For years China has been the pinnacle of global growth. However, the years of double-digit growth may be over for China, at least for now, with only 7.6% GDP growth expected in 2013. If correct, this would represent the third straight year of declining growth for the country.
By no means is the Chinese growth story even close to over. Nevertheless, the search has already begun for that next big growth market. For restaurant industry leaders such as McDonald's (NYSE:MCD), Yum! Brands (NYSE:YUM), and Domino's Pizza (NYSE:DPZ), India is the place to be. But why are these restaurant industry leaders falling all over themselves to expand in India?
India's middle class could be a billion strong by 2025
You may think of food from McDonald's, KFC, Taco Bell, and Domino's Pizza as relatively cheap. In most cases you are only going to end up spending $3-$7 at any one of these restaurants, which by no means is going to break the bank if, like the average American in 2012, your individual income was somewhere around $52,000 (World Bank U.S. 2012 GDP per capita: $51,749).
In India it's a completely different story. According to the World Bank, in 2012, India's GDP per capita, a close measurement of the average citizen's income, was only $1,489. That translates to just over $4 a day. On that kind of income, even something off of the McDonald's Dollar Menu seems expensive.
Going by the Asian Development Bank's definition of the middle class, only 25% of Indians fall into this category. Yet even for those Indians who are considered to be in the middle class, four out of every five (224 million) can only spend $2-$4 a day. Those who are considered to be in the "middle middle" (spending $4-$10 a day) and "upper middle" (spending $10-$20 a day) only make up around 50 million people. Thus, up until this point restaurant chains haven't been dying to expand into the country, as a very small number of people there would be able to afford their products.
Right now there are only around 2,500 quick-service restaurants in India, compared to 15,000 in China and 175,000 in the United States. India has some major catching-up to do, and much of this will come as a result of India's total household consumption growing 300% between 2005 and 2025, according to the McKinsey Global Institution.
Based on these numbers, by 2025 India's middle class will have grown to 583 million, which would make India the world's fifth-largest consumer market.
Projections by World Bank economist Ejaz Ghani put over a billion Indians in the middle class by 2025.
Any way you look at it, the number of people in India who will be able to afford Western luxuries such as fast food will grow dramatically over the next couple of decades, providing a once-a-in-a-lifetime opportunity for fast food chains.
McDonald's, Yum! Brands, and Domino's Pizza all target India
With incredible growth expected for the number of Indians who will be able to afford fast food, it is no wonder that industry leaders have been moving to rapidly expand in the country.
McDonald's breaks up its operations in India into two segments: Amit Jatia (West and South India) and Vikram Bakshi (North and East India). In the Vikram Bakshi segment alone, the number of restaurants is expected to grow from 140 presently to over 300 in the next three years. McDonald's is focusing on vegetarian products, as in the Hindu religion the cow is viewed as a sacred animal.
Yum! Brands, the owner of KFC, Pizza Hut, and Taco Bell, has already grown its store count in India from 261 in 2008 to 593 in 2012. Just in 2012 alone Yum! opened 138 new restaurants in the country. In 2014, the company wants to open at least 150 new restaurants in India.
Domino's Pizza already has 600 locations in India. Within the next couple of years India will overtake the UK as Domino's second largest market, behind only the United States. In 2014, Domino's is looking to add another 125 locations.
The Foolish conclusion
By 2025, India could have as many as one billion "middle-class" citizens primed and ready to consume fast food. McDonald's, Yum! Brands, and Domino's all realize the incredible potential in this rapidly expanding market and are swiftly moving to stake their claims.
For McDonald's and Yum! Brands India only makes up a small portion of their overall businesses, as McDonald's had 34,480 locations and Yum! had 39,014 locations worldwide at the end of 2012.
For Domino's it's a different story, as India is likely to become the company's second-largest market in the next few years.
One thing is certain: all of these companies have an exciting future in India.
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Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.