EATING OUTA Bite of F&B Food Service in India

INDIA is one of the world’s largest producers as well as consumers of food. Changing food consumption patterns of India’s population is expected to not only increase consumption volume in absolute terms to US$230 billion by 2013 but also shift people’s diet qualitatively towards richer, processed foods, which will force increased commodity requirements.1 Thanks to a population of more than one billion people and food constituting a major share of the Indian consumer’s budget, the industry has continued to perform well despite the poor economic performance across the board during the global recession of 2008-09.

The F&B industry comprises three distinct categories: (1) agricultural and horticultural produce, (2) processed foods and beverages, and (3) food and beverage retail.

India’s agricultural sector is large and diverse, accounting for about 16% of GDP and 10% of export earnings. Its arable land area of 159.7 million hectares (394.6 million acres) is the second largest in the world (after the United States), and its gross irrigated crop area of 82.6 million hectares (215.6 million acres) is the largest in the world. India is among the top three global producers of a broad range of crops, including wheat, rice, pulses, peanuts, fruits, and vegetables. Worldwide, India has the largest herds of buffalo and cattle, is the largest producer of milk, and has one of the largest and fastest growing poultry industries.2

Food and Beverage Industry

Agricultural and horticultural produce: Fruits, vegetables, herbs, nuts, grains, pulses, seeds, other food crops, milk, meats, eggs, poultry, fish, seafood

Processed food and beverages: Packaged staples, processed fruits and vegetables, ready-to-eat foods, canned products, dairy products, baked goods, snacks, alcoholic beverages, nonalcoholic beverages (juices, cola, health drinks), tea, coffee, confectionery

Food and beverage retail: Food retailing (grocery stores and supermarkets) and food service establishments (organised sector--quick service restaurants, full-service casual and fine dining restaurants, hotels, bars and lounges, cafes; unorganised sector--dhabas, street stalls, halwais (sweet shops), roadside vendors, food carts)

Source: Enterprise Consulting, Athena Infonomics

1Past and Prescriptions for the Future, released at CII’s Conference on Crop Diversification 2US Department of Agriculture

The Indian food processing sector has an abundant agricultural base to rely on and is a fast growing sector in the economy. Standing at $135 billion, the sector is poised to grow at a compound annual rate of 10% to reach over $200 billion by 2015.3 Dairy products, in particular packaged milk, biscuits, snacks, packaged staples (flour, cooking oils) are among the leading growth segments in this sector. Industry experts point to ready-to-eat foods, indulgence foods (ice cream, salty and sweet snacks), and health foods as holding significant potential. Changing demographics and lifestyles with consumers seeking more convenience and choice, rising disposable incomes, and government initiatives are infusing this sector with huge opportunities for new and existing players. These changes will spur improvements in much-needed food processing infrastructure and bring about further growth in new and existing segments.

The F&B retail industry, which sells the fresh agricultural produce and the processed and prepared foods to people, has grown considerably in the last few years, with organised retailing becoming more prominent in urban India. On one side of the F&B retail coin are the unorganized sellers (kirana stores and neighborhood fruit/vegetable vendors) and the organized grocery stores and supermarkets such as Food World, Nilgiri’s, and Spencers, which are doing well in cities across the country. These primarily sell packaged, processed foods, staples, and fresh produce. On the other side of the F&B retail coin are casual/fine dining restaurants, quick service/fast food restaurants, food courts, cafes, and the numerous “away from home” eateries in the unorganized space. The market is still concentrated with unorganised retailers but the organised sector is fast gaining ground.

This report is a primer on the Indian F&B food service sector with particular focus on quick service/fast food restaurants and eateries.

F&B Food Service Structure And Size

The F&B foodservice industry provides both direct and indirect employment to millions of Indians. Latest industry estimates place direct employment at 5 million workers. In addition, there are 10 million street vendors in India. The industry also makes a significant contribution in terms of tax revenue to the government. It currently contributes $220 million to government coffers, which has the potential to reach $770 million, according to industry analysts. According to the National Restaurant Association of India (NRAI), the F&B foodservice industry is growing at a rate of 5-6% per annum with revenues amounting to $8.6 billion.

The F&B foodservice sector in India comprises two distinct market segments: organised and unorganised. The organised segment accounts for 16% of the industry and is worth about $2 billion. It is growing at a compound annual rate of 25%. The organised sector is characterised by an organised supply chain with quality control and sourcing norms, multiple outlets with standardised design, and accounting transparency. The unorganised segment accounts for the bulk of the industry (84%) and lacks technical and accounting standardisation and a structured supply system or business practices.

The Indian market has been piquing the interest of global players and several have already entered or are working on entering the fast-growing Indian foodservice market. Domestic players are also beefing up their position to grab their bite of the growing market. In the next 3 to 5 years, the organised segment is projected to grow at 20-25% and reach almost 45% of the Indian F&B foodservice sector, at the expense of the unorganised sector, which will shrink to 55%.

