Disrupting the Indian QSR Industry
How the Indian QSR industry is being disrupted and what they can do to fight it I’ve lost count of how many times I’ve heard the argument that the food business is “evergreen” and people will always “flock” to a McDonald’s or a Dominos. Having been a part of the QSR industry for over 2 decades, I’m not so sure. The thing about disruption that makes it difficult for incumbents is that it’s easy to dismiss at its earliest stages and impossible to stop at its later stages.
The Indian Quick Service Restaurants (QSR’s) is estimated to be a $40 billion industry and is dominated by global brands such as Domino’s, McDonald’s, KFC & Burger King. However, even as these and newer brands grow their market share in this competitive industry, there are signs of disruption that they need to be wary of.
The 7 signs of disruption, as described by Innosight’s Scott Anthony in the Dual Transformation, decreased customer loyalty, spike in VC investment, policy changes, fringe entrants, changes in consumer habits, new business models and a shift away from revenue growth to margin protection, are playing out in the Indian QSR industry as we speak. I take a closer look at how these signs are showing up and what the incumbents can do. The Indian QSR industry, a sub-segment of the $40 billion Eating Out industry, is dominated by brands such as Domino’s, McDonald’s & Burger King among the western fast food segment and Haldirams in the Indian Fast Food segment. The Indian QSR industry really came into being in the mid 1990’s when McDonald’s & Domino’s started their Indian operations. The only noteworthy QSR player up until that point was Nirula’s. For over 2 decades, McDonald’s & Dominos were far too dominant in the industry and enjoyed the benefits that creating a new market entail. From 1996-2015, they both added capacity (locations) to over 450 in the case of McDonald’s and over a 1000 for Domino’s. The success of both these brands, brought in other global QSR’s like Burger King, with over 150 locations, Pizza Hut & KFC. There was also a lineup of also-rans, brands that were attracted to the Indian QSR market by the success of McDonald’s & Domino’s but found the going tough for a multitude of reasons. Brands such as Papa Johns, Johnny Rockets, Wendy’s, Carl’s Jr., entered the market and either exited completely or are in some form of extended hibernation.
Even as the global & homegrown QSR brands fight it out for market share in this increasingly red ocean of the Indian QSR industry, changes in consumer habits & preferences and new business models, both perpetuated by technology, are disrupting their core positions. How they respond, will impact their relevance in the years ahead. Clayton Christensen described disruption as a process whereby a smaller company with fewer resources can successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred (https://hbr.org/2015/12/what-is-disruptive-innovation). There are signs, some weak, but some very evident already, that the Indian QSR industry is undergoing disruption. 1. Decreasing Customer Loyalty – Most of the big QSR brands measure customer loyalty through a metric that tracks visitation in a preceding period, anywhere from 1 week to 4 weeks. Some brands also track NPS as a measure of loyalty. India, as an eating out market, is far less developed than other Asian economies, particularly in the south eastern region. Where Singapore, for example, has an eating out frequency of 18 times a month, India is less than 4. The fact that the Informal Eating Out industry has been growing at 10% CAGR over the past 5-10 years, coupled with the reducing visit frequency for any 1 brand, suggests a) that the market is growing as new players enter and b) that customer loyalty is much lower as new dining options, experiences and cuisines become common. 2. Increasing VC Investments – India already figures in as #2 in the global CVC trends as per CB Insights. Almost 1/3rd of global VC activity is through CVC’s, so this is a substantial amount. Recent capital activities in companies such as Rebel Foods, are indicative of the interest risk capital is showing in the Indian F&B space. And, even considering the immediate impact of Covid-19, this trend will continue. To say nothing of the unicorns created in the foodtech space over the past few years. Heightened risk capital interest in F&B is indicative of the disruptions that technology enabled new business models are bringing. Also, interesting to note is that the consumer adoption for these new business models is much faster than say what it was for the traditional dine-in QSR. Technology, especially the mobile-first business models, has a way of democratizing the “new” at a much faster pace. 3. Policy Changes – Policy, especially in the Indian context, is usually the last component to fall into place. However, with bodies like FSSAI now taking an active interest in the running of cloud kitchens and ensuring the regulations apply to all food service operators uniformly, expect policy regulations to improve in the near term. This will have a beneficial impact on food service operators, especially those with Technology as their primary business model. 4. Fringe Entrants – The growth of Impossible Foods in the US, the rising consumer interest in responsible sourcing and healthy living are giving rise to a heath & wellness ecosystem that has not escaped the Indian food & beverage industry. Two prime examples of this are Greenr & Blue Tokai Coffee. Greenr, a vegan café and restaurant with a handful of locations in Delhi NCR, has quickly carved itself a niche in the informal eating out space. Even ardent non-vegetarians regularly find themselves enjoying the vegan offerings at places like Greenr and the artisanal coffee’s at Blue Tokai. These fringe entrants and their faster than usual adoption by consumers, are indicative of a larger trend in the F&B space in India, a move away from large, branded chains. At least at the top of the pyramid. A sign of this segment being underserved by the major players, this disruption will consolidate as more and more Indians, especially in the Tier-1 cities, become more affluent. Similarly, for anyone who’s been to Leo’s Pizza in Vasant Vihar, or ordered from Burgerama in Delhi NCR would understand this high-end disruption taking place. And even though they technically operate in a different sub-segment of the Informal Eating Out industry, their focus on the mass consumer base, Domino’s & McDonald’s (in the case of Leo’s & Burgerama) have a sizeable underserved segment, which is ripe for disruption as these niche brands are showing. 