MULTINATIONAL FAST food companies are planning a new phase of growth centred around middle India: the new battleground for chains such as KFC, McDonald’s, Domino’s, and Pizza Hut.

To begin with, KFC, owned by Yum Restaurants India, is planning to add 85 new towns to its existing network of 25 over the next three years. It also plans to more than quadruple its 120 outlets over that time.

“The hunger and aspiration for brands in smaller towns is evident and often higher than in cities,” says Vikram Bakshi, managing director and joint venture partner McDonald’s India—north and east. The company plans to add about 80 to 100 outlets over the next three years, of which around 30% will be in small towns.

Moving to middle India makes sound business sense. A 2010 McKinsey urbanisation report says that by 2030, the number of cities with a population of more than a million will grow to 68 from the current 42.

Amit Jatia, vice chairman, McDonald’s India—west and south India, says population is one of the first filters when choosing a new town to set up operations. “Typically, we look at cities that have a population of over a million.” The McKinsey report goes on to state that over the next 20 years, 13 cities, including Kanpur, Surat, Vadodara, Jaipur, and Nagpur will have a population higher than 4 million.

Rising disposable incomes are another factor. The 19 cities McDonald’s has identified for expansion in south and west India are estimated to have a per capita GDP of $4,500 (Rs 2.06 lakh) by 2030.

“The biggest incentive is the increasing disposable income in small town India. Urbanisation is getting bigger as a trend,” says Harneet Singh Rajpal, vice president, marketing for Domino’s Pizza India, that presently operates 392 outlets across 93 cities and towns.

Of course, moving to a whole new market comes with a new set of challenges—and costs. Companies need deep pockets to sustain low margins over a long period of time in B and C towns. “The future potential for growth is limited and that could push your costs up,” says Jatia.

Which is perhaps why Yum Restaurants started Pizza Hut Delivery (PHD) in these towns. These delivery-based outlets can be set up with just half the investment required for a full-scale restaurant. “In places where we see that the future potential for growth remains low, we prefer to enter through a PHD outlet instead of a full-scale diner,” says Ashok Bajpai, general manager, PHD.

The good news is that an early entry means a better chance at a good location and lower entry costs, says Girish Aivalli, head of research, food and agri business at Yes Bank.This could result in quicker turnaround for these early birds. And they will have middle India eating out of their hands.

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