A number of factors identified in this report will drive this growth in the organised sector. The attractive growth potential of the organised segment has generated a lot of interest among private equity investors who made investments worth $100 million in the first half of 2011 itself.4

3India Brand Equity Foundation4Associated Chambers of Commerce & Industry of India (ASSOCHAM)

Breakup of F&B Food Service, 2011

Projected breakup of F&B Food Service, 2015

Slices of the Organised F&B Food Service Pie

The organised segment is dominated by restaurants, both full service and quick service (40%), followed by cafes, pubs, clubs, and bars (31%), takeouts/home delivery formats (17%), and hotels (9%). The unorganised segment consists of individuals or families selling ready-to-eat food through roadside

vending, dhabas, food carts, and street stalls.

Source: National Restaurant Association of IndiaSource: National Restaurant Association of India

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Competitive Landscape

Amongst the various formats in the organised sector, quick service (or fast food) restaurants (QSRs) have been growing the fastest, registering year-over-year growth of 15-20%—a trend that is expected to continue over the next five years.5 The QSR market in India is worth $13 billion and is dominated by global players like Domino's, McDonald's, KFC, and Pizza Hut. QSRs are well-entrenched in the big metropolitan cities, and companies are now pushing into tier II and III cities such as Pune, Ahmedabad, and Chandigarh. Indian consumers are more than ever willing to try new cuisines and foods and have the purchasing power to back it up. Increasing brand awareness through travel and media has also fueled the growth of QSRs in India. The rise of large organised retail formats like malls, multiplexes, and food courts has provided ideal spaces for QSRs to set up shop. International fast food brands have teamed up with small Indian franchisors to setup their brands in India, and this route is working out well for the companies.

Although QSRs have expanded exponentially, their share of the entire F&B foodservice industry continues to be low. There is immense scope for further penetration and increased consumption. Evolving lifestyles, younger population, increasing income, expansion of retail space, increase in travel and commuting, media exposure to global brands, and other factors indicate that more and more Indians are choosing to eat out, thus creating vast opportunities for new players and existing players to expand.

In the flurry of global QSR activity in India, domestic QSR brands are also upping the ante and vying for their slice of the market. These have traditionally had a loyal following in their regions of operations. Unlike Western brands, local chains have largely been confined to specific areas. Nirula’s, one of India’s oldest QSRs, is well established in the northern part of the country. In 2006 Navis Capital Partners and Managing Director Samir Kuckreja acquired the Nirula's Group of Companies. The new team at Nirula's undertook a massive brand revamp exercise. While retaining the brand name and logo of "Nirula's," new sub-brand logos were created for Nirula's ice creams, pastry shop, delivery business, and others. Bengaluru-based fast food chain Kaati Zone offers a range of quick-to-eat kaati rolls and other on-the-go assortments. CEO Kiran Nadkarni has expressed interest in taking Kaati Zone’s existing franchise model to the next level and aggressively pursuing it. Coffee Day Group, Haldiram’s, Bikanervala, and Rasna’s Devil’s Workshop are making ambitious plans to open new outlets across the country. Even traditional joints like the Bengaluru-based MTR Restaurant and the Chennai-based MuruganIdli Shop are looking at Delhi and Mumbai for the first time in 80 years.

Global Brands Biting Big in India

• Hardcastle Restaurants, Indian partner of McDonald's, is planning a massive expansion, doubling its India stores over the next three years with an investment of $100 million. • Yum Brands, which owns KFC, Taco Bell, and Pizza Hut, plans to open 1,000 outlets—half of them KFC restaurants—and over the next four years is projected to rake in $1 billion in revenue from India. • Indian fast-food operator Jubilant FoodWorks Ltd. runs the Domino’s Pizza chain in India. Domino's Pizza India has grown into a countrywide network of more than 300 stores with a team of over 9,000 people.• Dunkin’ Donuts along with Jubilant FoodWorks setup its first Indian outlet in New Delhi earlier this May. Cinnabon, part of Focus Brands, has set up shop in New Delhi.• Subway Systems India Pvt. Ltd., part of the US sandwich chain Subway, opened its first restaurant in India in 2001 and has grown its operations to 183 outlets in 26 cities. Competitor Quiznos has set up shop in Hyderabad and Mumbai.• Pizza chain Papa John's International Inc. has 25 outlets in India.• Baskin-Robbins opened its first shop in India in 2010 and expects to open approximately 60 additional locations over the next year. Baskin-Robbins India launched a convenient home delivery service in Mumbai and plans to expand this service to several other key cities.• Denny’s, part of CKE Restaurants, is gearing up to enter India in summer 2012. • US bakery chain Au Bon Pain and Belgian bakery-café Le Pain Quotidien entered India in 2009 and 2011, respectively.• Starbucks, which set up a 50:50 joint venture with Tata Global Beverages Ltd., expects to open its first cafe in 2012 and aims to have 50 stores brewing coffee by year-end. • Frozen yogurt chain Pinkberry announced it is entering India via a tie up with JSM Corporation.• Others wanting a piece of the action include Burger King, Church’s Chicken, Pollo Tropical, Wendy’s, Arby’s, Schlotzsky'sDeli, BannaStrow's Crepes, Raving Brands (Carvel Ice Cream, Moe’s Southwest Grill, Aunt Annie’s Pretzels), Rita’s Italian Ice, and Johnny Rockets.

