McDonald's Corp (MCD) Expands In India As Tastes, Especially Among Youth, For Specialty Coffees, Western Fast Food Grow

BANGALORE, India — McDonald’s Corp.'s quarterly results may have disappointed Wall Street this week, but in India the U.S. corporation’s largest franchisee is gearing up to add more restaurants and install additional McCafe counters within existing locations as urban Indians indulge their growing appetite for Western fast food and specialty coffees.

Unlike in the U.S., where grabbing a coffee or a McDonald’s breakfast sandwich on the way to work is common, most Indians typically eat and get their first cup of tea or coffee at home. But that’s changing as more of India’s young join the country’s workforce not just in the major cities but also in smaller towns, Smita Jatia, managing director of Hardcastle Restaurants, one of two McDonald’s franchisees in India, said.

On Monday, Jatia opened McDonald’s newest McCafe inside one of its restaurants in the southern Indian city of Bangalore, the first stop on McCafe’s expansion into South India. The region is unusual in a country of tea lovers because it is home to much of India’s coffee production -- and consumption.

For now, India contributes only a small portion of McDonald’s global revenues, with about 370 restaurants, which consist of Hardcastle’s 202 and those operated by Connaught Plaza, the franchisee responsible for North India and East India. In total India's McDonald's outlets serve about 325 million Indian customers annually.

As McDonald’s has expanded in India it has been sensitive to the nation's many cultural nuances. It uses no beef in the country -- which is key to the popular Big Mac hamburger in the West -- or pork, and from preparation to serving it segregates vegetarian and nonvegetarian foods.

Coffee consumption is soaring, as is eating out, Jatia said, and that's reflected by the growing number of outlets such as McDonald’s own McCafe, and competitors such as Costa Coffee and Cafe Coffee Day. The latter, with 1,500 outlets, is the dominant Indian player in the segment.

The Indian coffee chain market is forecast to grow 20 percent each year from 18.2 billion rupees ($290 million) in 2014 to 54.3 billion rupees by 2020, according to market research firm Technopak. The total number of organized cafe chain stores will increase from about 3,500 today to 6,200 by 2020.

“Eating out in India has evolved from an occasion-driven activity to an everyday activity,” Euromonitor International said in a report on the fast-food market in India. The rising number of nuclear families, exposure to global trends, the increasing number of employed women and an increase in the number of dual-income households are all factors boosting eating out, the research firm said.

“Coupled with these factors, international chains entering India offered a wide variety of options to individuals. Multinationals launching low-price offerings also helped fuel growth. In addition, companies are increasing their reach to medium- and small-sized cities to drive sales,” Euromonitor said.

Young Clientele

“The typical age group that we get here is in the 18-25 year range,” said 29-year-old Manoj Shetty. This under-30 clientele doesn't think much of spending close to a 100 rupees for a cappuccino -- more than the cost of a working meal at many local no-frills hotels -- in return for the ambiance, a place to hang out with friends and when needed a wifi connection that's on the house for the first half hour.

That also represents a big difference between how people in India view a McDonald’s compared to how customers in the West, where takeaway is the norm, view McDonald's, Jatia said. Eating at the restaurant, rather than takeaway, accounts for the dominant share of revenue at McDonald’s India.

Shetty himself represents another facet of this age group. In a country with half the population aged below 25, many youngsters head to big cities for jobs. Shetty joined Cafe Coffee Day after a basic degree in commerce. He didn't have money to pay for MBA studies but worked his way up from an entry level member of the “crew” to becoming a manager after eight years. Last year, he switched to McDonald's.

There’s visible confidence in his body language and pride in his voice as he talks about his responsibilities as senior executive for business operations. Shetty is looking forward to training staff on the quality of service as the chain expands deeper into South India.

This McCafe was the third to be opened in less than a week in Bangalore, taking the total to 41 across western and southern India, the regional markets that Hardcastle is responsible for. It has been only 18 months since the first cafe was opened in Mumbai, India’s financial capital.

In the next three to five years, Jatia expects to more than triple the number of McCafe outlets to as many as 150, investing about 3.5 million rupees to set up each cafe, within an existing McDonald’s restaurant.

Hardcastle started out as a joint venture between McDonald’s Corp. and India’s Westlife, a listed company, but in 2010, became a development licensee, buying out McDonald’s equity in the venture, getting the right to invest and expand McDonald’s chain across the markets it was responsible for in India.

The company is also looking to roughly double the number of McDonald’s restaurants over the next three to five years, from the 202 it operated at the end of 2014, with investments of 7.5 billion rupees.

What gives Jatia this confidence is that even second-tier towns are seeing demand for cafes and younger people willing to try western cuisine, making India a nascent, but promising market.

As to coffee, the McCafe only uses 100 percent premium arabica, with no blends of cheaper beans like robusta, she said.

“We want to become a destination for beverages also, so it’s not about only serving coffee.” Therefore frappes, chocolate shakes, cold coffees are offered, and for the tea drinkers English breakfast tea is available, too, or chai latte," Jatia said.

The McCafe “provides affordable luxury, which is what the masses want (in India), good quality stuff and affordable rates, not at cheap prices, but more value-for-money price."