At the Indiabulls Finance Centre & One Indiabulls Centre on Mumbai’s Senapati Bapat Road, the lights have been staying on late than usual on the 10th floor of Tower 3 and the 16th floor of Tower 2A respectively. In these adjacent high rises, a couple of boardrooms have been a beehive of activity. One is the market leader by miles and the second, an unpretentious contender not only in the Indian market which it has just entered but also in its home base where it is a distant second. Even from an overall perspective, its 13,000 outlets seem puny compared with the leader which has 14,000 in the US alone. This heft is also reflected in a market cap of $92 billion compared with the contender’s $12 billion (see: Who’s your daddy). Tower 3 is home to the offices of Hardcastle Restaurants, the development licensee (West and South India) for McDonald’s Corporation while Tower 2A houses Everstone Capital, a private equity firm which is the master franchisee for Burger King in India. For now, Burger King India, too, works out of the Everstone office. By the time you are reading this, both will be fiercely competing less than a mile away at High Street Phoenix, a high footfall retail destination in Mumbai. The irony is that they will literally be within shouting distance at many of the high profile locations. Given their overlapping target market, is such an in the face presence a source of worry for McDonald’s India?
Hardly so, feels Amit Jatia, vice-chairman, Westlife Development, the listed entity which houses Hardcastle Restaurants. “They are opening a few restaurants. We have 350, for them to make an impact in India; they first need to get a 100. We like to compete when a brand is right next to us as that is when the differentiation stands out. As nobody has a location advantage, it boils down to execution. Somebody coming next to us at the mall doesn’t matter to us.” That is not cockiness but ground reality from someone whose brand has single handedly grown the category and made burgers a much familiar item of consumption in India.
Informal eating out is a $90 billion market and growing at about 10% a year. Within that, western fast food is growing at 15% a year and the organised sector’s share is about a billion dollars. Given a turnover of about Rs 1,500 crore in India, McDonald’s roughly has a 25% market share of the organised sector. This heft has been created through nearly two decades of patient investment. When further pressed about the advantages and disadvantages that late comers such as Burger King enjoy, Jatia shares, “The biggest advantage for a new comer is that there is a supply chain in place. The disadvantage is there is a very strong global leader. Business is not just about opening doors. Enough restaurants have opened their doors in India. Competitive advantage comes from real estate, supply chain and customer connect. It is not that easy a thing to put together.”
Paving The Path
To the uninitiated, this may again come across as self boast. But speak to almost anyone in the industry and there is unanimity about the role that McDonald’s India has played in developing a reliable supply chain in the country. Post its entry, McDonald’s worked directly with farmers to address its requirements. Samar Gupta, director, Trikaya Agriculture was among the first to work with McDonald’s as it went about building its sourcing network. The company supported him in growing superior lettuce and he ended up as its biggest supplier of fresh iceberg lettuce in its earlier years. He stopped supplying to McDonald’s as he wanted to focus on being an exotic agro boutique rather than a mass supplier as margins are better in the former. His reminiscence, “McDonald’s brought in a new level of intensity to sourcing. When their people visited the farm, it was serious business for them. For most five-star hotels that we supply to, it is still more of a picnic when they come down to my farm.”
Gupta also adds that while many organisations talk about best practices, 90% of them are just talk. “In one of the sandwich chains that I used to supply to, because of its franchised model, it clearly used to be a free for all. In some cases, lettuce was chopped right off the floor. McDonald’s is a stickler for processes unlike at the other chains where a lot of them just went by the supplier’s word. McDonald’s tested everything, including for residue.”
Given its early mover advantage and deep processes, couldn’t McDonald’s have created an entry barrier by opting for exclusive sourcing arrangements with all its suppliers? Well, turns out it is not the parent’s policy to do so. Jatia says, “We do handshakes with suppliers, not agreements. Our French fries comes from the same supplier who sells to everybody else but McDonald’s French fries are McDonald’s French fries. That is because we have proprietary potatoes and processes.” This level of supplier trust is something that Gupta clearly remembers as well. “They were very comfortable letting suppliers mingle among themselves unlike a typical Indian mindset where you would want to keep them apart for fear of them discussing what each of them was paid,” he adds.
Many, who came in latter have ridden on the back of the supply chain put in place by McDonald’s. Gupta cites the almost year round availability of lettuce. “Because McDonald’s popularised lettuce, now a lot of farms in Ooty grow it, so availability is not an issue.” The current situation is a far cry from the day when McDonald’s had a stock out situation and had to use cabbage. Since that was unacceptable, the unhappy experience led them to plan for future stock out scenarios (see: Round-the-clock delivery).