5NRAI Whitepaper on the Indian Restaurant Industry

Domino’s India: The Road to Success

With a compound annual growth rate of 40%, Domino’s India is one of the biggest success stories of an international QSR brand in the country. However, the road to becoming a leading player has not been easy and has taken a decade of toil. Domino’s opened its first Indian outlet in January 1996 in New Delhi. With the concept of home delivery being new to India at that time, it wasn’t easy work for Domino’s to popularise the concept in the Indian market. The company, however, was successful in putting in place an integrated home delivery system, which formed the backbone of its Indian operations.

Domino’s also altered its products to suit Indian tastes with the introduction of localised toppings like “Peppy Paneer” and “Chicken Chettinad,” and it was also one of the first fast food chains in India to spread its wings into the mini-metros and tier II & III locations—a move deemed risky by many at that time. In addition to its localised product offerings, Domino’s has also been supported well by its strong proposition of “on-time delivery.” What works for the company is that it has been successful in establishing a strong brand recall with the “30 minutes” delivery proposition. To enhance this delivery proposition, the company started setting up stores on a franchisee model, in locations that could cater the local demand within 30 minutes.

By 2005, Domino’s had 102 outlets across the country. However, it was still behind McDonald’s and realised that its on-time delivery promise was not strong enough to convince many to switch tastes. It is at this point when Domino’s realised that just the promise of “on-time delivery” is not enough and started working on coming up with a low priced menu. Lowering costs, however, was not easy and to be a market leader in India, Domino’s had to spend considerable time and effort in fine-tuning its supply chain—an effort that took three years. By August 2008, Domino’s came up with one of the lowest priced pizzas in the Indian market, which sold for INR 35 (70¢). The low cost strategy was well accepted by Indian consumers who had just become more careful about their expenditures as the financial crisis hit the Indian economy. By 2010, when Jubilant FoodWorks (the company managing Domino’s India) came out with its IPO, it was oversubscribed 31.11 times, a sign of investor confidence in the business. The total income in 4Q2010 for Jubilant increased by 67.2% year over year to INR 1.24 billion (US$24.8 million). Domino’s has, since then, ventured into six new tier II cities and operates over 430 outlets in India and 70% of all home delivered pizzas are those baked by Domino’s.

The rising number of middle-class consumers and the youth segment will only add to its growth. The Indian market is already amongst the top 10 contributors to Domino’s global top line and by 2014, the chain expects it to be amongst the top five earners globally.

Farm To Fork: The F&B Supply Chain

The food supply chain in India is complex, less developed, and involves numerous small stakeholders at various stages: farmers, wholesalers, food manufacturers, retailers, and multiple intermediaries who add little value to the product.

One notable development since the advent of global brands in the Indian F&B sector is direct procurement by way of contract farming by large F&B players to source key products. While contracting firms benefit from more assured supplies and reasonable control over quality and other specifications, this system does have its risks. In India, contracting agreements are often verbal or informal in nature, and should there be a breach, neither party will be keen to contest these issues in court, where litigation can be an extremely slow process.

While the supply chain is dominated by the traditional set up of traders and intermediaries, a lot of venture capital and private equity activity has been taking place in developing robust foodservice supply chains with modernisation of cold storage and transportation. Most of the investment is going towards supply chain management and building cold storage infrastructure. Investments in 2012 are expected to rise by 50 percent, hitting $750 million from about $500 million in 2011.6 Among recent investments, World Bank’s arm the International Finance Corporation has reportedly invested $6.5 million in food supply chain company Snowman Logistics. SwastikRoadlines Private Limited, the Gwalior-based food cargo supply chain service provider, has raised $10 million from India Equity Partners. The company offers India-wide solutions in both long haul (primary) movement of temperature sensitive goods, intra-city secondary distribution in over 55 cities, and surface transportation for specialised dry cargo. In 2010 the Coffee Day Group acquired control of Sical Logistics, which provides integrated multimodal logistics services. IL&FS Private Equity has invested INR 40 crore in Indore-based JICS Logistics Limited. Formerly known as Jhawar Ice and Cold Storage, the company provides a wide range of services including warehousing, collateral management, commodity funding, and export. IDFC Private Equity has invested INR 150 crore in Jaipur-based Staragri Warehousing and Collateral Management Limited, which provides post-harvest management solutions. Staragri plans to add allied services like cold chain, seed and liquid warehousing, agri retailing, and farmer clubs.

