India may top China as hottest restaurant growth market

Move over, China?

India may be ready to supplant China as the top growth market for Western quick-service brands, according to a new research note from Sara Senatore, securities analyst for Bernstein Research.

Based on projections that India’s economy could soon outpace China’s, and recent moves by McDonald’s Corp., Yum! Brands Inc., Starbucks Corp. and Dunkin’ Brands Inc., “the focus on the Indian foodservice market has intensified,” Senatore wrote.

India’s economic growth could exceed China’s as soon as 2014, the report said, adding that much of Indian consumers’ discretionary income likely would go toward spending at restaurants. This means the quick-service market in India could double by that year, she wrote.

“At $13 billion, the Indian market for fast food is just less than one-fifth that of China’s, but it is growing fully 4 percentage points faster — 19 percent annually versus 15 percent in China,” Senatore wrote. “Importantly, fast-food growth has consistently outpaced income growth in India by a factor of 50 percent, as Indian consumers disproportionately allocate incremental income to luxury goods like Westernized food.”

McDonald’s and Yum recently told investors they would accelerate growth in India, while Starbucks and Dunkin’ will open their first outlets there this year. Other brands, like Baskin-Robbins and Domino’s Pizza, already have several hundred locations in India.

Quick-service restaurants investing in India also could reap a “demographic dividend” from India’s youthful population, Senatore added.

“Unlike in China, where the population bulge sits in middle age, India’s largest population cohorts are its youngest,” she wrote. “Because eating habits are established at a fairly young age, this bodes well for growth. Young consumers cite taste, variety and limited time as reasons to eat fast food; we anticipate that these factors will only grow with time.”

By 2015, Indian consumers could generate annual sales of $1 billion for Yum, $800 million for McDonald’s and $80 million for Starbucks, Bernstein Research estimated.

In late 2010, McDonald’s said it would grow its system of restaurants in India by about 25 percent annually.

McDonald’s currently is the sales leader for Western quick-service brands in India, Senatore wrote, ringing up sales of $206 million in 2010, compared with $98 million for KFC, $38 million for Subway and $27 million for Baskin-Robbins.

However, during from 2006 to 2010, KFC recorded the highest growth in systemwide sales and unit counts of that group, with a five-year compound annual growth rate of 73 percent in sales and 57 percent in locations, outpacing 26 percent and 20 percent, respectively, for McDonald’s.

Last November, Yum separated its India-based restaurant operations from its Yum Restaurants International reporting division, creating a new Yum Restaurants India. The move conveyed the country’s importance as a growth market on par with China.

Yum Restaurants India president Niren Chaudhary has said on several occasions that Yum’s growth in China is the model for India.

“India today is at the same inflection point China was before it took off 10 years ago,” he said at the company’s investor conference last year.

The company said at that meeting that it would aim to have 550 restaurants in India by 2015, led by KFC, which surpassed Pizza Hut last year as Yum’s biggest chain in the country.

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Coffee consumption in India lags far behind tea, but coffee’s growing popularity gives Starbucks and Dunkin’ Donuts, both of which plan to enter India in 2012, room for aggressive growth, Senatore wrote.

Starbucks aims to have 50 units in the country with joint-venture partner Tata Global Beverages by year’s end. Meanwhile, Dunkin’ Donuts signed a franchise development deal with Jubilant FoodWorks, the exclusive franchisee in India for Domino’s Pizza, and hopes to open 100 restaurants there over the next five years. Starbucks has previously said its first outlet in India would open by August, and Dunkin’ said its first restaurant would be ready by June.

Jubilant FoodWorks operated 439 Domino’s restaurants in India as of its third quarter ended Dec. 31, 2011. Same-store sales in that system grew 30.1 percent, Jubilant said.