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Indian QSR Sector

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A foodservice market of …

A foodservice market of
the magnitude of India,
growing at a scorching
25-30 per cent year non-
year, has barely
10-15 QSR brands. The
opportunity is huge and
so are the challenges.


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  • 1. COVER STORY Fast A foodservice market of the magnitude of India, growing at a scorching and 25-30 per cent year- on-year, has barely Furious 10-15 QSR brands. The opportunity is huge and so are the challenges. So what exactly are thesebottlenecks, and why does so much of fast food in India look so American? By Bhavya Misra 24 July-August 2011 FOODSERVICE INDIA EDITION
  • 2. T he Indian economy opened up in Market Opportunity the year 1991. This was the time Prior to the year 1996, there were barely any QSR when leading multinational quick- brands present in India barring Haldiram’s (which service restaurant (QSR) brands, jumped the chain-QSR bandwagon only much including McDonald’s, Domino’s, KFC, later). Nirula’s, which had commenced operations Pizza Corner et al, laid siege over a way back in 1928, launched its first family-styleconsumption boom that was soon to explode. The restaurant only in the 1990s.journey of some of these brands has been a mix of So, did the QSR phenomenon create a newhighs and lows. KFC, in fact, had to withdraw from consumption class altogether, or did the rapidlythe market during the initial entry phase after being evolving consumers drive the need for fast food?buffeted by a storm over a controversial menu. “Over the past few years, urban Indian “India may look like a market easy to enter, but consumers have become more “expenditure-to be successful one really needs to have a lot of oriented,” with out-of-home dining being one ofenergies invested towards getting the back-end the top leisure activities. There is a substantialchain in place,” says K Ramchander Raman, head increase in both dine-in and delivery businesses inof Food & Beverage at Cafe Coffee Day, which the industry. With the rise in disposable incomesprefers to define itself as a cafe rather than a QSR. of the average urban Indian consumer, the market “When McDonald’s decided to enter India in size and potential of restaurants are only expected1989, there was nothing readily available here to rapidly grow in future,” states Ashish Kapur,that would help us launch front-end restaurant managing director of Yo! China. In a marketoperations instantly,” Vikram Bakshi, managing dominated by unorganized players, he reckons thedirector and JV partner, McDonald’s India (North organized players accounting for only about 3,000& East) explains. “The infrastructure was poor; outlets all over India.the very concept of a cold chain did not exist! On Samir Kuckreja, managing director and CEO oftop of this, there were no ready suppliers available Nirula’s, says: “The Indian restaurant industry haswho could deliver the ingredients that make a all the right ingredients for robust growth. FactorsMcDonald’s product.” such as rapid urbanisation, growth of mid-sized Bakshi confirms that the chain spent the cities, improved infrastructure, rising population,initial years in the country building everything rise in the number of working women and higherfrom scratch – right from setting up suppliers by disposable incomes have together made QSRs theteaching them how to produce the ingredients fastest growing foodservice segment, growing at anthat McDonald’s needed, with know-how and annual rate of 25-30 per cent.”technology transfers from the global partners, to Bakshi estimates the overall size of the QSRdeveloping a menu which would be relevant to industry in India to be about Rs 43,000 crore,Indian consumers along with segregation of non- with the organized segment accounting for a paltryvegetarian and vegetarian cooking sections. 16 per cent of the market. However, this ratio is expected to change in the next few years. “The organised segment would increase to about 45 per cent of the market by 2015, when the overall size of the industry would reach around Rs 62,000 crore,” he says. The Indian restaurant industry is growing at a scorching pace of 20-25 per cent per annum. The organised segment is expected to grow faster at the rate of 25 per cent per annum. “I am seeing a trend that shows unorganised segment fast becoming organized. Added to this is the growth of current organised players, which would double the size of the sector,” adds Bakshi. Indian Fast Food QSRs: Where are They? The entry of multinational QSR brands appears to have propelled the growth of indigenous chains, which lay almost dormant until the entry and rapid expansion of brands such as Domino’s, Subway, KFC and McDonald’s. However, given the rich diversity of Indian street foods, pan-Indian specialist domestic QSRs are still hard to find in the country. The main problem seems to be a lack of standardization and the huge gestation period required before a restaurant chain comes alive. Says Harneet Singh Rajpal, vice president of FOODSERVICE INDIA EDITION July-August 2011 25