It is crucial to employ the right sourcing strategies in a market like India. A well planned supply chain requires strong domain knowledge as well as a localised approach and is a major contributor to running an efficient, successful Indian QSR operation.

The McSupply Chain

McDonald’s spent four years developing its supply chain prior to setting up its first store. Today, McDonald’s sources 95% of its food ingredients from 40 suppliers in a highly efficient operation that contributes to the company’s success in India. Most of the suppliers are local and a few are international companies that have set up shop in India to supply McDonald’s. The suppliers are two-tiered: Tier 1 suppliers receive fresh produce from Tier 2 suppliers (lettuce, potato, cheese, and poultry farmers) and convert them into value-added ingredients such as vegetable and chicken patties,french fries, and potato wedges. Trikaya Agriculture supplies the iceberg lettuce and Dynamix Dairy supplies the cheese via a dedicated system of quality milk procurement. The Tier 2 suppliers are Vista Processed Foods Pvt. Ltd. and McCain Foods India Pvt. Ltd. A dedicated fleet of refrigerated trucks then transports the processed products to McDonald’s distribution centers (in Noida, Mumbai, Bengaluru, and Kolkata). The fast food is then transported to the over 200 McDonald’s locations across the country. One aspect of the supply chain that is crucial to McDonald’s supply chain is return logistics. For example, the buns come packed in crates and once the buns are unpacked, the crates are return shipped to the bakeries for use once again, so the process goes on. McDonald’s has a sole distribu-tion partner, RK Foodland Pvt. Ltd., which manages the four distribution centers and handles the refrigerated truck transportation across the country.

6Mahendra Swarup, President, India Venture Capital Association, quoted in the Hindu Business Line

Source: Enterprise Consulting, Athena Infonomics

Drivers Of F&B Food Service In India

Demand Side Drivers

Favorable Demographics: India, with its population of 1.2 billion, is one of the largest consumer markets in the world. It is also demographically one of the youngest with more than 50% of its population below the age of 25 and more than 65% below the age of 35.7 The majority of Indian consumption of fast food is driven by people between the ages of 18 and 40. The appetite of the young Indian population has been a key driver in QSR industry growth. QSR’s are also increasingly becoming social hangouts, where the young population gathers to meet friends and spend their leisure time. More and more young Indians are gainfully employed in sectors such as information technology and services, which has increased their standard of living and wallet size. This change in the social landscape in urban India has also spurred growth in fast food restaurants.

Increase in Income and Consumption Levels: India’s annual growth of 8% is boosting incomes rapidly. According to the World Bank and International Monetary Fund, per capita income surged to $1,265 in 2010 from $857 in 2006—an almost 50% increase. Growing affluence and higher spending capacity provides a huge opportunity for the foodservice sector. With higher disposable incomes, consumers do not hesitate to spend more on eating out. By 2025, India will have 583 million people living on incomes of above US$4,380 (around US$23,530 after accounting for the purchasing power parity). With 65% of the population are under the age of 35, an increasing number of Indians are capable of earning and have rising disposable incomes, which is driving up demand for specialty and value-added food products.8 Indians spent an estimated $1.3 billion on chain restaurants in 2009. According to Euromonitor, about $400 million of that was at fast food restaurants. According to a McKinsey Global Institute’s (MGI) study titled Bird of Gold: The Rise of India's Consumer Market:

• Total annual household consumption in India is likely to triple (from INR 82,000 in 2005 to INR 248,000 in 2025), making India the fifth largest consumer market by 2025.

• Urban India will account for nearly 68% of consumption growth while rural consumption will account for the remaining 32% by 2025.

• India’s Middle Class population is expected to increase from the present level of ~150 million to ~550 million by 2025.

7India Census Report 20118US Food and Agricultural Service

The projected drop in the relative share of food and beverages in Indian consumption is due to the rise in share of rest of the categories, not an actual fall in food consumption. When incomes rise, it is natural for households to begin to spend more on categories other than food. In fact even though the relative share of food falls, food demand and consumption will accelerate significantly in the next decade.

