.

Advantage Local

While it becomes easier for homegrown vendors to offer a complete meal for less than Rs 100, global brands using Indian franchisees find it difficult to toss up a menu at that price. It is not the emergence of organised players alone that is challenging for foreign brands. With the growing appetite for fast-food in India, competition is getting even more intense with roadside vendors scoring a point against organised QSR chains with their range of the desi aloo tikki and vada pao and other delectable snacks at a price as low as Rs 25, too.

Since pricing and local flavour are democratising branded fast-food consumption in the country, many western chains are also trying to slash the prices of their items. But does low pricing erode brand equity for foreign chains in particular? “The entry level pricing should not be less than 20-30 per cent of your actual core product price. If you price the entry level product lower, you will attract the wrong segment, which comes in purely due to the pricing. This actually drives away your real customer, who may be looking for a different eating out experience,” says Samir Chopra, chairman & founder, CybizCorp — the master franchisee for Carl’s JR and Lazeez Affaire Group.

Another issue that preoccupies international chains is the high real-estate cost here with the market over saturated. It is a bigger challenge to choose the right multiplexes with high footfalls.

The concept of QSRs took off in India around 20 years ago with the entry of McDonald’s in 1996, and the sector has seen a massive makeover since. Given that McDonald’s had the first-mover advantage, it succeeded in ramping up its presence in subsequent years. Currently, as per industry estimates, as much as 60 per cent of the QSR market in India is dominated by foreign brands.

Ned Lyerly, president (International) at CKE Restaurants Holdings, the parent company of Carl’s Jr, says: “So far, we have invested in product development and consumer research. We plan to open 100 stores in five years; we see a potential for 1,000 stores right now.”

However, not everyone is as upbeat as Lyerly is. Industry experts say there could be a deceleration in growth for foreign players. If current signals are any precursor, the growing competition from local players is beginning to eat into the share of foreign chains. Yum! Brands — an American fast-food company that runs brands such as KFC, Pizza Hut, Taco Bell and others — in its fourth quarter results ended December 2015, showed a sales decrease of 9 per cent and 5 per cent for the fiscal, excluding foreign currency translation for its India division. The company said that the operating loss was $4 million for the quarter and $19 million for the year. “During the quarter, we re-franchised 86 KFC units, reducing equity ownership in India from 25 per cent to 15 per cent,” the report stated.

The contours of the fast-food market here have witnessed a dramatic change in the past 2-3 years with national chains replicating the efficient supply chain models of their global counterparts. Some of the prominent ones who have not only been able to establish a brand for themselves but have also evinced investor interest in the past one year alone, include Faaso’s that offers a variety of wraps, Massive Restaurants, founded by Zorawar, son of celebrity chef Jiggs Kalra, that runs chains such as Made in Punjab and Farzi Café. There are many more in growing list of Indian QSRs raising funds. In addition to the modern desi chains mushrooming, like Haldiram’s, Bikanervala and even Saravanaa Bhavan, which are growing at a significant pace.

However, this is not to say that the going is all smooth for local players. Look at what happened to home grown Nirula’s that entered the fast-food business in 1977. With the entry of several players in the market eventually it failed to keep pace with competition and had to shut shop in several parts of north India. Currently, it is understood that the company is again focusing on its revival recipe strategy.

With today’s intense completion where too many food chains are locked in a battle to woo the customer, it has become imperative for all players to re-invent their business outlook. This perhaps explains why most global chains are tailoring their offerings in terms of the flavours, pricing and services. Their efforts include sprucing up vegetarian menus, offering no beef based products, sometimes even establishing separate cooking areas for vegetarian and non-vegetarian food. To meet the Indian consumers’ inclinations, even the mayonnaise McDonald’s serves in India is eggless.

At a time when both national and international QSRs are trying to build on the growing appetite of Indian customers, a host of online food portals are busy trying to control costs and sustain investor interest. The result is they are having to adhere to extreme measures that include shutting shop, tweaking their businesses or reducing staff. Recently, online food ordering startup Foodpanda was in the news for laying off 50 per cent of its workforce. This was right after TinyOwl Technology, a Mumbai-based online food ordering firm, hit the headlines for slashing over 110 jobs. Pioneering restaurant-finder app startup, Zomato, also announced layoffs of a reported 300 employees. There are others who have shut down. Bangalore-based food tech startup Dazo recently decided to wind up within a mere year of launching. It failed to keep pace with its competitors and was short of capital even after raising its first round of funding in April last year. Similarly, SpoonJoy, an online restaurant, announced that it will be shutting down in Delhi and in parts of its headquarters city.

But the outlook for the food and beverages market remains strong and the consumers really have reasons to cheer as they have a plethora of choices. According to Assocham, as much as 50 per cent of India’s population eats out at least once every three months and eight times every month in bustling metros compared to the US (14 times), Brazil (11 times), Thailand (10 times), and China (9 times).

So, with competition mounting in the industry, both national and international QSRs will be aiming to draw in new consumer segments.

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