Hungry for more

A police van was permanently parked outside the KFC outlet in Bengaluru’s Brigade Road area for the first year. In 1995, when Harland Sanders’ famous fried chicken made its debut in India, the timing couldn’t have been worse. Protests over globalisation, small farmers’ rights, the environment and foreign investors were already at fever pitch when the entry of a brand owned by the poster child of American consumerism — PepsiCo — added fuel to the fire. The outlet was picketed and ransacked repeatedly and charges of unacceptable levels of monosodium glutamate made consumers hesitate even as they turned up their noses at the bland recipes and lack of add-ons in the menu.

Nearly 20 years later, so much has changed. Now, Yum Brands — spun out of PepsiCo in 1997 and currently the world’s largest fast-food company — is the fastest-growing restaurant chain in India. At last count, there were 719 outlets of its three big brands — 341 KFC restaurants, 373 for Pizza Hut and five for the newest entrant, Taco Bell. (see: So far, so good) And, unlike its so-so growth all these years, now those numbers are nowhere close to satisfying a sudden, enormous appetite.

So far, so good

Despite the initial slack, KFC outlets have grown in number over the years

“India is the opportunity of a lifetime. By 2030, India will be the largest consumer market, ahead of the US, ahead of China. And we want to be a big part of that,” confirms Niren Chaudhary, president, Yum Brands India. The company’s target: 2,000 outlets by 2020, with an immediate target of crossing the 1,000 restaurant mark by 2015.

And how it plans to reach that target is the biggest proof of Yum’s intentions towards India. Like other fast food multinationals in India, including McDonald’s, Domino’s and Subway, Yum, too, had been relying on franchises for expansion over the years.

Now, it has changed trajectory, investing heavily in opening company-owned outlets in an all-out bid to get the reach and growth it is seeking. Going forward, that strategy will continue and Yum has an impressive war-chest to ensure its success: $100 million (₹600 crore), to be invested over the next three or four years. “Our mission is to be the No. 1 company in every category in which we operate,” Chaudhary adds.

This fire in the belly was stoked only a couple of years ago, after the American parent carved out the Indian division as a separate entity in 2011. China is the only other standalone international market — a telling indicator of how important success in the Indian market is to the parent company. At the time, India had around 466 Yum restaurants compared with 4,493 in China.

“We now have a direct reporting relationship with the CEO of the company and direct sponsorship from the company on investment and resources required to bring home this opportunity,” says Chaudhary, a 20-year veteran of the company who took over the India operations in 2007. Since then, Yum India has opened close to 276 restaurants in the past two years, even as the China division added 1,750 to its portfolio.

Mind, the real battle isn’t with China; it’s with competition in India, which has been increasing almost by the day. As a Euromonitor report on the fast food battle in India points out, “…as excitement about future potential in India has grown, so too has the competition, taking with it any chance of finding any sort of first-mover advantage. This has resulted in a market that’s relatively underdeveloped in terms of outlet per capita, and yet one that is already crowded with competitors all vying for customers in the same concentrated areas.” In such a market, how feasible are Yum Brands India’s plans of taking an ever-larger bite of the Indian fast food restaurants market?

Playing catch-up

Perhaps it was rattled by the initial experience or perhaps it was the parent’s single-minded focus on growing the China market. Whatever the cause, KFC and Pizza Hut (which launched here in 1996) didn’t exactly set the Indian market on fire. Even as late as 2005, there were just five KFC outlets across India, while competitor McDonald’s, which entered India in 1996, had over 240. In pizzas, too, Pizza Hut lost first place decisively to Domino’s, although both had roughly 100 stores in 2005.

The company failed to adopt home delivery strategy in time and lost lot of ground to Domino’s in the later years. Even now, although KFC has caught up with the golden arches (thanks to Yum’s ‘equity leadership’), Pizza Hut is still a distant second to Domino’s (see: Smaller slice of the pie).

Smaller slice of the pie

Yum lags in the pizza business but is gaining ground with KFC

Meanwhile, the opportunity in the Indian market is only growing. Over the next 15 years, says Chaudhary, “you will have 200 million people moving to urban centres. And eating out is currently a $90 million market, of which just 2% is organised. There is huge headroom for growth for restaurant brands.”

What gives Chaudhary the confidence that Yum will be among the biggest beneficiaries of this opportunity? “Yum is uniquely positioned,” he says. “First, we are in India with all our brands, three global brands. Second, we have twin growth engines — franchise and equity — to drive growth here. Third, we have a direct reporting relationship with the CEO. Last, having been here for 20 years and with Yum investing directly, we have the largest and most capable leadership in the category.”