Lifestyle Changes: The shift to nuclear families and with both parents working and bringing in dual income in most urban households, lifestyles and routines of people have changed, including food habits. There is increased demand for affordable “food on the go” and prepared ingredients to make cooking faster. According to an ASSOCHAM survey, 86% of households prefer to have instant food thanks to a rise in dual income level and standard of living, convenience, and influence of western countries. The same survey reveals that 85% of parents with children under the age of 5 are serving easy-to-cook meals at least 7 to 10 times per month due to increased pressures at work and reduced time for household activities.9 In addition, 92% of nuclear families feel that they have less time than before they had kids and are spending less time in the kitchen and turning to takeout, delivered food, and semi-prepared meals. Of the bachelors surveyed, 72% prefer ready-to-eat food because it is low-cost and saves time and energy in their busy lives.10

Rising Number of Working Women: Along with an increase in India’s working population, there has also been a stark increase in the number of working women. With more women spending a substantial number of hours at work, there is little to no time to prepare elaborate meals at home, as generations before them did. More working women are spending their disposable incomes on eating out or serving ready-to-eat or prepared foods picked up on the way home from work. Urban Indian women who earned an equivalent of $90 per month in 2001 were, on average, taking home as much as $189 in 2010. The rise in urban women’s income is directly reflected in the average monthly household income of urban India going up from $165 in 2001 to $330 in 2010. Participation of women in the workforce increased from 14-17% between 2000 and 2005.11 Nearly 2.1 million people have joined the list of double-income homes between July 2010 and June 2011. This is a major driver that will contribute to the growth of the food service industry, in particular the QSR sector. According to Technopak, women constitute 51% among those who eat out at least once a month.

Lifestyle Changes: The shift to nuclear families and with both parents working and bringing in dual income in most

Profile of a Working Woman: Boon to Indian F&B Sector

RasikaVyas, 35, is a mother and full-time financial analyst in Mumbai. Her 9 to 5 job often runs until 6 or 7 and when she gets home, there is nearly no time to prepare a three course meal as her mother and grandmother did when she was growing up. She relies heavily on packaged, prepared, and frozen foods to make cooking go fast, and several times a week she stops by Domino’s to pick up a couple of pizzas for dinner. Often, her banker husband, Raj, and daughter, Riya, meet her after work at one of the many QSRs near her office to grab dinner. “I have the money to spend on eating out but I have no time to cook an elaborate Indian meal,” she says. Since, traditionally, women have been the decision makers on food in Indian households, this trend among working women to opt to eat out and buy prepared foods to make quick meals at home bodes very well for the Indian F&B industry.

9ASSOCHAM, Survey on Ready to Eat Food in Metropolitan Cities10Ibid.11Technopak, 2009

Health and Hygiene Consciousness: Indian consumers are becoming ever-more conscious of the quality of the food and drinks they consume. Rising awareness and incomes among upwardly mobile urban consumers are making them care more about health and fitness. The mushrooming of juice bars and kiosks selling salads and wraps are cases in point. Consumers are opting for healthy options at the supermarket as well. Many now cook with healthier oils as opposed to ghee and butter, the traditional cooking medium in India. The fortified/energy drinks segment is also picking up pace. These include fortified milk and buttermilk, vitamin water, enhanced iced teas, and other restorative drinks. According to Euromonitor International, urban Indian consumers are looking for easy-to-consume fortified beverages because they are concerned they are not consuming enough nutrients due to their erratic eating habits and schedules. Euromonitor estimates India's functional drink market at INR 546 crore in 2011, 19% more than in 2010.

Urbanisation: At present the QSR/fast food phenomenon is largely an urban story. Urbanisation in India is growing by the day, which will further contribute to increasing demand among urban Indians to eat out. The proportion of Indian population living in urban areas is expected to grow substantially through 2030.As urban concentration rises, so will income levels of the people dwelling in the urban areas. A McKinsey study on urban India estimates that by 2030, the population of Indian cities will reach around 590 million—40% of India’s total population. With economic growth reaching beyond urban areas, Indian consumers in tier II and III cities are also experiencing a rise in incomes and purchasing power. QSRs are rightly eyeing these markets as they hold enormous opportunities to expandand grow.

Supply Side Drivers

Multiple Cuisines: The foray of Indian restaurants into a variety of global cuisines is having a positive impact on the F&B sector. Indo-Chinese food has risen in popularity to almost become a staple cuisine across the country, and new favorites such as Mexican, Italian, Thai, and Japanese food are tickling the palates of Indian consumers. They are more willing to experiment with different cuisines because it is now easily accessible in the cities they live in, and this trend could also increase Indian consumers’ frequency of eating out.

Improved Retail Formats: The development of malls and multiplexes has provided the F&B industry with ideal spaces for operation. Malls have allowed new formats such as food courts to enter the market and offer consumers access to multiple cuisines. A portion of the malls’ traffic is also converted into customers for the food courts (the inverse also being true) and leads to an increase in revenue for both.

Emergence of Logistics Providers and Contract Cultivation: Contract farming—companies signing contracts with farmers to grow a specific crop and guaranteeing to buy the produce at an agreed price—has emerged as a preferred way for big global and domestic F&B brands to source agricultural produce. Take the case of potatoes. McCain Foods, which supplies McDonald’s, has 400 farmers cultivating 2,000 acres of potato fields in Gujarat under contract. Pepsi Foods has over 2,000 farmers on contract, covering 7,000 acres across Haryana, Punjab, and Uttar Pradesh for crops ranging from potato to chilli and groundnuts. Nestle India, Rallis, and ITC are also contracting farmers.12 Third party logistics providers, which transport the produce and food products from source to destination, have also emerged as growth in the F&B sector picks up. As mentioned earlier, Radhakrishna Foodland, a back end distribution and logistics company, offers its services to McDonald’s, Pizza Hut, and Subway.