A world-class supply chain ensures a zero stock out at every McDonald’s outlet
- Buns 150 million
- Million litres of special vegetarian sauce 3.2 million
- Patties 100 million
- Cheese Slices 350 metric tonne
- Fresh Iceberg Lettuce 1,500 tonne
- Tons Of Tomatoes 1,000 tonne
Burger King, too, might rely on the usual suspects for supplies as it goes about expanding in India. And while a lot of strategy might get discussed in the boardroom and one can hype up one’s arrival on social media, the honchos at Burger King are aware that the moment of truth is when the customer troops in and tries out the Indian whopper, be it chicken, mutton or vegetarian. Burger King might be the newest kid on the burger block but Rajeev Varman who runs it in India is a Burger King veteran. He used to run Burger King’s operations in the UK earlier and it is now upon him to deliver a whopper of a presence.
Burger King’s approach to the Indian market is at odds compared to what it is doing in the home market. Out there it not only franchises but is also actively selling its owned stores in favor of an asset light model. In India, not only has it agreed to a minority stake but is also going to operate its own stores. This test-the- waters approach on the part of 3G Capital, the aggressive owner of Burger King seems to suggest that they wouldn’t be averse to walking away if the numbers don’t show up in the desired timeframe. 3G is known to run a very tight ship and one needs to see how patient they are willing to be in a deep duration market like India. Burger King India’s point of view could not be obtained as despite repeated attempts, they did not respond after having asked for a questionnaire.
While the intent is to open about 12 outlets in the next three months, Varman was quoted by Reuters as saying, “In India, we will set up our first few restaurants and use that to fine-tune our operating model before determining our growth plans.” Burger King’s choice of partner Everstone is also interesting. Everstone is helping out with stores where the initial outlets are coming up. For instance, the High Street Phoenix outlet earlier housed Spaghetti Kitchen; a brand owned by Blue Foods, which itself is controlled by Everstone, ditto for its first outlet at Select Citywalk Mall in Delhi. There, too, a Spaghetti Kitchen made way for a Burger King. Even from an equity partner’s perspective, if the venture gathers critical mass for 3G’s comfort, it could very well buy Everstone out. But that for now is the equivalent of wishing for the moon from terra firma.
Burger King has a very long way to compete before it enjoys some semblance of recall in the Indian market which has its own idiosyncrasies in terms of perception not to mention taste. Jatia recalls the experience of his early days. Cleanliness and value are prime planks on which McDonald’s operates and that is what it put into practice when it entered India. “We built spick and span restaurants for our customers which offered affordably priced meals. But the neat look of the restaurants itself ended up becoming a barrier as customers thought it must be expensive and one should be well dressed to get in,” says Jatia. The company changed that through advertising about the fun nature of the brand and emphasising that it was easy on the pocket.
Matter Of Taste
While that perception issue was addressed by imagery, getting the taste right in a diverse market like India is a herculean task (see: Give me Red). After the first bite, the challenge is getting the right word of mouth. It is a test that will be faced not only by Burger King but all the other new burger chains that have entered or plan to venture into India. Among those already here include Johnny Rockets as well as Fatburger and in the pipeline are Carl’s Jr., Wendy’s and Dairy Queen. Johnny Rockets currently has three outlets up and running. Prime Gourmet, the master franchisee for Johnny Rockets, decided to take no chances and drafted noted chef Bakshish Dean on board. But that did not prevent their original vegetarian offering, a soya patty, from crashing off the menu. Since then Dean has consistently worked to Indianise Johnny Rockets’ offerings to suit the Indian palate. He details, “The primary challenge was to make a bridge between international flavours and what the palate in India wants. One outcome is a vegetarian burger called Ultimate Veggie. It has a European style flavoring yet connects with the Indian palate that likes garlic, thyme and oregano. When you bite into it, it is 85% vegetables unlike other vegetable patties which is primarily potato with specks of vegetables. We upped the seasoning a bit, added a hint of spice and it has worked very well for us.”
Like Jatia, Dean has had his own share of surprises in a market that has a high vegetarian population. McDonald’s today sells 1.5 chicken burgers for every one vegetarian burger. Even during Burger King’s pre-booking offer in the north in the run-up to its launch, the biggest preference displayed was for chicken burgers, then mutton and vegetarian. As for Dean’s shocker, “Our highest selling burger is called Houston whether in chicken, tenderloin or vegetarian builds. It is an actual Johnny Rockets recipe and we haven’t changed it at all. But we clearly did not expect a demand ratio of 60% tenderloin and 40% chicken when we started off. Now it has settled at 55% chicken and 45% tenderloin.”
