Yum! Brands Sees Significant Growth Opportunities in India

Yum! Brands is good at positioning itself for success in high-potential areas. However, it’s not the only company that stands to benefit from India’s rising middle class.

Mar 19, 2014 at 10:00AM

Yum Brands India

(yum.com)

Yum! Brands (NYSE:YUM) currently operates in 130 countries and territories, serving an average of approximately 1 million customers per day. While China is often considered the greatest growth opportunity for quick-service chains like Yum! Brands, India is sometimes overlooked. Despite current economic concerns in India, Yum! Brands sees tremendous long-term opportunity.

Growth potential
Chain restaurants did $2.5 billion in sales in India in 2013, and that sum is projected to reach $8 billion by 2020. Over the past three years, the quick-service market in India has grown at a 30% annual clip.

Yum! Brands currently has 625 restaurants in India. By 2015, it aims to have 1,000 restaurants in the country. By 2020, it aims to have 2,000 restaurants in India. To achieve this, Yum! Brands plans to start by investing $100 million in India over the next three to four years. 

You might be wondering why. What is the proof that India is likely to present a good investment opportunity? The answer to that question is simple.

India has a population of approximately 1.2 billion, and 65% of those people are younger than 35 years old. Therefore, there is plenty of room for long-term economic growth. Like China, India has a growing middle class ... only India's growing middle class is younger. Additionally, India has a tremendous labor force: 487 million people.

The United States is known for its highly skilled labor force, but we're currently an aging population. Therefore, economic growth will be much more difficult to achieve -- at least for the next 10-15 years.

Yum! Brands' presence in India includes 301 KFC locations, 290 Pizza Hut locations, and five Taco Bell locations. But these brands don't sell all the same items as in the United States. While there are many overlaps, Yum! Brands also caters to local culture by serving what's in demand. Yum! Brands has been in India since 1996, the same year McDonald's (NYSE:MCD) entered India.

Room for all (for now)
Yum! Brands and Burger King Worldwide (NYSE:BKW) won't fight for much market share, but Burger King's new entry into India will present a threat to McDonald's. That said, McDonald's possesses a much stronger brand, and its experience in India regarding menu preferences, supply chain, and marketing will give it a distinct advantage over Burger King. Plus, McDonald's is introducing its McCafe in India. If McDonald's can get Indian consumers hooked on coffee, then it could be a home run. On the other hand, it will have to contend with Starbucks (NASDAQ:SBUX) in this arena.

Starbucks currently has 30 locations in India, whereas McDonald's has approximately 300 locations. That being the case, McDonald's has a significant head start. That said, Starbucks doesn't give up easily.

Starbucks recently opened a new store in the city of Bangalore, broadening its exposure in this enormously populated country. All Starbucks locations offer coffee, local food items, free Wi-Fi, and merchandise. Starbucks is looking for the majority of its growth to come from abroad, and India could play a big role.

Getting back to Yum! Brands, ironically, it's focusing on offering Indian consumers food that is lower in fat and calories. For instance, it's selling grilled chicken at KFC, and vegetable salads and soups at Pizza Hut.

The race for the Indian consumer should be a competitive one. But it shouldn't be anything like the current competitive environment in the United States, which has many more brands fighting for a hesitant consumer's dollar. It should be easier for all these brands to grow in India, where the middle-income consumer is on the rise, demand for American brands is high, and the playing field isn't as crowded. 

Since Yum! Brands already has a presence in the big cities, it plans on expanding to smaller towns and cities in order to grow its geographical footprint. It will also expand its menu and customize its products. Many product launches are scheduled for the remainder of the year; Rockin' Burgers are already a go. These burgers feature a tri-pepper tangy spice sauce, which caters to the local palate.

The Foolish takeaway
Yum! Brands (and McDonald's) knows this market due to trial and error. The rise of the middle class should aid Yum! Brands' growth in India, which could be a major positive considering the country's population. While McDonald's aims to attract more customers with its McCafe, Starbucks has the best odds of hooking consumers on caffeine.

As far as Burger King goes, it lacks experience in India, which could lead to setbacks. Then again, Burger King does have a habit of seeing what McDonald's does and then attempting to make it better, so anything is possible. Please do your own research prior to making any investment decisions.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. 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.

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