At present the QSR/fast food phenomenon is largely an urban story. Urbanisation in India is growing by the day, which will further contribute to increasing demand among urban Indians to eat out. The proportion of Indian population living in urban areas is expected to grow substantially through 2030.As urban concentration rises, so will income levels of the people dwelling in the urban areas. A McKinsey study on urban India estimates that by 2030, the population of Indian cities will reach around 590 million—40% of India’s total population. With economic growth reaching beyond urban areas, Indian consumers in tier II and III cities are also experiencing a rise in incomes and purchasing power. QSRs are rightly eyeing these

12Wall Street Journal India and Times of India

Government Regulations

Foreign Direct Investment in India

In January 2012, the Government of India announced it is permitting 100% FDI in single brand retail under the government approval route—i.e., global single brands such as Starbucks, Louis Vuitton, Ikea, and Gucci can have full ownership of their Indian businesses. Under the old rules, the government required single brand companies to own 51% of their Indian business and therefore they had to find a local investment partner who would own 49% of the business. QSRs like McDonald’s, Pizza Hut, and KFC entered India under the old rules. For new entrants, this new policy could be good news, but there is a catch: Global single brand companies choosing to own their Indian operations 100% (i.e., beyond 51%), are subject to the condition that they will have to procure at least 30% of the value of products from Indian small industries/village and cottage industries, artisans and craftsmen. “Small industries” are defined as industries with a total investment in plant and machinery not exceeding US$1 million. For QSRs well established in the Indian market, this does not seem attractive and is a major reason why the likes of McDonald’s and Yum Brands (Taco Bell, KFC) do not want to break away from their Indian partners.

Companies interested in setting up shop in India make an application to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy and Promotion. The application should specifically indicate the product/product categories that are proposed to be sold under a single brand. Any addition to the product/product categories to be sold under a single brand requires fresh approval of the government. The Department of Industrial Policy and Promotion processes the applications to determine whether the products proposed to be sold satisfy the notified guidelines, before they are considered by the Foreign Investment Promotion Board (FIPB) for government approval. FDI in single brand product retail trading are subject to the following conditions:

(a) Products to be sold should be of a single brand only.(b) Products should be sold under the same brand internationally—i.e., products should be sold under the same brand

in one or more countries other than India.(c) Single brand product retail trading would cover only products that are branded during manufacturing.(d) The foreign investor should be the owner of the brand.(e) As noted earlier, proposals involving FDI beyond 51% are subject to mandatory sourcing of at least 30% of the value

of products sold from Indian small industries/ village and cottage industries, artisans, and craftsmen.

Starbucks Chooses 50:50, Not 100

Starbucks Corporation has inked a 50:50 joint venture with Tata Global Beverages Limited to enter the Indian market. The new company, Tata Starbucks Limited, plans to open 50 outlets across India by end of 2012, with the first one to be opened in later summer in Mumbai or Delhi. Starbucks has not taken advantage of the new rule of 100% FDI in singlebrand retail, which the Indian government now permits, nor did it want to take 51% that the government previously permitted. Speaking to the Financial Telegraph, the president of Starbucks China and Asia Pacific, John Culver, said, “We never considered 51percent. When we looked at the opportunity to enter India, understanding the complexities of the market and the uniqueness that is India, we wanted to find a local business partner.”The government permitting 100% FDI may not be that major an incentive for global companies to pump investment into the country. Given the complex nature of the Indian market, global F&B companies looking to enter India will continue to not opt for full ownership of the Indian operations and choose to tie up with a local partner to gain a foothold. This would be a wise strategy on their part as India can present significant challenges and to surmount them, global companies would need the knowledge and expertise that local partners possess.

Type of License Requirement/Issuing Authority Food Safety and Standards (Licensing and Registration of Food Businesses) Regulations, 2011

Compliance is MANDATORY; obtained from Food Safety and Standards Authority of India and Commissioner of Food Safety

Registration under Factories Act If number of employees exceeds 20; issued by Department of Labour

Shop and Establishment Act MANDATORY; issued by Department of Labour Liquor License L-4 (L-17 as per new Excise Rule)

For service of liquor in the restaurant, otherwise not needed; obtained from Department of Excise

Environmental Clearance MANDATORY; obtained from Pollution Control Board No Objection Certificate/Fire License MANDATORY; obtained from state’s Fire Department State Tax and Value Added Tax Obtained from Department of Commercial Taxes Trade License MANDATORY; obtained from Corporation or Municipality

of the area Health Department Clearance MANDATORY; obtained from Health Commissioner,

Corporation or Municipality of the area Signage License MANDATORY; obtained from Corporation or Municipality

of the area Eating House License MANDATORY; issuing authority is the Police

Commissioner Playing of Music in Restaurants–License

MANDATORY when recorded / live music of the two copyright holders is played in the restaurant.