Jay Singh’s experience at the high end, though, has a twist. He is the co-founder of JSM Corp, which has straddled the entire spectrum from a nightspot to fine dining. His experience running casual dining brands such as Hard Rock Café and California Pizza Kitchen reveal that at the top end there is a distinct vegetarian bias. “At our price point, there is more similarity than difference between the consumer here and the other parts of the world. Of the top five, at least two or three menu preferences will be in the top five globally. However, vegetarian offerings with high-end ingredients account for 50% to 60% of our sales.”
While Carl’s Jr. is working on a 60% vegetarian and 40% chicken menu for its launch next year, Sam Chopra, chairman, CybizCorp, which is getting the brand into India, says, “Outside of a Wednesday or Sunday, many Indians are vegetarians either by religion or personal choice.” He also says that in India, most people consider burger to be healthy and pizza to be unhealthy. “Pizza has much visible cheese and burger has salad and the option of whole wheat bread which can be dressed down a low calorie burger. The fried patty can be replaced by chargrilled, which we will do,” he adds. Burger King, too, will offer flame-grilled patties and is bringing its own menu innovations such as mutton burger and vegetarian options like Spicy Bean Royale, Paneer King Melt and Veg Chilli Cheese Melt.
While Jatia doesn’t rule out the chances of McDonald’s launching a mutton burger, he says it is remote. He elaborates, “We started with the mutton burger in 1996-1997. There are supply chain constraints in mutton and limited interest and we found the chicken platform to be more standard. We recently launched a mutton burger in Australia. We keep bringing things from the globe. If we find that consumers are favoring it, we may or may not bring it.”
Building It Right
McDonald’s massive size and reach does lead to a lot of cross learning but it is not all smooth sailing for the Golden Arches as it is dealing with turmoil back home as well as in India. Its overall sales have continued to plummet this year as niche burger chains such as Shake Shack and Five Guys continue to roll in the dough. The parent’s Q3 topline and profit also took a hit due to increased competition in its home market (Chipotle that it had funded and held equity in earlier, is growing faster and now has a market cap of $20 billion), the food scare in China and Putin hitting back in Russia by closing down 9 outlets and citing health & hygiene violations continues to investigate more than 200 others.
In India, it is sparring with its partner in the North and East. The exact genesis of the dispute between the parent and Connaught Plaza Restaurants is still not clear. Vikram Bakshi did not respond to questions on what exactly triggered off the current state of affairs nor elaborated on his contribution in establishing McDonald’s in the areas that he earlier used to oversee. Hearsay varies from Bakshi alleging preferential treatment to Jatia’s Hardcastle Restaurants to allegations of impropriety on Bakshi’s part. Left to itself, the US parent would want Bakshi out of its cross hairs, so that it can protect and grow its business in the North and East market. Already, Burger King has chosen Delhi as it launch market and so have a lot of other burger chains like Johnny Rockets, Carl’s Jr. and Fatburger among others.
There is enough launch buzz now to get footfalls in for Burger King but to manage that on a sustained basis in the current economic climate has been challenging for Jatia as well. Same store sales have been falling and for the first half of the current financial year his company reported nearly a Rs 15 crore loss compared to a profit of about Rs 3 crore in the same period last year (see: Investing to grow).
The current red ink does not bother Jatia much as he says he is building for the future and this temporary trough is well understood by his investors. “Every new restaurant I build I lose money. So my P&L is only going to get worse. My investors understand that it is an operating leverage business. I started my first restaurant in 1996 but the first time we made money was in 2009. That time we were privately held, so nobody cared. As we now start scaling again, there is twin pressure. Cost pressure and new stores are taking away our profits and in the old stores, same store sales are negative,” he explains.
Jatia is aiming for a critical mass of 500 to 1,000 restaurants and is opening 30 to 40 stores a year. As he expands, his pet theme is broadening accessibility, which translates to being accessible and affordable to customers. He explains, “We just opened a restaurant in Vasai. Previously they had to drive 30 minutes. By going close to them, they will build McDonald’s into their life. I also need to be affordable. Then you will visit more often, you will eat more often. We have played a significant role in moving the eating out frequency from 3 in 2003 to 8 times a month now in Mumbai If a restaurant in Kalyan (a far flung Mumbai suburb) does as well as the one at Crossroads (India’s first mall at South Mumbai) that is because they can afford it.”