5. Changes in Consumer habits – 61% of Indian internet users have used an app/web-based food ordering service in the last month. The mass adoption of internet-based ordering by Indian consumers could be a study of how convenience, coupled with technology, can drive change in consumer behavior. But it’s not only online ordering, the average order size has also reduced. 10 years ago, an average order at a QSR would be for 3-4 people, indicative of it being an occasion-based outing, a family outing. Today, it’s more likely less than 2. App & Web based ordering has made it easier to impulse order. You don’t need an occasion for it. A similar change is also seen in the daypart trends. Dinner, between 7-10pm used to be the prime time for eating out for most QSR’s. While dinner is still one of the dominant dayparts, lunch (12-3pm) has become the dominant daypart, enabled by convenient food tech operators with deals galore. 6. New business models – One of the biggest and most important business model trends witnessed by the Indian informal eating out industry has been the rise of the Cloud Kitchens. Rebel Foods, a cloud kitchen company, has over 500 cloud kitchens in India, making it, by volume, one of the top 5 IEO players in India. As technology develops and the ecosystem around it builds, expect to see new business models to develop, challenging the status quo for the major QSR’s. improvement in technology, such as 5G, will only bring in a new wave of business models, enabled by faster internet bandwidth. 7. Shift away from revenue growth to Margin protection – with all the changes described above, it’s no wonder that the major brands have shifted to focus away from the double-digit revenue growth they were used to experiencing, to protecting their margins. Efficiency improvements & cost cutting in one form or the other, have become the dominant themes. Often disguised as transformation, this focus on margin protection is a fallout of the fragmentation in the informal eating out market and the disruptions being ushered in by technology, new business models & evolving consumer preferences. There’s no doubting the fact that disruption is currently underway in the Indian QSR industry. But how do the major brands react to it?
The Road Ahead for QSR’s in India
“You can’t stop the waves, but you can learn to surf.” – Jon Kabbat-Zinn
Artificial Intelligence, Robotics, 5G…the waves of technological evolution will continue. And this will bring with it changing consumer preferences as new & better technologies offer newer & better business models. The F&B industry is no more immune to this truth as is the technology industry. With new & improved technology comes new & improved business models. Just as 4G & Moore’s law had dramatically reduced the cost of mobile phones, spawning a mobile-first economy, resulting in consumers preferring to order from their mobile phones. This in turn resulted in the fragmentation of the Informal Eating Out industry in India leading to the rise of cloud kitchens and even while the overall market size increased, the share of the global QSR brands dramatically lessened. Technological evolution spawns’ choices. The natural response to disruption is to find comfort in data. The problem with that is that the data is pointing to what’s gone by. The real challenge for incumbents is to imagine a future. I offer some thoughts below on how the Indian QSR industry can “learn to surf”. 1. Invest in Innovation – The risk of NOT investing in innovation is far greater than the risk of investing in innovation & failing. For any industry today, investing in structured innovation management is the difference between long term viability & obscurity. As an Innovation Management professional, I’ll be the first to admit that Innovation has a branding problem. It’s not about the jeans & T-shirt clad millennials working in glitzy workspaces. Far from it. Innovation Management is a rigorous, process-oriented capability that incumbent companies, need to build. When it comes to Innovation, there is a widening gap between what’s said & what’s done. 86% of senior executives in a McKinsey survey said that Innovation is core to their growth strategy, yet only 6% were satisfied with their company’s innovation efforts. Investing in Innovation as a capability requires careful deliberation and a long-term perspective. It’s easy to be distracted by the “new, shiny objects” and go overboard with accelerators, incubators & innovation labs. What’s needed is a balance between efficiency Innovation, the day to day product, service & process improvements that most companies are comfortable with, and the exploratory innovations, which don’t necessarily present themselves as fully cooked growth options yet. As William Gibson put it, “the future is already here. It’s just not evenly distributed”. Specific to the F&B industry, the impact of AI, RPA & 5G, for example, is too far in the future to effect a change in core business models today. But there are enough signals & reasons to participate in the evolution of these technologies today. McDonald’s Corp. recently announced the acquisition of a couple of startups in the AI & ML space and while acquisitions are at one end of the innovation engagement spectrum, it is indicative of how McDonald’s is viewing these developments. Innovation Management needs to be brought front & center in the organizational design of incumbent companies. Formalizing Innovation within the organization is the first step towards making the organization more innovative. Having a clear & succinct Innovation strategy, is the next step. Innovation, like strategy, is as much about choosing to “not” do certain things. And a well-articulated innovation strategy will provide the blueprint to manage that, ensuring fewer wasted resources. In this period of disruptions, incumbent brands will need to explore what’s happening at their fringes, both at the low end of their customer segments & at their high end. Cloud Kitchens, automated kitchen operations, blockchain, even automated delivery, all these “innovations” are already in the market, adopted by smaller, more agile startups. Incumbents need to prioritize familiarizing themselves with these technologies today. They may not necessarily be how the future finally turns out but participating is far less risky than dismissing. 