  • 3. COVER STORY marketing at Domino’s India: “India has a rich there is a long gestation period, primarily to put bounty of popular street foods, but the issue with up a viable supply chain. “Huge investments in Indian food formats is that they lack scalability and the form of time, effort and capital are critical to consistency of delivery. This is because there is no get the back-end infrastructure in place before the standardisation of processes and ingredients. For operation is up and running,” he says. example, a Domino’s pizza would taste the same, whether you eat it in Delhi or Patna or Mysore. This standardisation is not possible with Indian street foods. Some QSR chains are however focusing on this and trying to replicate the western fast-food model with signature Indian foods.” Manpreet Gulri, the development agent for Subway in India, adds: “There are a few successful Listen home-grown QSRs in India that are doing extremelyto your well. But to build a successful QSR, a brand needs consistency in product and quality, and thiscustomers. comes only through standardisation.” Some of theInnovate domestic QSR success stories include Café Coffeecontinuously. Day, Barista, Haldiram’s, Bikanervala, Sagar Ratna and Nirula’s.Think long Bakshi notes that QSRs make for a high capexterm. business, requiring huge investments in not only the front-end but also the back-end. “Food safety – Vikram Bakshi,managing director & JV partner,McDonald’s India (North & East) systems must be stringently followed across QSRs: Life Cycle Dynamics cold chain and logistics, which requires huge While the potential of the Indian market is huge investments as well,” he says. “With changes in and challenges stand equally tall, what really drives lifestyles and increased awareness, customers now a foodservice operator specifically towards a QSR prefer quality food in a safe, hygienic environment. format? And when does a QSR outlet breaks even? This is something being acknowledged now, and According to Kapur, one of attractions of QSRs is will contribute to the growth of Indian QSRs,” he the comparatively quicker returns on investment. says. “Full-service formats take a longer gestation period Kapur of Yo! China points out that for any investor to achieve favourable ROI compared to QSR outlets intending to open a chain of restaurants in India, which generally generate payback within four years. 26 July-August 2011 FOODSERVICE INDIA EDITION
  • 4. The QSRs often succeed in a big way because of Start-up Challenges Consumer Foodservicespeed of service and overall consistency, and also So even as the excitement about the QSR business by Location in Indiabecause they are more accessible through multiple among restaurateurs and entrepreneurs seems • Standalone dominates, touch points for families with children,” says he. justified, what about the multiple challenges that with an 87% share of Kapur points out that casual-dining restaurants often queer the pitch, especially the start-up pangs? outlets in 2009 face more challenges in keeping up with Rohit Aggarwal, CEO of LiteBite Foods, highlights • Travel locations record competitors because they are competing with both, some serious operational challenges that crop up the strongest growth of fine-dining restaurants and fast-casual places, once any QSR commences operations. He says 17% in 2009 to reach depending on subtleties in menu pricing and negative myths about QSRs as a potential career 64,000 outlets atmosphere. gateway pose a problem in hiring people. “Beliefs • Shopping mall outlets Bakshi however holds the opposite view. regarding pay scales and growth prospects make suffer from the According to him, the break-even period of QSRs candidates think twice before joining any QSR economic downturn in could be anything between 6-8 years versus 2-3 chain. Another issue is the unavailability of skilled 2009 years for fine-dining restaurants. “A restaurant is a staff. Pre-trained recruits are hard to find. Most • Foodservice operators long-term business; it takes comparatively long to employees get their initial training for the job only expand in travel and turn profitable. This is especially true for QSRs as after a QSR brand has hired them.” standalone locations in the margins are thin, and menu pricing plays a big With 11,514 employees across 378 stores, the 2009 role in defining success or failure. Also, QSRs need HR department of Domino’s faces a big challenge, • Retail is expected to scalability to become viable and succeed, which keeping the entire work force motivated to deliver record the fastest is not the case with fine dining restaurants,” he their best. “There is a scarcity of professional and CAGR of 9% in terms explains. “However, it is important to understand trained personnel at all levels to run the growing of outlets over the forecast period source: Euromonitor International Report, Aug 2010 QSRs in India : Snapshot Total Number of Outlets as of May ‘11 McDonald’s India 216 Domino’sthat QSRs would always have a larger pie of the IEO business. Given a typically high employee churn, it 368(Informal Eating Out) market and their life cycle becomes even bigger challenge,” Domino’s