Kaleidoscope

Quick Service Restaurant Industry: Coming of Age May 2012

Eos Capital Advisors Pvt. Ltd., New Delhi, India

Quick Service Restaurant Industry

Income > Consumption> Food & Beverages CONSUMPTION is going to be the most important driver of the Indian growth engine in the ensuing decades. Led by favorable demographics, higher disposable incomes, increasing urbanization and higher government spending, total consumption will reach USD 1390 bn. by 2025 and India will be the 5 globally. The food and Beverages market will be the biggest market at USD 345 bn. by 2025. The food consumption per capita will reach to USD 242 by 2025. Restaurant Industry The restaurant industry in India is estimated at approx. USD 8.6 bn and is expected to grow to USD 12.6 bn. by 2015.The unorganized industry is estimated at 80% of the total market at USD 6.9 bn. and is growing at 8-10% p.a. The organized market is estimated at 20% of the total market at USD 1.7 bn. and is growing at 20% per annum. Organized sector is expected to grow four-fold to USD 5.6 bn. by 2015 and its share in the restaurant pie is expected to increase from 20% currently to 45% by 2015. QSR Industry Quick service restaurants (QSRs) are estimated to have a market of USD 600 mn. At CAGR of 25-30%, QSR is the fastest growing food service segment. The industry is witnessing entry of international chains like Dunkin Donuts, Starbucks, etc. The entry routes include entering directly (Yum Brands), structuring JV with a local player (Starbucks & Tata) or appointing a master franchise (Dominos Jubilant Food Works) McDonalds is present in 50 cities in India. Being a strong brand, McDonalds goes for revenue-sharing model with lessors / developers. McDonalds started with Metros and later moved to Tier I and Tier II cities.
Eos Capital Advisors Pvt. Ltd., New Delhi, India
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On a High Growth Trajectory

Currently, there are an estimated 3,000 outlets in the country. These are located in high-streets, malls, food courts in office complexes, supermarkets, and public transport stations and therefore witness a large number of footfalls. Growth Drivers India is urbanizing at a rapid pace - Urban population to increase from 318 mn (2005) to 523 mn (2025); 20-40 age group to reach 458 mn by 2021. Growth of household income and young working class is causing share of wallet to shift from essential to discretionary Items (Indian youth is the most promising target segment for QSRs). Shift in lifestyle in modern India Increase in nuclear families & working couples, greater time spent away from home in eating & socializing and greater exposure to trends is set to create tremendous market opportunities. Increase in organized retail space (malls, shopping complexes, etc.) where people shop, hang-out, watch movies, etc. QSR joints derive substantial sales in and around these areas. Key Players The key players in this segment are McDonalds, expected to Dominos, reach KFC, 12,000 pizza by hut, 2015. Haldiram etc. Total no. of outlets is Starbucks, Quiznos and Dunkin donuts are also entering into the market.
Key Players growth Quick service Restaurant Industry Indian Consumption will grow by 4X

largest consumer market

Key Statistics
Current Level Sensex 17,464.90 Industry Classification NIFTY 5,258.45 CNX Midcap 7,221.00 DJIA 11,836.00 FTSE 100 5,484.10 WTI Crude 97.40 Gold ($/Oz) 1,797.25 10Y G-Sec 8.97%
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% Change* -3.67% -3.50% -6.90% 12.90% 10.00% 6.50% 26.10% 72 bps

*Percentage change from 30 June th 2011 till 9 Nov 2011

KFC is currently present in 25 cities in India. It started with Metros, invested in its brand and is subsequently looking to expand to more Tier I and Tier II cities in India. Dominos is present in Approximately 100 cities. The business model is focused on home delivery, small outlet size and product innovation. Typical Customer Profile Target Audience includes young professionals on the move, teenagers, Students, multiplex audience. The age group is 16-35 yrs. A typical Customer looks for Quality of food, convenience, variety, speed of delivery and price.

Key Challenges The QSR business is characterized as a low entry-barrier business and hence is extremely competitive. QSR customers are very easy to sell to in first place; however they have low stickiness. A robust and efficient supply chain holds the key to a successful QSR operation. India still has relatively poor cold to storage developed infrastructure compared

Customer Profile & Trends

countries. Another challenge comes in face of poor transportation, and erratic power supply The other Challenge is to indianise the menu items for the Indian palate. Securing prime locations is becoming an expensive exercise owing to high real estate rentals.

Key Success factors There is a shortage of skilled labor for

Indianize the product menu to include offerings that take a leaf from most successful QSR offerings Experiment rapidly to decide on the optimal product mix Design targeted marketing campaign to influence the buying behavior of the target group Utilize the right mix of channels and content to position the brand Tie up real estates at major customer footfall areas Design the roll out strategy in accordance with the product portfolio

working in QSR restaurants especially in profiles of store managers and chefs. Future outlook The competition in the sector will intensify as more and more players will enter in to this growing market. Larger chains will expand into small cities. In terms of outlets we shall see more of express outlets and Kiosks. We shall see more product Sensex NIFTY CNX Midcap DJIA FTSE 100 WTI Crude Gold ($/Oz) 10Y G-Sec categories e.g. Breakfast Menu is being launched by jubilant foods along with Dunkin donuts. There will be more of integration of concepts e.g. McDonalds serving coffee or CCD serving Sandwiches. In terms of technology, online ordering system, IVR system for placing order and payments will develop. Investors have developed a lot of appetite for QSRs. In the past a lot of QSRs have raised PE funding like Devyani International, Sagar Ratna, Faaso, Speciality restaurants and Barbeque Nation etc. Going Forward also, we shall be see a lot more investments by PE in QSR industry.

Product Development

Brand Building

Key Statistics
Current Level 17,464.90 5,258.45 7,221.00 11,836.00 5,484.10 97.40 1,797.25 8.97%
th

Store Roll Out

Supply Chain

Invest in establishing tie ups with relevant commissaries and vendors depending on store roll out strategy

% Change* -3.67% -3.50% -6.90% 12.90% 10.00% 6.50% 26.10% 72 bps

*Percentage change from 30 June th 2011 till 9 Nov 2011

Eos Capital Advisors Pvt. Ltd., New Delhi, India

Eos Capital Advisors Pvt. Ltd.

A-1/68, Ground Floor, Safdarjung Enclave New Delhi 110029, Ph: 011-43639076 info@eoscapital.in www.eoscapital.in
Eos Capital Advisors Pvt. Ltd., New Delhi, India