2. Redefining Value – Since the QSR industry has taken off in India, there’s always been a premium on Value. It’s the definition of Value that has evolved over the years. The perception of Value, in the QSR context, is affected by many aspects of the restaurant’s operations, including convenience, consistency, deals, choice, taste & quality, price, image & experience. Price, what is always thought of as the primary driver of Value, is but one, and surprisingly, not the most important, driver of value. Modern lifestyles place a far greater importance on drivers such as convenience & consistency. And while some of these drivers are subjective, such as experience, the aggregation of the informal eating out industry, means that there are green fee drivers that shape customer perception of value. As the pace of technology-enabled consumer preferences evolve and the changes that the current COVID-9 crisis brings about in the months & years to come, Value will remain one of the critical drivers of success for Indian QSR’s. And for individual brands, the relative importance of each driver will vary. Which of the above driver is prioritized in the mind of the consumer and how the value chain of the incumbent can build a moat around them, is of course, the $40b question. 3. The Experience disrupters – As with Value, experience can mean many things to many people. Today’s millennial's demand an “Insta-worthy” experience, while most of the Gen X’ers would yearn for a hark back to the simpler times. And as with Value, the drivers of experience are also evolving. Modern infrastructure is just one of the drivers of a modern restaurant experience. Starting from social media engagement to ordering, to payments, to packaging, there are several drivers of the experience that incumbent brands will need to get right. The good news is, as with other aspects of Innovation, there are examples of how smaller, niche players are at the forefront of pioneering new restaurant experiences. Elements, of these new experiences will need to be carefully orchestrated into the current business model of incumbent brands. The danger here is of doing too little or conversely, too much. The experience must be consistent with the brand. An uncalibrated approach can lead to inconsistent experience. 4. Food, just better – strip away all the other renderings from a restaurant of any type, and at the core of it is the food. That’s the reason consumers buy at the most basic level. For a while now there’s been a movement towards sustainably sourced, healthier & more natural food. Bigger incumbents in the Indian F&B industry will need to intensify their focus on their food to make it better and more aligned to the perceptions of the modern consumer. Initiatives such as “Farm to Fork” are great PR activities, but the consumer is quick to figure out what’s gimmicky and what’s not. The new normal in mass F&B retail, must be more natural, sustainably procured & produced & healthier food. This is obviously a big challenge for the kinds of volumes the large brands drive, but it cannot be left as a one-off initiative on the marketing calendar. From institutionalizing free-range protein to preservative-free produce, better food needs to become core to the menu strategy for incumbent brands. Again, Innovation will continue to play a huge role here as well as the Impossible Foods story in the US, suggests. Companies will need to not only drive improvements in current menu, but also experiment & mainstream when ready, the newer technologies. 5. From data literate to data leaders – During periods of disruption, incumbents tend to use data in a way that reinforces their biases. Signs of disruption aren’t going to show up in your historical data. Yet, incumbents spend too much time analyzing past performance to choose a future course of action. QSR’s, because they are volume driven, generate an enormous amount of data, every minute and every day. But it’s unclear how that data is used to generate true business value. Digital is redefining how brands engage with consumers, and vice-versa, at every stage of the restaurants value chain. Incumbent QSR brands will have to go head to head with digital native brands and develop the capabilities to be able to use data, quickly, to experiment & learn & eventually scale. The consumer journey looks very different to what it was 5-10 years ago. The legacy QSR brands, who developed that consumer journey experience, will have to refocus their learning abilities to a new digital world where data tells a story. Brands that use digital as an offensive strategy, will perform far better than brands that are digital & data literate but haven’t yet learnt to use data holistically. I’d like to see Data Science as a capability being embraced by the Indian QSR’s in the future and digital evolving from social media engagement to digital being adopted across the value chain. It’s estimated that by 2030, India will be home to a middle-income household base of 300m (PRICE projections based on ICE 360 surveys). The attraction that size commands also makes it easy to sweep under the carpet, the inherent problems being faced by incumbents today. There’s no doubt that the Indian Informal Eating out industry is undergoing disruption brought about by technology that has transformed consumer behavior & preferences. Agile, digital native startups have already eaten into their market share and the rise of food tech & delivery aggregators such as Swiggy & Zomato, is only going to make the consumer adoption of new business models, quicker. Indian QSR companies need to recognize this as a period of disruption and need to remodel their core competencies, and perhaps their business models, to face this challenge. At the heart of this change is how these incumbents tackle the issue of Innovation and whether they see innovation as a one-off event or as an organizational capability.