Rajpal Subwaywould always be far longer than that of a fine dining says. 204restaurant.” While Yo! China’s Kapur agrees on the lack of Yum Brands India Dheeraj Gupta, managing director of Jumbo trained manpower in India as a big hurdle for QSRKing Vada Pav, offers a more optimistic outlook on outlets, he also mentions infrastructure issues like 300 Plusbusiness viability of QSRs. “A well-run QSR unit cold chains and power and water supply as other Nirula’sshould break even in 2-3 years,” he says. bottlenecks. “A complex maze of licensing and 85 Plus Vinod Mahboobani, vice-president of business taxation laws – which differ from state to state – isdevelopment at Yum! Brands India, believes the the other major irritant,” he says. Yo! Chinalife cycle of a QSR would vary across brands. “Big Jumbo King’s Gupta seconds this view. “Because 50 Plusmultinational QSR chains figure it out fairly quickly of multiple taxes varying from state to state, uniform Jumbo King Vada Pavas recall for these brands already exists. The QSR pricing – which forms the essence of a national 43model is far more scalable than a FDR or a CDR brand – becomes difficult”. He also mentions highmodel due to the higher levels of transactions that it logistics costs as a major problem. “Transportation Cafe Coffee Daydrives. If you get the consumer proposition right and costs are high because the current QSR brands 1200 Plusoffer the right value, the returns are very attractive.” have relatively smaller footprints. These should FOODSERVICE INDIA EDITION July-August 2011 27
  • 5. COVER STORYMarket Share of Leading Foodservice Formats in India (Percentage Breakdown)Brand Company name (GBO) 2004 2005 2006 2007 2008 2009McDonald’s McDonald’s Corp 0.1 0.1 0.2 0.2 0.2 0.2Café Coffee Day Amalgamated Bean Coffee 0.1 0.1 0.1 0.1 0.1 0.1 Trading Co LtdDomino’s Pizza Domino’s Pizza Inc 0.0 0.1 0.1 0.1 0.1 0.1Indian Hotels Co Indian Hotels Co Ltd 0.2 0.2 0.2 0.2 0.2 0.1RestaurantsPizza Hut Yum! Brands Inc 0.1 0.1 0.1 0.1 0.1 0.1Others Others 99.5 99.5 99.4 99.3 99.3 99.3Total Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Euromonitor International Report, August 2010 however decrease as store count increases and economies of scale kick in.” Elaborating on the complexity of licensing issues, Kuckreja of Nirula’s lists the following procedures of documentation and licensing that are required in India to open an independently-owned restaurant: • Land Purchase/Lease: From government agencies or private individuals • Approval of development plans: From city municipal body • Planning permission / Retail permission: From city municipal body, but other state and central government agencies are also involved for providing certain clearances Raise Supply chain and distribution infrastructure arefunding via clearly big challenges in India, compared to theprofessional developed markets. “There is a complete absenceinvestors and of big distribution companies in India, the cold chain infrastructure is not developed and thebuild that into condition of the roads is pitiable. In effect, the sheera business. cost of entering a new territory is a major drain,”Select smart says Mahboobani of Yum! Brands. Kapur agrees that there is a lack of inadequatelocations and supply chain infrastructure for restaurants. Hedetail out all points that there are very few specialised supply chain companies in this sector and there is hugeaspects of the requirement of an organised supply chain solutionoperation. to help restaurants with procurements. “There should be more companies looking at delivery and storage cold chains, though there are indications of – Ashish Kapoor, supply chain networks maturing in the metros,” hemanaging director, states. Yo! China Rajpal considers these bottlenecks as part and parcel of every sunrise industry that is beginning to take off. “Infrastructure scarcity, rising real estate rentals, complex tax structures, shortages in manpower, inflationary pressures, underdeveloped supply chains, lack of quality and reliable suppliers – these are typically features of a growing industry in its early days,” he says, adding that there are ways around them. Domino’s, for instance, enters long-term contracts for the properties it leases for opening stores. This, according to Rajpal gives the company as well as the property owner a sense of continuity and long-term relationship. Such long- 28 July-August 2011 FOODSERVICE INDIA EDITION
