India QSR: Hungry for growth

This week Burger King opened its 23rd outlet in India, just eight months after the first restaurant opened for business in New Delhi. The US burger chain, which is owned by 3G Capital, arrived in the country through a partnership with Everstone Capital. The local GP has an exclusive 25-year master franchise to lead the roll-out.

"3G saw Everstone not just as a PE investor but as a business with strong execution capabilities." says Sameer Sain, co-founder of Everstone. "The idea was that we would not only build the business from scratch but that we would fund the project, and that was attractive to 3G."

The deal is something of a poster child for the quick service restaurant (QSR) industry in India. Burger King has since been followed by other US brands like Carl's Jr. and Wendy's, which are looking to make inroads, albeit on a smaller scale. A handful of local players, with VC backing, are also targeting the space.

Despite the hype, Sain emphasizes the importance of distilling the noise from the reality that India's QSR space is still very nascent. This is largely due to issues involving logistics and real estate costs, and investors' ability to capitalize on the opportunity depends on their ability to overcome these obstacles. According to market research firm Crisil, QSR was worth INR60 billion ($960 million) last year and represents around 2-3% of India's food economy. It is tipped to be worth INR177 billion by 2017.

The private equity role in this is difficult to gauge - AVCJ Research does not track Indian QSR investment specifically - but looking at data for the broader restaurant industry, deal activity is still fairly limited. So far this year, $21 million has been transacted over three deals, compared to $104 million and six investments in 2014.

Links in the chain

While QSR may be growing fast, it is still dominated by just handful of foreigner players. Crisil found that foreign brands had a 63% share of the market in 2013, led by Domino's Pizza on 20%, with Subway (12%), McDonald's (11%), KFC (9%) and Pizza Hut (8%) trailing behind. This only represents the organized market; around 80% of the food industry is still unorganized.

The multinationals' big advantage lies in their vertically-integrated supply chains, which are difficult for new entrants to replicate. As such, many previous PE investments in the space have focused on solving this piece of the puzzle first. This was the case with SEAF India Agribusiness Fund's decision to buy a minority stake in Guha Roy Food Joint & Hotel (GRFH), which has operated two QSR brands - traditional Indian food chain Only Alibaba and fried chicken brand Baked & Fried - since 2008.

"The supply chain was what was attractive about the format," says Hemendra Mathur, managing director with the fund. "The founder had put all his effort into setting up his own supply chain with a central kitchen in Delhi that can serve 80-100 outlets."

In this way the company was able to control the quality of products and raw materials: it had ovens for baking bread, a chicken-slaughtering line, and spice-grinding machines. Furthermore, GRFH could cut costs and offer its menu at an attractive price point - a vital consideration in the quest to achieve scale.

Everstone's Sain also stresses the importance of having effective supply chains. "Scale only comes if you can offer value and India is a very value on conscious market," he says. "QSR is about getting hundreds of transactions in every store on daily basis. If you can't do that, it is a waste of time. You have to dig deep for value and dig deep for scale, and for that you really have to build a strong supply chain."

Another issue that comes with scale is the availability real estate. QSR outlets often need to be based in dense urban areas but these locations often fail to meet electricity and sanitation requirements. Mall locations offer better facilities but they don't have the same kind of footfall.

Inevitably, the strongest locations command premium prices. Mathur notes that the one of the strengths of GRFH has been the company's focus on home delivery, which has gone a long way to improve the economics of its outlets.

"The cost of rental in India as percentage of sales is very high so if you want to make a more viable model then home delivery becomes a very important component," Mathur says. "Because the cost of doing home delivery is a fraction of the cost of rental, almost 30% of the company's revenue is from home delivery."

Disruption impact

This is part of reason why new entrants have prioritized logistics. Companies like Faaso's Food Service, which raised $20 million from Lightbox Ventures and existing investor Sequoia Capital in February, differ from regular QSR chains in that it is supported by an app-based food delivery service. Faaso's claims that 65% of its business is online, with the app processing some 50,000 orders a month.

A similar approach has been taken by Box8, which received a $3.5 million Series A round of funding led by Mayfield in March. Like GRFH, it operates a centralized kitchen as well as a call center and 22 delivery outlets across the Mumbai. The business claims to process over 2,000 transactions per day via both its mobile and web platforms.

While foreign franchises like Burger King will continue to have a place in India OSR's market. Sanjay Mehta, an angel investor and early backer of Box8, believes there is a lot of scope for disruptive start-ups to carve out a significant chunk of this fast-growing market.

"I anticipate we will see a least a dozen local QSR brands getting creative in the next 10 years and solving some of these operational issues," says Mehta. "It is comparable to the e-commerce space 10 years ago, the journey for India's QSR companies has just begun."

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• Topics
• South Asia
• Consumer
• Expansion
• India
• Everstone Capital
• Consumer
• Real estate