Can Burger King Make An Impactful Start In India?

The American burger giant, Burger King (NYSE:BKW) reached another milestone in its path for international expansion, as the company opened its first store in India on November 9. ^[1] The company opened its first Indian restaurant at a good location in the country’s capital, New Delhi, with a plan to open 12 outlets across Mumbai and New Delhi over the next 60-90 days. Burger King restaurants in India will be equipped with two product lines: vegetarian and non-vegetarian products — both with different managing staff. Burger King believes that India could become one of its largest international markets. However, Burger King is a late entrant in the country, with other restaurant chains such as McDonald’s (NYSE:MCD), Dunkin’ Brands (NASDAQ: DNKN), and Starbucks (NASDAQ: SBUX) already present in this crowded market for a long time now.

Burger King India Pvt. Ltd. is a joint venture of Burger King Asia-Pacific and Everstone Capital, an India focused investor with dedicated private equity and real estate funds. Burger King had an excellent third quarter, with strong financial results and a major merger deal with the Canadian multinational fast-casual restaurant chain Tim Hortons (NYSE: THI) in August. This was the company’s best quarterly performance in terms of comparable store sales in North America since 2012, primarily driven by impactful new product offerings and the value menu. As a result, the company’s global comparable store sales rose 2.4% year-over-year (y-o-y).

We have a price estimate of $31 for Burger King, which is roughly 12% below the current market price.

See full analysis for Burger King

Vast Growth Potential In India

• Size Of Indian QSR market

According to the National Restaurant Association of India (NRAI), the food service industry in India is a $48 billion per annum business (approximately INR 2,500 billion) with an expected annual growth of 11%, making it the third largest industry in the country. ^[2] However, the Indian market is largely unorganized, consisting of street stalls, roadside vendors, and food carts, and it accounts for 70% ($33.7 billion) of the Indian food service market. ^[3] The remaining 30% ($14.3 billion) is the organized market, which includes:

• Chain market (brands with more than 3 outlets), which accounts for 5%, or $2.5 billion, of the total food service industry in India.
• Licensed Standalone market (single licensed outlets paying taxes, with all required licenses), which accounts for 25% of the total food service industry in India.

The organized market, or the Indian restaurant market, is expected to reach $26 billion by the end of 2015. ^[4] This would mean that the organized sector would account for nearly 36% of the total Indian food service market. Brands such as McDonald’s (NYSE:MCD), Yum! Brands, and now Burger King, fall under the chain market. Quick service restaurants (QSRs) accounted for 43% of the total chain market in 2013, and are expected to account for nearly 50% by the end of 2018. (Ref: 3) Among all the segments, QSR is outperforming in India and is outpacing the market’s projected growth.

• Indian Consumer Habits Drifting To Fast Food

Over the last decade, a number of international chains have entered the Indian QSR market and have played an important role in the growth of the Indian restaurant industry. QSRs in India had an estimated market size of $1.06 billion in 2013 and their market is expected to grow at an annual rate of 25% to reach $3.2 billion by 2018. Burger King is planning to capitalize on this growth by opening its initial outlets in metro cities, such as New Delhi, Mumbai, Bangalore, and Kolkata. Metro cities offer a bigger potential customer base, due to more brand awareness, favorable environment, higher consumption, and a higher concentration of income in these cities.

The international QSR brands, such as Taco Bell, McDonald’s, Pizza Hut, Dunkin’ Donuts, Dominos, and Subway revolutionized the QSR industry in India, with a wide variety of specialties in burgers, pizzas, sandwiches, tacos, and other beverages. According to the National Restaurant Association of India, an average Indian consumer eats out nearly 2 times a month, compared to 60 times a month in China. ^[5] The Indian restaurant industry is driven by the younger population, who are driven towards popular national and international chains in the organized market. In 2013, McDonald’s was the highest selling fast food chain in India with a 40% market share among fast food chains, but held merely 2% share by value in the country’s total restaurant industry.((Fast food in India, Euromonitor)) The fact that McDonald’s holds only a small share while still being the industry leader shows that the market is highly fragmented, with a huge number of market players, including local restaurants. Moreover, this indicates that unlike consumers in the developed markets, such as U.S., Canada, and European countries, Indian consumers are not inclined towards a particular brand. The majority of Indians prefer ease and convenience with dishes with regional tastes and spices.

