India, a land that was long stricken with poverty, stymied by bureaucracy and at times showed overt hostility to foreign businesses, now beckons with a burgeoning middle class, relaxed restrictions on international investors, and a young population eager to try sandwiches, burritos, pizza and cinnamon rolls.
Also enticing is India’s economy, which is growing at a clip of 8 percent annually, compared with the less than 3 percent growth being tallied annually in the United States, according to the International Monetary Fund.
And India’s foodservice market is growing at a rate of 5 percent to 6 percent annually, while its quick-service segment is growing by more than 20 percent annually, according to the National Restaurant Association of India in New Delhi. That compares with the U.S. foodservice market’s projected growth of about 1 percent annually for the next 10 years, according to The NPD Group, a Port Washington, N.Y.-based research firm.
“I think the opportunities for our industry our enormous,” said Scott Chorna, director of international business development for Atlanta-based Focus Brands, which franchises Carvel, Moe’s Southwest Grill, Cinnabon, Auntie Anne’s Pretzels and Schlotzsky’s.
Chorna was one of a dozen foodservice franchisors that participated in a recent trade mission to India organized by the U.S. Department of Commerce’s Commercial Service.
While Cinnabon already operates in India, Chorna said that among his other concepts he saw the most potential for Moe’s, whose bold flavor profile he thought would appeal to Indian palates and whose stateside competitors had not yet landed in India.
“To see the energy and enthusiasm about how things are going to develop is exciting,” he said.
Know before you go
India’s road to opportunity is not without obstacles, however.
Tantalizing statistics from India, such as a 300-million-member middle class — about the size of the entire population of the United States — and labor costs that local operators say can trend as low as 6 percent, can be deceiving, observers said.
U.S. consular officials in Mumbai pointed out that India defines the middle class as those people who have adequate food, clothing and shelter; they don’t necessarily have disposable income to spend on meals at California Pizza Kitchen or T.G.I. Friday’s, both of which have operations in India.
Richard Rothman, head of commercial services for the U.S. consulate in Mumbai, estimated that about 20 million Indians are what Americans would consider middle class.
No one who spoke to trade mission delegates during their five-day trip to Mumbai, Hyderabad and New Delhi would estimate how many Indians could regularly go out for a $20 meal.
And although the government, currently headed by respected reformist technocrat Manmohan Singh, has been liberalizing investment restrictions since 1991 and last year removed the cap on the franchising fee that foreign companies could charge, some hurdles remain in place.
For example, National Restaurant Association of India president Samir Kuckreja pointed to a 98-year-old law in New Delhi, where the legal drinking age is 25, that requires an official to beat a drum in the area around an establishment that’s seeking a liquor license to make sure no one objects.
American multiunit operators, having to deal with a multitude of zoning regulations, community boards, and local, state and federal regulations at home, might expect similar layers and varieties of regulations in India’s 28 states and seven federally administered territories.
But in India, people in different states speak different languages, with different alphabets, and regional differences have developed over thousands of years.
In fact, according to the NRAI, although south Indian food is the most popular cuisine in restaurants throughout the country, Chinese food is more popular than south Indian food in the north Indian states. Italian is the next most popular foreign cuisine, followed by Japanese, according to the NRAI’s Kuckreja.
And anywhere in India, menu adaptation is considered essential. A spokesman for the 22,000-unit Subway chain, which currently has 202 franchised units in India, said that country required more adaptation of the chain’s menu than any other country in which Subway operates.
Perhaps the biggest adjustment that needs to be made is regarding protein.
Many Indians are vegetarian. Amit Jatia, managing director of McDonald’s India, with responsibility for the south and west of the country, estimates that half of his customers are vegetarian.
The majority of Indians are Hindus, whose religion forbids the consumption of beef. The largest religious minority practices Islam, which bans pork.
So, many chain restaurants, including Subway and McDonald’s, have banished those proteins from the menu.
Don Fertman, Subway’s chief development officer, noted that his franchisees in some Indian states have separate sections for serving vegetarian and non-vegetarian food.
Fertman said that while his franchisees report labor costs of between 6 percent and 8 percent, food costs are higher than in the United States, especially if any ingredients are imported. Meanwhile, prime real estate prices are comparable to those in the United States, he said.
Potential payoffs
But those and other obstacles — particularly shortfalls in infrastructure that bring added challenges to keeping perishables items cold while they are being transported to restaurants — have not stopped foreigners from opening franchises in India.
According to a USCS report, there are currently 1,200 franchisors in India, of which about 25 percent are of international origin. USCS valued the current franchise market at $3.3 billion in all sectors, including food, education, retail and services, and said it had the potential to grow to $20 billion by 2020.
Among the American franchisors operating in India are Domino’s, Baskin-Robbins, Pizza Hut, KFC, Papa John’s and Ruby Tuesday.
Johnny Rockets, Carl’s Jr., Wendy’s, Applebee’s and Denny’s all participated in the recent trade mission. So did smaller chains, such as 126-unit fast-casual sandwich chain Which Wich; 120-unit Pollo Tropical; and BannaStrow’s, a four-unit crêpe chain based in Miami.
C.Y. Pal, who heads the Franchising Association of India, said international brands appealed in particular to the large number of young people who have studied or traveled abroad.
Pal said franchising already employed half a million people in India and was growing by between 35 percent and 40 percent a year.
“In the U.S., one reads about franchising being about 50 percent of the trade; in India, it’s 2 to 3 percent,” he said, indicating the potential for growth in the country.
But B.V.K. Raju, who owns a supermarket in the southern Indian city of Hyderabad and is currently working on opening Curves fitness studios, said that most foreign companies don’t understand the complexities of the Indian market.
“They just go by numbers and the population,” Raju said. “They don’t understand that every few hundred kilometers the tastes change. You have to take all of this into consideration, and when you look at it from that standpoint, the market is very small.”
John Peddar, executive director for international franchise development for Applebee’s, who participated in the recent trade mission, said the family-dining chain would have to serve rice in the south, bread in the north, be alcohol-free and vegetarian in Gujarat and meat heavy in Rajasthan.
He said he had learned that 17 or 18 permits are required to open a restaurant, “and you need to know how to work that process.”
Regional variations with regard to liquor licenses are also daunting, he added, noting that in Chennai, the capital of Tamil Nadu state, an establishment needs at least 20 beds to get a liquor license.
“In other states that’s not the case,” he added. “In some states liquor licenses are very inexpensive; in other states they’re very expensive.”
Henry McGovern, chief executive of Applebee’s franchisee AmRest and a partner in Starbucks Corp., was on the trade mission as a consultant to Which Wich chief executive Jeff Sinelli. He said that in Hyderabad, in the state of Andhra Pradesh, some restaurants have single-day liquor licenses, which cost about $150. They obtain the licenses for weekends, when they do most of their business, and forego them during the middle of the week, he added.
McGovern said he was encouraged by the enthusiasm of potential franchisees.
“It’s really refreshing how many entrepreneurs are here,” he said during the trade mission. “It feels real.”
He added that he thought the level of development was similar to where China was seven years ago and where Russia is today.
“It’s been a very encouraging week,” said Phil Crimmins, president of the Applebee’s international division, at the end of the trade mission. He added that he was “pretty confident” he would be able to sign a franchise agreement with someone his group met during the trip, possibly between now and the end of the year.
Contact Bret Thorn at bret.thorn@penton.com.
