The estimated value of “organised eating out” market in India is approximately USD 625 million. The overall food service market remains highly fragmented with standalone outlets accounting for over 80 per cent of the total restaurant industry. Clearly, the deepening consumer pocket is making the typical Indian consumer to taste fine dining experience as compared to the earlier value for money dining. Strong entrepreneurial spirit along with inherent strength have enabled domestic food chains such as Sagar Ratna, Haldiram’s and Nirula’s to become names to reckon with.
Changing lifestyle, changing preferences
Cut throat competition, higher quality standards, dynamic transformations in consumer lifestyles, increasing need for convenience, higher socialising needs and changing retail landscapes have brought radical shifts in the Indian food service industry, forcing players to keep up with the changing palate. To add on, evolution of the Indian woman - from a homemaker to a bread-earning member - has contributed to the change in the Indian mind set and greater inclination towards “dining out.” Similarly, compared to the supply landscape a decade ago, restaurant owners today have a wide range of themes, locations and cuisines to choose from while setting up an outlet. Infrastructure development and better connectivity have created opportunities across malls, education and IT parks, airports, BPO locations and multiplexes.
Further, enhanced viewership of western media programmes have helped the growth of this sector, especially the Quick Service (QS) format. With changing industry dynamics in India, even the Average Per Cover (APC) in fine dining category has increased from USD 6 to USD 13 over the last five years. Also, increased demand for value-for-money has made online food services more popular over order-by-phone. Such online portals enable people to make well-informed choices by gleaning information on restaurants, cuisines, ambience, outlet reviews and pricing of restaurants.
Having said this, it is essential for players to focus on the rough edges in order to convert challenges into opportunities. Growing awareness of health and wellness suggests the need for restaurants to focus on offering healthier eating options with strict quality control. Increasing pressures on costs of raw material such as sugar, chicken, fish, onions, etc. is just the tip of the ice berg. In addition, restaurateurs have to pay extreme attention to issues such as food safety, low product shelf life, quality and hygiene, unavailability of skilled human resources and excessive wastages. Further, pandemics such as bird flu and swine flu discourage customers from eating out and thus exert downward pressure on poultry and meat consumption.
Therefore, the dilemma - juggling between rising food costs and simultaneously maintaining quality standards - seems to inflict immense operational pressures on players, where players are tempted to compromise on quality to maintain margins. This has increased the role of governance bodies such as Ministry of Food Processing Industries, Department of Food and Public Distribution and the Ministry of Health and Family Welfare.
Another major road block for growth and expansion of food chains in India is the high cost and lack of availability of real estate at prime locations. Besides these, innumerable clearances and licenses are required to open and operate a restaurant. In India, there are six-seven intermediaries in the supply chain for fresh produce compared with just two-three in developed economies. The involvement of so many middlemen and lack of infrastructure results in inefficiencies in operations and increases the product prices without adding any significant value.
Menu customisation to satiate local tastes and food habits in a diverse country such as India is another huge challenge that requires investment in innovation. Other challenges include acquisition and retention of good chefs, ensuring recipe confidentiality and effectively managing sourcing and logistics. While smaller restaurant chains continue to struggle with investments in sourcing, achieving economies of scale and managing logistics, larger chains may suffer from underutilised capacities.
Franchise recipe: a strong need
Although, food service companies in India are increasingly looking for partners for long term growth, there is a need to sift the committed entrepreneur from wannabes to get the best out of the franchising model. While a franchise model is a good way to enhance market penetration, drastically reduce the chances of failure, save valuable time and resources, enable quick market presence and ensure cost and operational advantage in many ways, firms need to be extremely careful on aspects such as quality control, customer relationship management and the brand image. However, one needs to structure the arrangement well to ensure consistent quality, prompt customer service, operational effectiveness and long term brand success.
Currently, 17 per cent of the F&B outlets within the organised sector operated through franchisees and over 30 per cent of the new food outlets coming up are expected to be based on franchise model. Therefore, while franchisee model is clearly a profitable option offering higher financial return vis-à-vis company-owned establishments, it needs to be well-controlled and managed in long term.
The next boom industry
Clearly, the food services and restaurant industry is on the fast track to become the next boom industry. With so many brands and restaurant chains entering the market, one has to wonder whether these brands will be able to tantalise the Indian taste buds, which still remain skewed towards traditional, spicy, Indian food. However, what is expected to keep these numerous restaurants afloat is identification of correct target segment and outlining of different strategies.
Restaurateurs need to outline well-defined strategies for supply chain optimisation, cost control and sourcing, besides improving their vendor selection processes and expanding in Tier I and II cities, thus, riding the urbanisation wave.
The future of the restaurant industry in India is definitely bright. It can scale newer heights in the near future with support from policy makers, which could help create a faster, easier and fairer regulatory process, and by leveraging on the government investments and initiatives towards promotion of travel and tourism in the country. The author is the Senior Professional, Retail & Consumer Products Practice, Ernst & Young