With the U.S. seemingly saturated, Europe conquered, and China fully breached, U.S. fast-food giants are targeting India as the new market for growth. A newly released study says the country could be a $1.1 billion opportunity over the next three years as revenues double. Translating sales into foreign markets, however, isn't always a smooth transition.
It's been more than 25 years since the first Kentucky Fried Chicken restaurant in China plopped its first chicken wing into a vat of grease just outside of Tiananmen Square, and today the chain has more than 4,200 fast food joints in the country. Yet as successful as KFC and McDonald's (NYSE:MCD) have been in China, relatively few competitors have followed them overseas. KFC's parent, Yum! Brands (NYSE:YUM) may have introduced the Pizza Hut chain to the Middle Kingdom, but no one else has really made a successful go of it.
So to say there will be a quick surge in the number of fast-food restaurants in India may be overstating the case. Since opening its first restaurant there in 1996, McDonald's has only built 240, and none sell beef or pork due to the country's religious beliefs. In contrast, McDonald's plans to have some 2,000 stores open in China by the end of this year.
Customization of a menu to meet local tastes and religious beliefs represents the biggest challenge for those looking to export their business model there. All of McDonald's restaurants, for example, must be certified halal, meaning under Islamic law they're permissible to eat at.
Analysts at Crisil, however, say that the barriers that have kept quick-serve chains on the sidelines before may be changing, and they expect new fast-food stores to open at a brisk 16% to 18% rate annually in India for the next three years.
Pizza in particular is seeing impressive growth. Domino's Pizza (NYSE:DPZ) already has a large and growing presence in India, with 552 stores at the end of last year. India represents its third largest international market behind the U.K. and Mexico, and its fastest growing market. Of the nearly 500 new restaurants the pizzeria opened around the world in 2012, 23% were in India.
In addition to its population having what may be considered a difficult palate to please by U.S. standards, there are significant environmental and political infrastructure hurdles to be surmounted. The climate in India is unstable, and roadblocks have been thrown in front of retailers looking to expand. Although the country's Department of Industrial Policy and Promotion directives mandating specific levels of investment in back-end operations are currently aimed at mass retailers like Wal-Mart, they do hint at problems other foreign operators may encounter as they grow in size and importance.
Crisil says global brands own nearly two-thirds of the QSR market in India, which may raise the hackles of local government officials, and, as much of the growth in the industry is expected to occur in outlying cities away from the large industrial centers like Bangalore, Hyderabad, and Mumbai (40% to 45%, according to the researchers), the cultural shock may be profound.
Yum!'s KFC chain is also facing difficulties with growth in China due to issues both external and internal. It's served chickens given unapproved levels of antibiotics, served ice cubes alleged to be dirtier than toilet water, and suffered from customer fears due to a flare-up of avian flu. It reported a 16% plunge in same-store sales at KFC in July as customers fled the chain in droves, with comps at some stores tumbling as much as 30%. It doesn't take much to create a crisis in confidence, and in foreign markets that could mean a significant turn for the worse.
India is a big opportunity, and there are plenty of multinational corporations lining up to take advantage. Burger King Worldwide plans to live up to its name by expanding into the subcontinent, though it hasn't made it there yet; Dunkin' Brands is trying to convince the populace that doughnuts are worth snacking on; and Starbucks has 18 coffee shops there now -- it opened its first one a year ago -- and plans to open 100 more over the next year.
All in all, India represents a fat opportunity for McDonald's and Domino's Pizza, which have already established themselves there and are likely to keep growing as the market expands.
Fool contributor Rich Duprey 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.