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India’s Restaurant Industry on the Rise
As a consumer service industry, restaurants were heavily impacted by the COVID-19 pandemic due to various social distancing measures. India was not an exception, and many mom-and-pop restaurants were forced to close during the period. However, COVID-19 has also created great opportunities for those that survived the shutdown, particularly large and well-capitalized Quick Service Restaurants (QSR). It has led to a rapid digital transformation of the industry and strengthened restaurants’ digital capabilities, particularly on the delivery side, to provide much-improved value and convenience to customers.
According to research by Kantar, the adoption of technology by Indian consumers accelerated during the pandemic. The number of monthly active internet users was estimated to have reached 622 million in 2020 and is forecast to exceed 900 million by 2025.1 Thus, we expect online ordering and delivery to sustain high growth even post-pandemic, which provides additional revenue growth opportunities to QSRs. In addition, similar to consumer packaged goods companies, digital marketing and communication have become much more important for QSRs to enhance their brand awareness. This is especially true for attracting younger consumers who tend to spend more on experiences and lifestyle purchases.
There have been several QSR chains, such as Restaurant Brands Asia (RBA IN), Devyani International (DEVYANI IN), and Sapphire Foods India (SAPPHIRE IN), that have been listed within the last 18 months to foster their growth. In addition, companies like Jubilant FoodWorks (JUBI IN) and Westlife Development (WLDL IN) have raised their new store opening targets in India.2 With a diverse field of players, it will be interesting to see how these leading companies drive India’s QSR industry growth in the upcoming years.
Food services is a USD$65 billion market in India, taking less than 10% of the total USD$670 billion food consumption market, while the 90% majority is largely food consumed at home.3 These figures contrast with the US and China, where the share of out-of-home consumption is 54% and 58%, respectively.4 According to Jefferies, India’s food services industry will grow at a compound annual growth rate (CAGR) of 9% and is forecast to reach USD$110 billion by 2025.5 We expect organized players to grow at an even faster rate, driven by aggressive store expansion and market share gains from unorganized or independent restaurants. According to Motilal Oswal, 30-40% of restaurants were closed during the pandemic. However, the market share of organized players has increased from 29% in FY15 to 38% in FY20 and is expected to reach 50% by FY25E.6
We have witnessed a growth in consumers’ preference for trusted brands across most consumer products, including food service providers, for better hygiene and safety. While eating is not discretionary, the decision of where to buy food is discretionary. Thus, consumers choosing to purchase food away from home at restaurants will benefit from rising standards driven by economic growth, income growth, and urbanization. In addition, India has a young demographic landscape, with 65% of its population below the age of 35.7 Younger generations tend to have a higher willingness to pay for value, convenience, as well as aspirational experiences provided by organized players.
Limited-service restaurants (including QSRs) have the most scalable business model in the restaurant industry. On the other hand, it’s not easy for restaurants that provide both product and service to scale up while maintaining consistent quality, particularly on the service component. Key service factors for QSRs are speed, accuracy, and hygiene standards. Thus, it is relatively easier for QSRs to control these factors compared to casual dining or full-service restaurants, where there are more complicated menus and higher levels of service by waiters and waitresses at the tables. Therefore, it is not surprising that we see a more consolidated market for limited-service restaurants in the US, which account for roughly half of the industry’s sales.8 In contrast, full-service restaurants, which make up the other half of the industry’s revenues, remain highly fragmented by independent operators.9 Applying this to India, we expect that the country’s food service industry will follow a similar path in the future.
Eating out is still very much a discretionary consumption in India, and Indian QSRs are still in the early stages of development. This means that QSRs in India benefited from the rise in off-premise consumption during COVID-19, as did most global QSR companies, with higher sales contributions from delivery and takeaway orders. Indian QSRs are also set to further benefit from reopening, especially as eating at McDonald’s is still an aspirational experience for many Indian consumers. Additionally, QSRs are still one of the favourite types of restaurants for many families with kids to celebrate their family events, similar to what we observed two decades ago in China. Thus, we believe Indian QSRs will enjoy dine-in restaurant sales growth for years to come. On top of that, they’ll be able to capture enlarged off-premise opportunities thanks to consumer behaviour change after the pandemic, with more demand for online ordering, delivery, and convenience here to stay. We believe this is why many QSR companies accelerated their nationwide expansion to ride on the S-curve of industry growth.
Like other industries, inflation remains one of the concerns of the restaurant industry in the near term. Yet, restaurant companies have been successful at passing on rising prices to consumers without much impact on volume. More importantly, many QSRs became more efficient operators during the pandemic by changing their cost structure through digitalization and making labour costs more variable than fixed. This is important because restaurants are a highly labour-intensive industry. Similarly, many changed their rental arrangements from fixed to variable by sharing revenue models. Thus, these companies are better equipped with an optimized cost structure to navigate the current inflationary environment.
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