To this, Singh adds a word of caution. He reminds, “Low prices are not sustainable as costs are not going down. So, something has to give. You lower prices with the assumption that your economies of scale are going to kick in and you can become more and more efficient to sustain that price. Those are untested assumptions.” Asked if he has considered a price hike to offset input costs, Jatia answers, “You can’t react in a knee-jerk manner in matters of pricing. So, if my input costs have suddenly gone up, I need to absorb it and maintain consistency. Menu prices can take half the pressure and the other half we will extract through productivity growth at the suppliers end.”
Keep Them Coming
Unlike Jatia, who is banking on scale, Vishal Chaudhry at Johnny Rockets does not have that pressure. For a Johnny Rockets or Singh’s Hard Rock Café for that matter hitting 150 outlets is not the driver. Given the limited capital, being profitable as early as possible is. In fact, the very reason that Prime Gourmet decided to go with Johnny Rockets was because there was flexibility in terms of format and menu localisation. “We have the flexibility to go into a location like Ambience Mall, which is 2,500 square feet with 92 covers or Select City, which is 1,500 square feet. Our sweet spot is 60 covers but we can go down to 40. This flexibility allows us to balance footfall, rentals and the overall business model,” says Chaudhry as the servers break into their regular dance routine, a Johnny Rockets differentiator.
As you look around the Johnny Rockets outlet at Gurgaon’s Ambience Mall during the weekday lunch hour, many notions about India’s eating habits get dismantled. With classics from the 60s, 70s and the 80s wafting in the background, Johnny Rockets is supposed to be an American Diner where the typical demographic should be expatriates wanting to feel at home, tourists looking for familiar eating spots or the well travelled looking for a genuine burger experience or working executives. While you do have all of the above, also in tow with their parents are kids and at a faraway table teenagers with their grandparents. Despite this diverse patron profile, Gaurav Sharma, director, Prime Gourmet, says, “We don’t consider ourselves competing with a McDonald’s. It is a different price point. We consider our competition to be casual dining chains like Chili’s, Nando’s or Big Chill. People who prefer us don’t want to spend thousands on fine dining but don’t either want to go to a McDonald’s and have a QSR kind of experience.”
The 70% to 80% weekday occupancy at Johnny Rocket’s biggest outlet is heartening but Singh thinks hyper growth will take its time coming as the industry tackles affordability issues and eating habits. He says he agrees with Yum India’s President, Niren Chaudhary’s assessment about India being a case of ‘first world cost, third world pricing’. “Our cost structure in the industry is becoming close to what it is in the West and the pricing power is probably 30% of what prevails there,” he points out. With respect to food habits, he says, Indians like things that fill them up. That is why wraps of different kinds sell. In Chinese food, there is a clear preference for things to be saucy and gravy. “In India, the appetisers are dry but the main course is always gravy or curry. If you really want to expand, you got to address that, “he says. Hence, the only way out, he says, for mass players is to localise their offering and aggressively sweat their assets.
Singh’s prescription has already been swallowed by a lot of QSR players. KFC is offering a rice bowl. Even at Dunkin’ Donuts, it is the more (burgers and sandwiches) that is selling more. McDonald’s is also working on filling up its restaurants in the slack hours by reaching out through different formats, be it through breakfast options, McCafe, online delivery or a Drive-thru.
Jatia is banking on McCafe and wraps to reverse the decline in same store sales. “We have 27 McCafe compared with zero last October and plan to ramp up to 75 by end of next year. McCafe gets me into your consideration set if you are a regular coffee drinker. Then there is wraps as it has a roti feel. Customers are increasingly buying it with a meal. So, we will play with more choice and options there. Then there is the flatbread option in case you want something different from the bun option.”
So, will all this be enough to help McDonald’s India grow and protect its turf? Jatia grabs this opportunity to pull out his trump card, “There is a whole generation that has grown up with us. Kids & teens have celebrated birthday parties at McDonald’s. People like to click their pictures with Ronald McDonald. You can’t take away that brand connect or nostalgia.” Well, that is certainly true. Parents don’t go to McDonald’s, their kids drag them there. And if the grown-ups drag the kids into Burger King for a curiosity visit, ‘doesn’t feel like McD’ is the last thing the guys in Tower 2A would like to hear. Kids may not be their core market but pester power is a killer multiplier. As for those huddled in Tower 3, they might just go, “We Are Lovin’ It”.