The plan is that Yum Brands India will open 1,000 outlets of Pizza Hut, KFC and Taco Bell by 2015. Of this, roughly half will be KFCs and other half Pizza Hut restaurants. By 2020, the count will increase to 2,000 outlets, of which at least 100 will be Taco Bell outlets and the rest equally divided between KFC and Pizza Huts. “At least half of the KFCs and all the Pizza Huts will be developed by franchisees,” says Chaudhary.

Of these, 60% will be in tier 2 cities, where costs are lower and there’s enough pent-up demand to ensure high returns. “Two thousand [outlets] isn’t a random number,” says Chaudhary sternly. “The who-where-when aspects are already clear.”

And this is where the biggest divergence from the past lies. In 2005, the first company-owned KFC outlet opened in Hyderabad, and once Yum India became an independent division three years ago — and could, therefore, ask for bigger investments from its parent — the focus shifted to owning stores. The first company-owned Pizza Hut restaurant opened in Mumbai in 2012, after Yum switched to what it calls ‘equity leadership’, which essentially means it began investing its own money to open stores in emerging markets.

The average investment in a KFC or Pizza Hut store is ₹2-3 crore and it takes three or four years to show a positive return on investment. Today, there are a total of 172 company-owned outlets, mostly KFCs, and 517 franchisee-owned stores.

 Chaudhary insists that the change in strategy does not signal any dissatisfaction with the existing franchise partners — Yum has three major franchisees, Devyani International, Dodsal group and Hansa Zone — or doubts on their fitting into the 2020 jigsaw. The idea of setting up own stores was not because partners were not doing well, he adds: “It is essentially to give them even more support.” Equity investments by the company help in brand building, marketing, people capabilities, backup infrastructure building etc.

Arvind Singhal, president, Technopak Consultants, sees another side to Yum Brands’ franchise strategy in the Indian market. “In a slowdown, franchisees may not have the financial capability to put in more money and suffer losses, so companies set up their own stores.”

That’s not exactly the same reasoning offered by Yum Restaurants International’s vice-president (finance), Neil Thomson, in a 2013 magazine article on the global behemoth’s shifting policy in India. “…even in markets where we have local franchisees, for instance, in India, our equity investment was the catalyst for exponential growth in our KFC brand,” he says, adding, “In our experience, a local partner will often be looking to make a return very quickly, and that doesn’t always work in the emerging world, where the economics can be challenging and you first need to establish your brand …the key differentiating factor between success and failure in a country is the selection of the local partner.”

Working together

Step into the office of Devyani International, Yum Brands India’s largest local franchisee, and the bonhomie between Yum and its partners is evident. One wall in president and group CEO Virag Joshi’s office is covered with trophies and plaques Devyani has won from Yum over the past 18 years. There’s a Transformers award that says Action Hero, which KFC’s global head Mickey Pant presented to Joshi a couple of years ago; another features a kangaroo and says The Great Leap. “We are one company with two CEOs,” declares Joshi extravagantly. (For his part, Chaudhary’s response was an equally sincere but more muted, “We value our partnership with Devyani.”)

“In the past three years, we’ve added 70% to our portfolio,” says Joshi, adding that that’s when “the story started”. Devyani currently operates 203 Pizza Hut and PHD stores (70% of the total) as well as 57 KFC restaurants. Going forward, Chaudhary indicates a similar break-up in numbers for franchises and company-owned restaurants.

“We see our franchisees leading the way and driving growth for Pizza Hut and equity driving KFC and Taco Bell,” he says. All Pizza Hut outlets and half the KFC additions will be developed by franchisees by 2020. The decision leads to raised eyebrows among industry observers. Clearly, Yum is keeping its focus brands, KFC and Taco Bell, for itself and shunting off the still-trailing Pizza Hut to Devyani and other franchisees. But how long will an already burdened franchise partner continue pumping in money into Pizza Hut? In Devyani’s case, there is also the issue of its multiple other interests: in addition to the Yum franchise, the Ravi Jaipuria-promoted company owns rights to Costa Coffee, American ice cream chain Swensen’s and south Indian fast food chain Vaango.

There’s also some doubt over whether Yum will seek new partners for its Pizza Hut expansion or continue with Devyani. A news report in April 2014 said that Jaipuria is in the fray to buy Pizza Hut franchise rights in south and west India; the Dodsal group that holds those rights currently is apparently seeking a buyer.

However, Jaipuria stated in the report that there was no clarity from Yum whether those rights were even available — in other words, would Yum continue to offer these markets to franchises or would it rather open its own outlets here. Chaudhary declined to comment on the specifics of that story but stated that Yum is “always on the look out for large new partners”. “The expansion will be a combination of leveraging our existing partners and wherever we find some strong, large local partners,” he says. Gaurav Marya, chairman, Franchise India, India’s largest integrated franchise and retail consultancy company, tries to decode Yum’s equity expansion here.