Lift License If lift is to be installed; issuing authority is Electrical Inspector, Office of the Labour Commissioner

Insurance required to be taken: Public Liability, Product Liability, Fire Policy, and Building & Asset

MANDATORY

Licensing

The Indian F&B Industry is highly regulated with numerous requirements that need to be fulfilled. When opening a new outlet, the following licenses should be obtained:

Source: Athena Infonomics and National Restaurant Association of India

Challenges Facing F&B Food Service

Manpower Issues: The F&B industry requires employees with specific skill sets such as fluency in English and basic knowledge of the workings of the sector. The current system of training in hotel management is not producing enough graduates and getting English speaking staff with basic service skills is proving to be a challenge. The industry also faces high levels of attrition of 40-50%.

High Real Estate Prices: There is a shortage of quality real estate in India and due to the high demand outlets often find themselves paying global rentals at Indian prices. Real estate rentals have increased 3 to 4 times in the past 4 years, contributing a significant percentage to the total costs incurred during operations.

Poor Infrastructure: Irregular supply of electricity is a major challenge faced by the F&B sector in India. As a result outlets have to contend with high costs of backup power, primarily through diesel-based generators. Access to purified water is also an issue and significant costs need to be incurred for securing the same. In terms of transportation logistics, India lags significantly behind other global markets: It takes three times as long to transport goods in India as it does in the USA. Cold storage facilities are also less developed, as are refrigerated transportation services.

Over Licensing: The number of licenses required to set up shop in India is a big challenge faced by many firms that are looking to set up operations in the country. There are, at the very least, 10 to 12 different basic licenses required; the number can go up to 50 depending on the state one is dealing with. As noted earlier, typically, a restaurant is required to obtain a health/trade license, eating house license, liquor license, environmental clearance, clearance from fire department, lift license, playing of music in restaurants license, signage license and nomination under the Prevention of Food Adulteration Act, to name a few. In addition, license fees are variable and are a significant burden on anynew establishment.

A Wise Move: Investing in Human Capital

To address high attrition rates among employees, big QSR brands are investing in the development and growth of their employees, especially at the entry level. For example, when a new employee joins McDonald’s, he or she is taken through a systematic induction programme. This is done through one-on-one interactions as well as exposure to the customer through operations training in the restaurants for a specified period of time. Crewmembers are trained extensively on all food safety and food handling processes. The crew trainees work shoulder-to-shoulder with their trainers while they learn the operational skills necessary for running the restaurant —from the front counter to the kitchen areas. McDonald’s also offers the Graduate Career Advancement Programme, which helps a crewmember transition to the level of assistant manager. Several McDonald's managers had started as crewmembers and have developed valuable career skills along the way. Nirula’s also uses training of its employees as a tool for their career development and to reduce attrition. Apart from companies conducting their own specific training programs, the National Skill Development Corporation, an Indian Ministry of Finance initiative, has tied up vocational staffing group Empower Pragati Vocational and Staffing to train over 20 lakh youngsters in the country over the next 10 years. The project focuses on training for tourism, hospitality and travel, organised retail segments, and information technology/BPO services.

F&B Food Service Trends

More International Players Entering Indian market: Given its large and untapped potential, and despite the challenges, a large number of international players are keen to enter the Indian F&B foodservice market. Many of them are in talks with local partners. Most large players plan to first foray into the Indian metros and then expand to tier II and III cities. Some multinationals are also expanding into India via the inorganic route by acquiring local brands.

Franchising: Food and beverage franchising is a very appealing business concept for an aspiring entrepreneur in India. The franchising sector in general is growing at a swift pace of 35-38% per annum and the market size is expected to reach $ 20 billion by 2013.13

Kiosks and Food Courts Are Increasing in Popularity: Given high property prices, rentals, and shortage of space, there exists a large opportunity in setting up shop in kiosks and food courts. The proliferation of malls and better retail infrastructure has presented an opportunity for players to share costs associated with operations. The number of food courts has increased from 39 in 2007 to 270 in 2010, representing a compound annual growth rate of 27.36%. This number is expected to go up to 1,200 in 2015, showing a compound annual growth rate of 34.76%.

Expansion into Smaller Cities and Towns: While new entrants tend to start their operations in metropolitan cities, the existing players in the market are looking at smaller tier II cities such as Kanpur, Vadodara, Cochin, Lucknow, and Pune as drivers of growth. Chains such as Nirula’s have gone one step further and expanded into tier III cities such as Meerut and Pathankot and plan to open more across the country.

