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Desi cuisine strikes back

Some years ago, foreign-branded quick-service restaurants (QSRs) were hot favourites among investors, including institutions.

The hypothesis was simple: Under-penetration, a growing middle class, and proven international brands.

Initially, the hypothesis appeared to play out – and these companies expanded rapidly, opening hundreds of outlets across India. However, in recent years, same-store sales have stagnated or declined, and margins have fallen. The recently announced merger of Sapphire Foods into Devyani International should be seen in that context.

Analysts suggest the poor growth is due to a decline in eating out post-Covid, coupled with rapid growth in home ordering, while higher input costs have dented margins. In the specific case of the two merging companies, they ran the same brands (KFC, Pizza Hut) and often competed in the same neighbourhoods. So the merger will help rationalise restaurants, cut overheads and (supposedly) get them back on a profitable growth path.

However, the optimism (still high valuations) for QSRs ignores a few fundamental facts. First, the rise and rise of food delivery apps. When you can order from over a hundred outlets, choices widen dramatically and are not restricted by location. And, when a biryani sells for half the price of a burger, the value proposition simply does not work.

KFC and Pizza Hut are primarily dine-in restaurants and incur higher staff costs, rent, etc. In contrast, Domino’s (Jubilant) has done better, as it is primarily a delivery business, and can offer more competitive pricing.

More importantly, and often ignored by analysts, is the huge competition from local outlets. This is structural, not cyclical or transient!

In the early years, McDonalds or KFC were novelties, and prime locations attracted many customers. However, these foods have now become just another part of the vast and diverse “desi” culinary landscape.

Nowhere else do you find the variety of food choices that you do in Indian cities. Biryani, idlis, vada pav, chicken Manchurian, momos, bhel puri, pasta, samosas, rolls, thalis; the list is endless. Spoilt for choice, customers won’t eat at the same place too often (unless it’s very close to work or home). In our cities, there are numerous eating outlets on every high-traffic street.  The sheer density of establishments makes India a very different market from, say, the US.

But how many restaurants are there in India? The National Restaurant Association of India represented half a million restaurants in 2024. A Times of India article says there are 70,000 restaurants in Hyderabad alone. Justdial lists more than 100,000 in Mumbai and Delhi.

But these are just the more “organized” players. The reality is there are many, many more unregistered food outlets. So the total number is possibly around 3-5 million food outlets in India. Amidst this, the QSRs are a tiny percentage.

And given that the vast majority are significantly cheaper than foreign-branded QSRs, it’s obvious why Devyani and Sapphire are struggling. Again, in the US, such QSRs are at the lower end of the pricing spectrum.

The merger might well help margins, and customer spending is bound to improve at some point.

However, given the rich valuations, investors might well ask, “where is the moat?”

I am not a registered research analyst or advisor. The above article should not be construed as investment advice or recommendation, but is merely for the purpose of debate and discussion. You should assume that I’m biased and may have a position in any of the stocks mentioned in the article.