“Franchisees such as Devyani are large corporations themselves. This sometimes results in negligence at the store level,” he says. Moreover, Yum is said to be under compulsion to deploy capital in India under FDI regulations. “So far, it has only been remitting royalties,” Marya adds.

For his part, Joshi has no issues with Yum choosing to open its own stores, especially for KFC and Taco Bell. “Over 70% of the Pizza Hut delivery market is with us; last year, we opened 80 stores,” he says. In any case, Devyani has been given the east India, NCR and Lucknow market for KFC. “East is a huge territory for chicken consumption and rice is a staple — our highest grossing store is in Kolkata. We have not yet gone to cities such as Gangtok and Aizawl. We have enough on our platter.”

The big plan

With three brands on offer in India, which will be the first among equals? The gap between Pizza Hut and Domino’s is perhaps too wide to be bridged, even though Pizza Hut is now focusing on scaling up its delivery business. PHD was hived off as a separate division in 2010 and there are currently 171 (of 373) outlets that focus exclusively on delivery. So, if you go by what David Novak, chairman and CEO of the $13-billion restaurant group, had to say in an earlier media interaction in India, the baton may well pass to Taco Bell.

“KFC is currently our lead opportunity but we think Taco Bell could have a bigger potential here over the long term, seeing the huge population of vegetarian consumers. We are localising a lot of the menu for Taco Bell as we build the brand,” Novak said in an October 2013 interview to a national daily. However it will take some time to have a firm footing in India. “Of 2,000 outlets by 2020, we would like to see at least 100 Taco Bell stores in India,” says Chaudhary.

Taco Bell isn’t a new entrant only in India, it’s also at the early incubation stage in 10-15 other markets around the world, says Unnat Varma, general manager, Taco Bell. Currently, the brand has just five stores, four in Bengaluru and one in Mumbai. The slow expansion here, even with support from the top, is deliberate.

“We are developing our vendor base with a lot of handholding. We really had to understand how it works and it has taken us three or four years to fix shortcomings. We are learning store by store,” says the man who drove KFC’s expansion in the past five years before moving to his current assignment.

Varma explains that getting things just so has taken up much time and effort. For instance, in the early days, the offerings weren’t turning out the way they had been envisaged. A team was called in from Taco Bell, US, which diagnosed that the wheat quality was to blame. After much experimentation, the team identified a variety from Madhya Pradesh that was suitable. “So, in the concept stage, we don’t want to expand in a big way,” he explains, adding, “We are ready to take it to five or six cities with 35-40 stores over the next two to three years. There are already enquiries from small centres such as Navsari and Bharuch.”

When it comes to Taco Bell, three factors make Yum optimistic about its prospects in India. The first, says Varma, is that 40% of the population is vegetarian, while the rest also eat vegetarian food most of the time. “Taco Bell’s 75-item menu has a variety of vegetarian items.” Then, the Tex-Mex fast-food chain serves spicy food — with familiar ingredients such as beans, rice and flatbreads — that should appeal to Indian palates.

More significantly, Taco Bell is playing the price card in India. The Indian menu kicks off at a loss-making Rs 25, but Varma justifies the decision. “The higher you want to go, the lower should be the price,” he says, pointing out that the strategy is already a success. “We get 50,000 footfalls every month and have already doubled our sales from the time of launch.”

He lists the four important stages of building brands. The first is incubation, which is where Taco Bell is at present. Then comes getting the business model right, the stage where Pizza Hut is. Stage three is about acceleration, when you start expansion — Varma says KFC is currently at this stage in India — and then comes stage four, which is about explosive expansion. “At the concept stage, one must not think of making money. That happens in stage four.”

Green shoots on the menu

Having multiple brands at different stages on the evolution chart may prove an advantage others in the Indian market lack. McDonald’s is a family burger chain and Subway sells only sandwiches. In theory, Jubilant Foodworks, which holds the Domino’s licence in India, has two brands since it also rolled out Dunkin’ Donuts a couple of years ago, but with just 29 stores compared with 726 pizzerias, it doesn’t really count. Yum, in contrast, has almost the same number of pizza and burger outlets — 373 Pizza Huts and 341 KFCs — with Taco Bell still a very nascent brand.

“The acceptability of burgers and chicken as well as pizzas has been tested across the country. The combination can give Yum a quicker roll out,” says Singhal. That’s a sentiment echoed by Abneesh Roy, associate director, Edelweiss, who tracks Jubilant.

“Pizza Hut is a higher ticket item than KFC and the consumer class is also different, so there is no cannibalisation between the two. Having multiple brands also ensures savings on the backend, in terms of rentals and economies of scale. After all, the same chicken, cheese and flour is used in both formats,” he points out.