Localisation of cuisine: When in India, do as Indians do. The Indian market is typically split into vegetarian (31%) and non-vegetarian (69%) restaurants. An important trend, especially amongst the international players, is the “Indianisation” of cuisine. Over the last decade, though, many of these players have improved their performance through a better understanding of the Indian market: Indianising menus, introducing breakfast menus, sit-down formats, and positioning outlets as destinations for family outings. A prime example is McDonald’s. The brand has reaped rewards due to its customer-friendly pricing (the INR 30 Chicken McGrill burger, which is less than 60 US cents) and an Indianised menu that includes the McAlooTikki Burger. McDonald’s today operates across 30 Indian cities and more than 70% of the items served in India are not available in other stores worldwide.14 This strategy is especially relevant in tier II and III cities, where the taste preference is still highly local andchains that have adapted their cuisineshave done well inthese markets.

Different Strokes for Different Folks

The signature Big Mac is not offered in India by McDonald's; neither is any other beef or pork product. Instead, on the McMenu are Chicken Maharaja Mac,Chicken McGrill, McAlooTikki burger, the McVeggie, Paneer Salsa Wrap, Filet-O-Fish, McChicken sandwich, and ChickenMcNuggets.Pizza toppings from Domino's and Pizza Hut do not contain beef; instead a variety of traditional Indian ingredients are offered, such as the Domino's Keema Do Pyazza pizza or Pizza Hut's Kadai Paneer pizza. The Indian Subway menu has chicken tikka sub or roast lamb sub. KFC offers chickpea burger with Thousand Island dressing, slaw made with mixed vegetables, and mixed veggie fingers with salsa. Taco Bell’s Indian menu features burritos stuffed with paneer and vegetables, Crunch wraps with potatoes or chicken, and tacos with potatoes or chicken.

13FICCI-CIFTI estimates14India Brand Equity Foundation

Five Forces

The Indian F&B industry, while having immense opportunity and witnessing high growth rates, is also one that is highly competitive and price sensitive. Understanding the industry dynamics is a crucial component for a new entrant to be successful. An international QSR seeking to enter the market should be aware of five forces operating in the market.

•The Bargaining Power of Suppliers is LOW in the industry as it is characterised by a large number of suppliers, highly fragmented supplier base, and negligible product differentiation.

•The Bargaining Power of Customers is HIGH due to the many alternatives available in the market. The Indian consumers are also highly price sensitive. However, the penetration of western fast food chains in India is still low compared with other mature world markets and there exists immense opportunity in both the metropolitan as well as tier II cities.

•Threat of Substitutes is HIGH as consumers can opt to either eat at home or eat at the numerous unorganised eateries that exist as an alternative.

•Threat of New Entrants is MEDIUM due to the high barriers to entry. Setting up an outlet in India requires a high level of documentation, permits, and licenses compared with other countries. It is imperative that any potential entrant should partner with a domestic firm to navigate through the maze of procedures that are required to set up shop in the Indian market. In addition, the capital costs required to set up a new outlet are high due to high property costs and rentals in major Indian cities.

•Industry Rivalry is HIGH, especially in the more developed cities where there are a large number of competitors in the market. The proliferation of newer food retail formats such as food courts has created a situation in which a high number of players are aggressively competing for business.

Threat of New Entrants

India has opened the door to foreign fast

food players

MEDIUM

Bargaining Powerof Suppliers

There are a numerous suppliers available

in the market

LOW

Industry RivalryNumerous companies are vying for their share of the pie; new retail formats are

heating the competition

HIGH

Threat of SubstitutesMost Indians still prefer

to eat at home

HIGH

Bargaining Powerof Customers

Consumers in India have numerous options and are

highly price sensitive

HIGH

About Athena Infonomics

Athena Infonomics is a boutique research and consultancy firm that applies an analytical approach to solving development and growth issues. We are supported by an active network of distinguished industry leaders, policymakers, academics, and intellectuals. Our team is a diverse mix of highly motivated individuals with backgrounds in engineering, management, economics, statistics, and development. We distinguish ourselves through cutting-edge research methods and tools, conceptual depth, analytical rigor, and holistic multi-disciplinary approaches to problem solving. Our research, analytics, and consulting services are geared toward domestic and international industry associations, state governments, multilaterals, and private companies. The sectors we focus on include Skill Development, Power, Infrastructure, and Retail.

This report was prepared by Enterprise Consulting, Athena's full-service division providing the entire range of services for companies and entrepreneurs looking to start or grow their business: from Micro Market Entry Strategies (market research, feasibility studies, and business plan creation) to designing a roadmap and implementation.

Don Devprakash, Lead Consultant at Enterprise Consulting, has more than 10 years of experience in the USA and India in Developing, Starting and Managing New Businesses; Franchise Ownership and Operation (both as a franchisee and franchisor); and Brand and Vendor Development and Management. Don ran a group of franchise businesses and also developed a micro credit company in the USA. Reach him at dd@athenainfonomics.in.

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