Quickening Service


October 10, 2009

By Vishal Krishna


10 October 2009

Indian shopping hotspots are sporting more and more golden arches these days. If McDonald’s is expanding like never before, not far away is KFC (Kentucky Fried Chicken), though on a lesser scale. Their guests are young, their menus glocalised, their branding established, and their menus are no longer over-priced. After more than a decade in the highly fragmented quick service restaurant (QSR) segment — only 20 per cent of the Rs 10,000-crore segment is organised — McDonald’s and KFC are growing at a nippy 20-25 per cent, despite the slowdown.

“In a recession, we see ourselves as a good substitute for premium dining,” says Amit Jatia, managing director of Hardcastle Restaurants, a joint venture partner of McDonald’s. “We are rapidly expanding because we have tested the supply chain for over 15 years and it has given us the opportunity to scale up.” McDonald’s, which had 20 stores in India till 2002, today has 160. It plans to open 200 more over five years, with an investment of Rs 500 crore. KFC, the smaller player with 52 restaurants, plans to open over 100 more outlets in the next two years.

Though McDonald’s foray into chicken nuggets this year has taken it into KFC territory, the companies give the impression of ignoring each other. “The Indian market is very large for QSRs and our focus is on large portions of white meat, while the competition focuses on different products,” says Unnat Varma, marketing director of Yum Restaurants, which has been developing KFC and Pizza Hut in India. The pricing of its menus makes McDonald’s a quick eatery with the average per person spend at Rs 100. KFC’s spend is higher, at Rs 125-150.

Thanks largely to dishes such as McDonald’s Veg McPuff and Chicken Maharaja, and KFC’s Veg Thali and indigenised Hot and Crispy, not only are the two no longer viewed as outsiders by jingoists, they also have a fast-growing loyal clientele. In 2009, McDonald’s guest count has crossed 30 million; in 1996, when it started, the count was a little more than 200,000. KFC’s annual guest count is expected to rise from 3 million today to 5 million by the end of 2010.

Many Indian retailers have not turned cash positive because they burnt most of their money on building the front-end. But, “McDonald’s and KFC have got an amalgam of things right,” says Harish Bijoor, a Bangalore-based brand and marketing consultant. “While McDonald’s has converted millions of people with its Rs 20 happy price menu, KFC has done it with its large portions as a QSR-plus restaurant.”

Staying Ahead In The Numbers Game

It has taken McDonald’s, which has a global turnover of $22 billion (Rs 1.1 lakh crore), almost 12 years to operationally break even in India (KFC is yet to break even). That in itself is not unusual; Bijoor says cereal maker Kellogg’s took 23 years to break even in Mexico. “The costs incurred on store design and supply chains are huge,” says Jatia. “Now, I am expanding in Chennai and I have to prepare the back-end to service that region, which requires large investments.” Of McDonald’s’ Rs 1,200 crore investments in India so far, Rs 250 crore was for the supply chain alone.

McDonald’s supply chain in is decentralised — a store manager sends a requisition to its logistics partner Radhakrishna Foodland (RKF) though a data management system, who in turn informs Vista Foods, which McDonald’s’ global supplier, OSI Global, bought in partnership with Hardcastle Restaurants. “We source everything for McDonald’s locally and process,” says Bhupinder Singh, Vista’s CEO. Vista, which has invested Rs 30 crore in its processing capacity, works on a 15-day lead time with farmers and meat suppliers in a just-in-time format; RKF picks up the supplies and stores them at its distribution centre before dispatching them to every store individually. A McBurger for Rs 13 is possible only due to this efficient supply chain.

Other than a tie-up with Venky’s for chicken, KFC outsources buns, vegetables and transportation from different vendors. While this explains its slow expansion and gives McDonald’s a clear advantage, KFC’s limited, chicken-based menu does not need the kind of supply chain McDonald’s has struggled to establish. It is also the reason why McDonald’s can envisage expanding faster into the metros as well as the tier-I and tier-II cities, but KFC cannot for now.

More To Come

McDonald’s and KFC are unique because their international competitors (Burger King and Church’s Chicken, respectively) have not come to India yet. Local chains such as Nirula’s are popular in their cities of origin but to compete with these two MNCs, they will have to manage a complex supply chain and open stores quickly, which is unlikely to happen on a large scale.

Moreover, the supply chain costs for international restaurant chain brands are complex and play out on a much larger, national scale. Rents, salaries and power make up the largest overheads, and they cannot be rationalised without affecting quality benchmarks.

“The only way to turn profitable is with a growing customer base and they have achieved this with product consistency,” says Devangshu Dutta of Third Eyesight, a retail consulting firm in Delhi. He says the flywheel concept of engineering applies to food retailing too, where a company could be slow, but by building the right things such as supply chains and prudent store openings, it creates momentum for growth.

Sources say both KFC and McDonald’s spend 5 per cent of their turnover on marketing. They also invest considerably in R&D — select McDonald’s outlets have been experimenting with a breakfast menu for over a year now. But, “We will doubly want to check that there are volumes in a menu before we launch anything,” says Abhijit Upadhye, director, supply chain, McDonald’s. In the quick service food business, no decision is taken in a hurry.

(From BusinessWorld, Issue of October 10, 2009)