What Yum does with that cheese, chicken and flour, though, has certainly changed. Over the past several years, the menu at Pizza Hut and KFC has adapted significantly to Indian tastes and preferences. It’s part of a carefully thought-out gameplan, says Chaudhary. “We want our brands to be youthful, aspirational and yet connect with the mainstream. First strategy, then, is to be seen as inclusive brands. Second is to make sure the brand is really relevant to India. That means we need to get inspired by local eating out habits but do it in a unique way that Yum can own, at price points that are very penetrable.”

A Jain Pizza Hut restaurant in Ahmedabad, Gujarat, paneer tikka and tandoori chicken pizzas, fiery grilled and curry chicken and chicken/veg rice bowl versions at KFC are only part of the transformation. Over the past 12 months, especially, Pizza Hut has been conducting an informal study it calls ‘India to Bharat’.

“We wanted to understand what and how consumers are eating and adapt that into our menu,” explains Sanjiv Razdan, general manager, Pizza Hut India. “Indians love carbohydrates more than protein, so more rice and wheat options. We like to pour sauces, so we increased the gravy in our food.” A recent innovation at Pizza Hut based on the study is Birizza, biryani stuffed between two layers of flatbread.

At KFC, ironically, the focus is on the chicken king’s vegetarian options. The ongoing ‘So veg, so good’ KFC ad campaign emphasises its veg and paneer offerings in a bid to reach out to a wider customer base. It has introduced dishes such as Veg Rice Bowl and Veg Zinger burger in keeping with this strategy. “Vegetarian dishes are typically cheaper than non-veg, so this will also help bring in customers seeking an affordable meal,” says Technopak’s Singhal.

That fits in with a conscious decision by Yum Brands’ restaurant chains to stay affordable. “We see our competition as street food, not branded food. And therefore, we want to make our brand affordable at street food prices. Why should I stand and eat in the heat when I have access to a world-class restaurant, an air-conditioned, hygienic, aspirational place with safe food?” says Chaudhary. Accordingly, prices start at ₹30 and ₹50 at KFC and Pizza Hut, respectively. “Pan pizza is our Rolls Royce product worldwide but is available at sub-₹300 in India,” adds Razdan.

Tough road ahead

Meanwhile, competition isn’t exactly standing still, even though McDonald’s is grappling with internal problems in the north and east. “It is hardly adding 15-20 a year, much lower than Domino’s,” points out Edelweiss’ Rai. Still, it would be folly to dismiss the golden arches. Amit Jatia, vice-chairman, Westlife Development, which holds the McDonald’s franchise for south and west India, points to a shift in approach going forward.

“We are looking at reaching consumers in tier 2 and 3 markets. These markets are witnessing a huge shift in lifestyles and purchasing power; customers are becoming more discerning,” adds Jatia. Currently, over 60% of Westlife-managed McDonald’s restaurants are in the top six cities.

Jatia steers clear of commenting directly on KFC as a competitor but indicates McDonald’s too has a clear roadmap of the future and the funds in place to ensure it stays on track. “We have robust expansion plans. McDonald’s plans to invest ₹800 crore-₹1,000 crore to add another 200-300 restaurants and 75-150 McCafe’s in India in the next five years,” he says. For its part, Domino’s too has expansion on its mind. It wants to pursue growth through restaurant additions in new and existing cities, backed by an upgraded and expanded commissary network. The target is to launch 150 new Domino’s Pizza restaurants by FY15.

Still early days

Franchise sales remain the saving grace for Yum

Yum India posted sales of $57 million in Q1 of 2014, compared with $58 million in the same period the previous year. Its operating losses stood at $3 million in Q1FY15 compared with $4 million earlier. So, unlike Domino’s or McDonald’s, Yum is yet to send back profits from India to its parent. (see: Still early days) But that should not be the only criterion to judge its potential or success, believes Vishal Sood, MD, SAIF Partners, which is the equity investor in QSR chains such as Mainland China, Oh! Calcutta and Dana Choga. “Domino’s is in a more mature stage. It also made losses for a long time. Yum is still in the investment stage.” He adds that the restaurant business needs patience as it takes models time to develop and prove themselves.

Not surprisingly, Chaudhary agrees with Sood’s reading of the situation. He believes that by 2020, Yum India will start contributing meaningfully to Yum global. He doesn’t think comparisons with others are right as Yum had at least two brands in all these years.

“Our CAGR of system sales is 40%. Certainly, for KFC, it is 45%. We believe that if we build the brands the right way and make them mainstream, relevant and accessible, then sales will follow. Profitability and shareholder value will follow.” But then, isn’t that true of any business in India?