Why Burger King, Wendy's are Queuing Up to Set Shop in India

Big names in the fast food industry are queuing up to grab a pie of the quick service restaurant (QSR) market in India. Burger King, the world's second largest hamburger chain, opened its first outlet in Delhi on Sunday, while Ohio-based Wendy's is likely to set up shop in the first half of next year.

Foreign brands are eying the Indian market despite the presence of well entrenched players such as McDonald's, Domino's and Haldiram's. The fact that margins of existing players are under stress amid a prolonged economic slowdown also seems to have little impact on new entrants' decision to set up shop in the country.

In the September quarter, Westlife Development, a company whose subsidiary Hardcastle Restaurants is a master franchisee of McDonald's in India, reported a 600 per cent year-on-year drop in operating margins. Jubilant FoodWorks, which operates the Domino's Pizza and Dunkin' Donuts brands in India and whose shares are well tracked, reported a 280 points drop in year-on-year margins in the September quarter. Its same-store sales growth (SSSG) also declined 5.3 per cent during the quarter.

Most companies see tough days ahead despite signs of early recovery. Jubilant FoodWorks' management said it is not seeing any positive change in consumer buying patterns and expects the weakness in consumer demand to continue in the near term.

"The management guided for negative SSSG to continue for another two quarters and for SSSG to hit high-single digits only over a 4- to 8-quarter period. This is despite the second half of FY14 having negative SSSG in the base," Nomura says.

Consumers have held back spending amid the economic slowdown in India. Low spending has weighed on demand forcing companies to come up with promotional offers despite a sharp jump in input prices. High attrition and real estate rental costs have also impacted profitability, analysts say.

Current market environment has impacted shares of listed companies. Jubilant FoodWorks shares are up just 13.50 per cent, while Westlife Development shares are down 17 per cent over the last one year. In contrast, the Sensex has gained over 38 per cent during the same period.

New entrants, however, believe that a recovery in around the corner. Raj Varman, chief executive of Burger King India, told NDTV that the food business is a recession-proof business. Mr Varman's Burger King is coming up with 12 restaurants in Mumbai and Delhi over the next few weeks. (Watch the full interview)

The biggest draw for these new players is the massive growth prospects in India, analysts say. According to a report by Technopak, the QSR segment in India is set to grow at a compound annual growth rate of 25 per cent to reach revenues of $3.2 billion by 2018 from $1.06 billion in 2013.

There's also a growing belief that demand will come back quicker-than-expected as inflation cools and disposable incomes rise. "The Indian market is on the verge of substantial recovery... Growing disposable income and rising number of dual income families mean the headroom is enormous," Mr Varman added.

A sharp fall in inflation will also bring down input costs and increase profitability. Analysts also say that most big foreign brands have deep pockets and they can afford to play the waiting game.