  • 6. India Market Size: Historic and Forecast Foodservice Value (Rs mn/Current Prices) Categories 2008 2009 2010 2011 2012 2013 India may Consumer Foodservice by Type 3,195,019.1 3,546,940.7 4,200,133.7 4,850,054.2 5,487,054.7 6,115,853.1 look like a and Chained/Independent market that Consumer Foodservice by 3,195,019.1 3,546,940.7 4,200,133.7 4,850,054.3 5,487,054.6 6,115,853.2 is easy to Location enter, but to Source: Euromonitor International Report, Aug 2010 be successful one reallyterm contracts are also signed with vendors andsuppliers of key ingredients. Food customisation is an art and it is possible to go overboard, cautions Mahboobani of Yum! needs to have “It is actually a win-win situation for the producer Brands India. “Simply put, you have to be an a lot of energyand the consumer. To the supplier it conveys the international brand with an Indian heart. You have investedsecurity of assured billing and returns. For thebuyer, this brings cost efficiencies and also assured to customise to an extent to suit local palates, but have to stay true to the core international offering.” towardsavailability of raw materials,” adds Rajpal. Typical customisation of an international offering for getting the Gupta of Jumbo King Vada Pav says that, all said India would include substituting beef with chicken, back-endand done, the market scenario today is much better pumping up the spice levels and making sure the chain inthan what it was five years ago. His company is menu has some vegetarian offerings. Mahboobaninow focusing on expanding its footprint and hopes says they have a clearly defined menu vision based place.that with every extra outlet added, supply chaindynamics would improve further and reflect onproduct quality and pricing. “A QSR business is alargely volume-based game. When we were at fiveoutlets, no one wanted to give us our rates. Nowthat we are approaching the 50-unit mark, everyonewants to work on our terms,” he adds.Think Global, Act LocalApart from getting the logistics in place, developinga menu that suits the tastes and preferences oftarget customers forms an integral part of anysuccessful QSR business in India. This is veryimportant because of the unique tastes of Indiansthat vary from region to region. For some QSR chains, the mantra of success isto have a mix of international and locally innovatedproducts in the menu, a strategy pioneered byMcDonald’s in India. “This strategy has worked forus, and is also working for new players who haveentered India since we launched here in 1996,”admits Bakshi whose company has introducedsuch hybrid India-specific products as McAloo TikkiBurger and steered clear of any beef or pork itemsin its menu. Another factor helping this trend is anevolution in consumption habits of Indians as theyturn increasingly cosmopolitan. “Today’s customershave begun experimenting and are increasinglyopen to new cuisines, foods and flavours. Thiscreates a very viable environment for the newplayers to launch global products, while continuingto build their portfolio with local flavours,” he adds. The success of this localisation strategy has notgone unnoticed by other QSR chains in India. Asthe eating out habit of Indians increases and theaverage bill value goes up, restaurant operatorsacross cuisines want to secure their share ofthese higher spends. “To do so, it is not just theinternational operators who have reviewed andlocalised their offerings to attract more consumers;domestic players are also continuously revampingtheir menus,” notes Kuckreja. FOODSERVICE INDIA EDITION July-August 2011 29
  • 7. COVER STORY on consumer insights and needs. “We have a rich pipeline of products and a well established R&D team that is constantly looking at product innovation. The marketing, supply chain and R&D teams work closely together to ensure readiness for new product launches,” he explains. Subway’s Gulri agrees that Indians have very unique taste buds, and that all QSRs in the market must recognise this and adapt their menus accordingly. “Based on this insight, we at Subway have been offering sandwiches successfully in India over the past decade,” he adds. Domino’s India also reworks its menu mix from time to time based on continuous customer feedback. For instance, the pizza-maker has localized the toppings by adding uniquely Indian If one is items such as paneer and spices, in an effort tolooking at make more Indians try pizzas and develop a tastea franchise for them. “We have launched many pizzas with ingredients that are in sync with quintessentiallymodel, one Indian flavours, but we also continue to have somehas to speak international favourites on our menu, and they areto people who doing pretty well,” says Rajpal.are already Domino’s has set in place a flexible supply chain which can quickly adapt to the changing marketinvolved in requirements. “Our supply chain is always alignedsuch a model. with the marketing department on new ingredientsGetting their as well as new vendor development for new productopinions launches and menu enhancements,” he adds. Despite the trend of customisation andgenerates localization, not many specialised QSR conceptsa fair have emerged in the Indian market yet. Westernunderstanding fast food still appears the best bet for most QSRs. New food concepts such as crepes, bagels, donuts,before muffins and salads – popular abroad – are stillkicking off a unheard of in India.foodservice Domino’s Rajpal explains the reason: popularityventure. of a product depends on its taste and acceptance by consumers. “It took almost 6-7 years for popular – Harneet Singh food formats such as burgers and pizzas to gain Rajpal, acceptance in India. It’s only in last five years that the QSR industry has really started booming. Burgers, pizzas, fries and sandwiches are the VP - marketing, forte of the currently operational QSRs and have Domino’s Pizza therefore, become popular menu items.” India