Potential Competitors

• McDonald’s

McDonald’s opened its first Indian outlet in 1996 when the fast food concept in India was not popular and eating out was restricted to local restaurants. Initially, the company had to face many challenges, such as adapting to Indian tastes and local food culture. However, by the early 2000s, the company managed to westernize Indian eating habits.

One of the reasons why McDonald’s succeeded in India is its sensitivity to local taste and culture. A vast majority of Indian consumers do not prefer pork and beef. McDonald’s, which succeeded in Western markets because of its beef and pork products, altered its offerings and specifically tailored them for the Indian customers. McDonald’s India is restricted to chicken, fish, and vegetarian products. Secondly, McDonald’s, being the first of its kind, managed to attract Indian customers, by introducing value meals with local Indian spices and new innovative menu items, which are affordable for an average middle-class Indian. Moreover, the company strategically opened its outlets in metro cities, where people are more aware of the international brands and are more willing to pay extra money to try something new. Later on, the company penetrated into second and third tier cities and by 2013, McDonald’s had nearly 340 outlets in India. Finally, other innovative facilities, such as drive-thru and home-delivery in India, further attracted more customers. Being the global leader in the QSR industry, McDonald’s might pose a huge threat to Burger King in the long run.

• Yum! Brands

In India, slightly behind McDonald’s are KFC and Pizza Hut, subsidiaries of Yum! Brands. The first KFC in India opened in 1995 and it suffered many protests regarding the consumption of meat products. Moreover, Pizza Hut completed 18 years of operations in 2014 and now has more than 130 outlets in India. Both the brands are planning to expand into second and third tier cities. Innovative international food items, such as pizzas and chicken wings, as well as additional conveniences, such as home-delivery, have strengthened the brand’s hold in the country.

• Domestic and Local Brands

Despite a huge number of international brands flocking to the country, the middle-aged Indian population still prefers local cuisines with regional spices and dishes. Indian families prefer to eat together in a restaurant with local dishes, and mostly opt for fine dining restaurants. As we have seen, one-fourth of the Indian organized restaurant market is controlled by these domestic brands.

Burger King’s Prospects In India

In India, people with higher disposable income constitute a wide range of the population. Furthermore, with an improving Indian economy, disposable income for the middle class section of the society is improving, as well as the working population is increasing. This middle section of the society is the  primary target for Burger King. Secondly, with its brand appeal and its innovative tempting value meals, the company will find it comparatively easy to penetrate the market and might attract customers in huge numbers. Burger King’s model is strikingly similar to that of McDonald’s. The above mentioned reasons for McDonald’s success are fairly valid for Burger King as well. Burger King is also focusing on chicken, fish, and vegetarian items at affordable prices. However, the company is currently targeting metro cities and planning to make an impactful start. In a developing nation like India, the concept of fast-casual dining is not so prominent, unlike in the U.S. This is an added advantage for a fast food chain, as the fast food segment has been facing huge competition from the fast casual segment in the more developed markets.

However, the company might find it difficult to attract those customers, who still opt for local restaurants. Indian families have a nuclear structure, with young people still living with their parents. When they eat out, families tend to go out together, and the decision for the choice of which restaurant is made by the elderly people, who compromise a demographic which has been relatively intransigent in changing their food habits. Moreover, it would be difficult for a new entrant to attract a wide customer base in India. With the passage of time, however, Burger King might be able to attract the budget minded Indian population with its value meals and sustain that customer base through new food offerings.  There is large potential if they are successful in this endeavor.

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More Trefis Research

1. Burger King Worldwide enters 100^th country with opening of first restaurant in India [↩]
2. Indian food industry to touch Rs 408,040 crore by 2018 [↩]
3. The rise of the Quick Bite [↩]
4. Indian restaurant industry outpacing global growth [↩]
5. Indian Restaurant Industry [↩]