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A growing taste for US fast food in India

India has long had a reputation as being unfriendly to foreign businesses, but when it comes to fast food, international chains are being warmly welcomed by a young, upwardly mobile population.

In the past few months, Taco Bell, Krispy Kreme, Burger King and McDonald's have either announced plans to expand in India or have opened new outlets around the country. Krispy Kreme was the latest to open a new store with its first outlet in Delhi last month, adding to its five branches in Bangalore.

(Read more: Posts on McDonald's employee site bash fast food)

A security guard opens the door for customers at McDonalds in New Delhi, India.
Daniel Berehulak | Getty Images
A security guard opens the door for customers at McDonalds in New Delhi, India.

Despite the country's economic troubles, the average middle-class Indian consumer's spending power is steadily increasing, with more people, particularly women, entering the workforce. In addition, Indians' increased exposure to international cuisine through the media and travel makes the country a desirable destination for international food chains looking to expand globally.

"In India today, I think people are acquiring new tastes rather than changing their tastes, because it takes a whole generation to actually change tastes," said Pinakiranjan Mishra, partner and national leader for retail and consumer products at Ernst & Young India. "As more and more people acquire money, there are a lot of new consumers who are experimental in nature."

(Read more: US energy secretary delays India trip)

According to a study done by analysts at Technopak, a management consulting firm in Gurgaon, the Indian market for chain restaurants was an estimated $2.5 billion in 2013 and is expected to grow to $8 billion in 2020, driven by the growth of what is known as quick-service, or fast food, restaurants.

"The Indian market is growing at a slower pace than what China has done but the potential is as large," said Saloni Nangia, president of Technopak. "India also has a young age profile, many more people eating out and international influences coming in. Some of the international brands could replicate, to some extent, the China story in India."

Burger King, the world's second-largest burger chain behind McDonald's, has joined with Everstone Group, an India-focused private equity and real estate firm, to bring the restaurant chain in India. The first branch is expected to open in the first half of 2014.

The agreement with Everstone Group is Burger King's latest attempt at finding an Indian partner, after talks with the developer DLF and the retailing conglomerate Future Group failed several years earlier.

Sameer Sain, co-founder and managing partner at Everstone Group, said Burger King was an appealing investment because it could thrive even in a bad economy, as people will still go out to eat but not at expensive restaurants.

(Read more: India tells US to close embassy club in New Delhi)

"There has been some slowdown in growth," he said, "but it continues to remain a very good opportunity in the long term."

Meanwhile, McDonald's is expanding in India with the introduction of the McCafe, a coffeehouse-style chain. In October, Hardcastle Restaurants, the licensee for McDonald's in South and West India, announced the opening of the first McCafe in Mumbai.

"Currently we are seeing consumer sentiment to be weak, and our same-store sales have been negative this quarter," said Amit Jatia, vice chairman at Hardcastle Restaurants, said in December. "But I don't think you can form your long-term strategy based on an immediate event. Any brand looking to enter the Indian market should not be looking at only this year to make their judgment call."

In the nearly two decades since international fast food chains like McDonald's first entered the Indian market, the customer profile and demographic for fast food restaurants in India has dramatically changed.

(Read more: Fast food CEO: How govt regulation is driving us abroad)

As India has one of the youngest populations in the world, with nearly 65 percent of the population under 35 years of age, more young professionals are eating fast food in urban India. In Mumbai, nearly 40 percent of the people eating out are young adults, Mr. Jatia said.

"Earlier, you would see quick-service restaurants being used for occasions and celebrations," said Mr. Jatia. "Today, the weekend and family business continues, but working adults are using the sector far more than in the past. We've now also become an option for young professionals with disposable income to use us for a meal on a weekday."

As an increasing number of young adults in India take to American-style fast food meals, health experts worry about the possible toll on public health.

Dr. Sailesh Mohan, senior research scientist and associate professor at Public Health Foundation of India, criticized the aggressive advertising and marketing that portrays fast food restaurants as "the cool place to eat," saying that they target impressionable children and young people.

"This is detrimental to long-term lifestyle choices and will have implications for the next generation vis-à-vis the increased burden of chronic diseases on the youth," said Dr. Mohan.

Health experts aside, international fast food chains have not encountered much opposition in India, especially compared to big-box foreign retailers like Wal-Mart. Experts in the retail and consumer field say that this is largely because unlike Wal-Mart, international fast food chains are not seen as replacing existing eateries.

"Both Wal-Mart and McDonald's have a very positive impact on the value chain, but the perception is different," said Ms. Nangia of Technopak. "People think that big-box retail chains can impact the local companies. While that's not true, that's the perception and that's what the political posturing in the country is."

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Yet foreign chains will find that operating in India has its challenges. Like every good business, restaurants need to know their customers, which in India means no beef products, as in McDonald's case, or no egg, as in Krispy Kreme's case.

"The first major challenge for new entrants in the market is menu differentiation and menu creation," said Mr. Sain of Everstone Group. "You have to come up with a good sense of taste and localization without compromising your core product."

The supply chain also presents a challenge, he said, as there are no existing cold chain networks or national suppliers that can deliver across different locations for various products.

"A lot of international players want to come in but when they come and check the scene on the ground, they realize that it's not that easy," said Mr. Sain. "There's a lot of hard work ahead for Burger King and for anyone who wants to come in, a lot of capital you have to invest, a lot of 'roll up your sleeves and get down into the execution of the business' that is required."

However, analysts argue that international chains opening in India today are much more likely to succeed than a few years ago.

"The initial entrants such as McDonald's have done a lot of the hard work — they had to create a market, educate people, change their menus to adapt to Indian taste, create a supply chain network," said Mr. Mishra of Ernst & Young. "The people who are coming in now can learn from those mistakes and successes, so that is a big advantage."

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