He argues that specialized food concepts will become popular once QSR chains start focusing on them. Some of them are getting there. For example, Dunkin’ Donuts is soon making its entry into India. The international baked goods and coffee chain has signed an exclusive master franchisee agreement with Jubilant Foodworks, which also manages the Domino Pizza franchise in the country. The Indian market seems ripe for concept- led chains and those focusing on new cuisines because of changing lifestyles of consumers which has made them more open to experimentation. “International food has a strong presence in the fine-dining segment. In future, there might be a trickle-down effect from the fine-dining to the mid- market offerings of international cuisine, as one has seen in the case of Chinese, Thai and even Italian cuisines,” says Kapur of Yo! China. 30 July-August 2011 FOODSERVICE INDIA EDITION
  • 8. COVER STORY Gaining Ground quick snack. It intends to explore non-traditional Location is perhaps the most important factor in the location opportunities, but not immediately. “We success of QSR chains. The Indian location strategy will eventually look at railway stations across the of most of them until now seems to have been country, airports and bus stations as they evolve driven by the “safety first” mantra. But what about and the highway petrol pumps as our national International the under-leveraged opportunities in high-traffic highways develop,” Gupta says.food has a public spaces such as highways, bus stations andstrong presence railway stations that are waiting to be tapped? “It’s true that the location focus initially for mostin the fine- QSR chains in India was shopping centres anddining segment. high streets,” Kuckreja agrees. “Highways certainlyIn future, there offer very high seasonal growth, but building andmight be a operating costs are very high on such locations. Buttrickle-down with improved infrastructure of cities, highways as aeffect from the new avenue for growth are surely being explored byfine-dining to most chains.” According to him the key determinants ofthe mid-market a successful highway strategy are customerofferings of convenience, service innovation, ample parkinginternational space and quality food. Currently, along withcuisine. Nirula’s, QSR chains such as Café Coffee Day, Barista, Haldiram’s and McDonald’s are operational The Final Take on many national highways. What does it take to succeed in the Indian QSR market? Why some prosper while others fold up? Mahboobani says it is critical to understand and crack the consumer proposition, offer what consumers really want at the right price and with a truly differentiated experience. “This requires a dive into the market and consumer preferences and adapting the offerings accordingly,” he adds. Domino’s Rajpal emphasizes that it is crucial for a QSR chain to understand the challenges in the sector and the business model that one is considering to enter. “For instance, if one is looking at a franchise model, one has to speak to people who are already involved in such a model. Getting their opinions on the opportunities and challenges generates a fair understanding before kicking off a foodservice venture,” he advises. QSR as a sector has a vast potential in India and can be tapped with the right product, quality, service, value for money and ambience. “The trick lies in understanding who the customers are and what their needs and requirements are. Provoking What holds the QSR chains back from fully continuous feedback from customers is one of exploiting the highways is an absence of localized the best ways to get them involved in the brand,” supply chains, erratic customer inflows and poor Rajpal adds. surrounding infrastructure. “QSR chains are Yo! China’s Kapur lays emphasis on defining gradually moving into this segment and hopefully the value proposition and opportunity of the we will see a richer QSR offer on Indian highways in business model. “Raise funding via professional the years to come,” Bakshi says. investors and build that into a business, select A major issue in exploring new locations off the smart locations and detail out all aspects of the beaten track is the availability of quality retail real operation,” he says. “Moments of truth – the estate for restaurants. “Locations such as airports, experiences that you deliver to your consumers – railway stations, bus terminals and highways have have to exist. For instance, whenever we see our great customer traffic, and they are certainly very customers waiting to get their orders delivered, we under-leveraged. These can provide great leverage offer them a complimentary side order. It makes to restaurant chains to expand, provided certain them feel special.” real estate and other issues that exist in these Bakshi of McDonald’s has a rather short but locations are corrected,” he adds. effective formula for success: “Listen to your Jumbo King Vada Pav predominantly targets customers. Innovate continuously. Think long the young on-the-go Indian who is looking for a term.” •• 32 July-August 2011 FOODSERVICE INDIA EDITION

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