McDonald’s (NYSE: MCD) announced an important change to its India strategy this week, revealing that it plans to open two vegetarian-only restaurants in the country. Both will be located near important Hindu sites: one will be in Amritsar, near the Golden Temple, and the other will be near the Vaishno Devi cave shrine in Jammu & Kashmir.
The company has rankled many Indians since it first entered the country in 1996. That’s because the cow is a sacred animal in the Hindu religion, something that poses a significant problem for a chain that’s mainly known for its hamburgers. As a result, McDonald’s Indian restaurants have been getting by on a half vegetarian menu. Chicken is the main meat: the company doesn’t serve pork in India to avoid offending Muslim sensibilities.
The new restaurants are an attempt to better align the company’s fare with local tastes: menu items will include the McAloo Tikki burger, with a patty made of spiced potatoes, and the McSpicy Paneer, which will be filled with Indian cheese.
India’s Fast-Food Market Is Set to Explode—and Yum! Brands Aims to Take the Lead
India has the planet’s second-biggest population, behind China. Its economy has slowed recently, but it still grew at an annualized rate of 5.5% in the latest quarter, a rate that’s still very high by global standards.
As India’s economy continues to expand, more of its 1.2 billion people are entering the middle class. As a result, more of them can afford fast food and other Western conveniences. That rapid societal shift is expected to fuel a stunning expansion in the country’s fast food market. According to research firm RNCOS, the industry is set to post a combined annual growth rate of 34% in India from 2011 to 2014.
At the same time, the presence of major U.S. chains in the country remains rather weak: Domino’s Pizza (NYSE: DPZ), which has the largest presence, operates a mere 500 restaurants. Yum! Brands (NYSE: YUM), which owns the Taco Bell, KFC and Pizza Hut chains, has 479 outlets, and McDonald’s is well back with just 271.
All this points to huge growth potential for restaurant stocks that can successfully tap into India’s rapidly expanding wealth. And Yum! Brands, in particular, has the international expertise to be a leader.
Yum! Brands‘ Experience in China Gives It a Leg Up in India
Yum! Brands is the world’s biggest restaurant operator, with over 37,000 outlets in 117 countries. The company’s growth outside America’s borders is staggering: in 2011, Yum! Brands opened an average of four new international restaurants a day. In its latest quarter, countries other than the U.S. accounted for 74.5% of its sales.
The company’s rapid expansion in China has been a big part of its growth story. Yum! Brands was the first major fast-food chain to enter the country, in 1987. Today, it has over 4,650 outlets in China. In the latest quarter, the country accounted for 49% of Yum’s sales and 38% of its operating profit.
A 32% jump in sales at the China division helped propel the company’s overall revenue to $3.2 billion in the quarter, up 12% from a year ago. Operating profits at the division dipped 4%, mainly due to higher labour costs, but the company is raising its prices and expects its profits to rise by double digits in China in the second half of 2012. Overall earnings per share rose 6%, to $0.69. Without one-time items, Yum’s profits rose 1%, to $0.67 a share.
From the time it entered China, Yum took steps to differentiate between its U.S. and Chinese outlets. Now, its KFC and Pizza Hut restaurants in the country share very little with their American cousins beyond from their names, as Heather H. Wang writes in Forbes:
“Appetizers [at China's Pizza Hut outlets] include chicken wings, fried squid and onion rings. Pizzas are designed for local taste, such as a seafood pizza topped with prawns and crab sticks. Entrées are elaborate, ranging from salmon rolls to lamb shanks to escargot in garlic oil. You will also find clam chowder, tiramisu, and French-style crepes on its 30-page menu.”
Yum’s Indian Expansion Is Off to a Great Start
In the latest quarter, Yum’s newly created India division saw its sales jump 32%, largely due to a 29% increase in the number of restaurants in the country. Same-restaurant sales rose a healthy 7%.
Over the next year, the company plans to add 100 new outlets in India, with a larger goal of growing its total to 2,000 by 2020. As with its China stores, Yum’s KFC and Pizza Hut restaurants in the country are offering Western fare with a local twist, including items aimed at the country’s many vegetarians: Menu items include Tandoori paneer pizza, the “Zinger” burger (with a vegetable patty), Veg Strips and the Veggie Snacker.
Still, expanding in India does pose considerable risk. The country’s average wage remains very low by global standards, and eating out is less common than elsewhere, with most Indians still preferring to eat at home. Infrastructure, too, lags that of China and other countries.
Despite that, Yum CFO Richard Carucci remains optimistic: “I look at India as the most dynamic market for us in the 21st century,” he recently told Reuters.
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Article originally posted on Investing Daily.