Culture Plays Against Local Indian Fast Food

Private equity professionals look to cash in on India’s huge appetite. But they have trouble finding deals they can sink their teeth into.

India has an immense and growing appetite. There are 1.3 billion people in the country, and the middle class alone is almost as large as the population of the U.S. The National Restaurant Association of India estimates that the restaurant sector, which had total sales of $13B in 2013, will grow to $78 billion by 2018. Already it’s 24x larger than India’s famous film industry and $9B more than the telecom sector.

In particular, India’s young, upwardly mobile consumers are hungry for fast food. But while U.S. chains are rising quickly on the subcontinent, local heroes are in short supply.

“This is an unusual characteristic of the market,” says Jacob Kurian, a partner at New Silk Route Growth Capital, which has dedicated $100M to India’s food and beverage sector. “International players like Domino’s and KFC have scaled nationally, but Indian restaurants have not. Why is it only pizza and fried chicken that are expanding?”

One obvious reason is that U.S. franchises arrive in any foreign country frontloaded with the advanced systems and processes necessary for rapid growth. Another reason is India’s diversity—it has dozens of distinct regions, each with its own cultures and dialects, along with peoples’ allegiances to the foods they grew up on. A third reason is the family nature of the typical Indian restaurant business. Franchises tend to do well at a small scale but implode when they bite off more than the founding family can handle.

An exception is Cafe Coffee Day, which is India’s version of Starbucks and a former New Silk Route investment. “We made the investment because the entrepreneur was clearly able to scale,” Kurian says. “He now has around 1,500 locations and continues to grow. We took the company public in India in November, so it was a good exit.”

Beyond Coffee Day, though, New Silk Route has found few attractive deals in the restaurant sector. It has turned up good plays, but they’ve usually been too small to take significant capital.

“We learned a lot with Coffee Day, and we’ve tried to apply it,” Kurian says. “What has proved to be a significant challenge is finding companies with the essentials they need. In many cases, it is hard to go through the financials of target companies because they are very difficult to understand. These are small businesses, and the entrepreneurs do not exactly adhere to the highest accounting practices.”

One investment that’s working so far is Vasudev Adigas Fast Food Ltd., which has grown from the founder’s eight original eateries in Bangalore to a regional chain of 50 low-cost vegetarian restaurants serving a million diners each year. Another is Moshe’s Fine Foods, specializing in Mediterranean cuisine. It was founded by Moshe Shek, an Indian Jew who immigrated to Israel, learned to cook on a kibbutz, then returned to India to build his business. Shek wanted to do more cooking—and less accounting and HR—so he partnered with New Silk Route, and Moshe’s is now expanding from Mumbai to Pune, Bangalore, and New Delhi.

In addition to the aforementioned regional diversity, headwinds to restaurant investments and expansion in India include high food inflation and political uncertainty that has slowed needed reforms.

“All that said, it is a great time to pick up a new investment if you have the appetite for it, because valuations are more attractive now, and owners are more motivated to sell,” Kurian says. “The high valuations that were prevalent in the past are becoming more realistic. So it is an interesting time, and we are actively looking for new deals.”