The fast food slowdown: Delivery revolution, surging inflation threaten business in India

It's no secret that the fast-food landscape in India has been undergoing a dramatic transformation following the pandemic, driven by the emergence of a host of disruptive delivery services.

The surge in app-driven deliveries of fast food after the partial lifting of lockdowns has been referred to as the 'delivery delta', reflecting a shifting trend in consumer behaviour. But it's being overtaken by a new delivery battalion that the pandemic also boosted — quick commerce.

Super-quick commerce of ready-to-eat, ready-to-cook foods and perishable groceries takes a large slice out of the fast-food pie, with 10-minute delivery promises beating the 30 minutes or free offers.

These nimble operators have burst onto the scene, touting fresh-to-home and quick-to-process, ready-to-cook foods — and in doing so, they're not just reshaping consumer preferences; they're taking an axe to the very foundations of conventional fast-food chains, which are also feeling the pinch of surging inflation.

Notably, Westlife Foodworld, the operator for McDonald's in India, has reported an unexpected drop in quarterly profits, resulting in a 7.7 per cent decline in its shares.

The implications of this change aren't restricted to India either, as globally, industry giants such as McDonald's and Yum Brands, the parent company for KFC, grapple with consumers increasingly opting to dine in the comfort of their homes — but not on fast food.

In India, the impact of these changing dynamics has forced fast-food businesses to take urgent steps to adapt.

The surge in essential commodity prices, including dairy and fuel, has prompted major companies such as Coca-Cola to introduce smaller product sizes, for instance. Restaurants and convenience food manufacturers have also worked to create more affordable options in pizzas and burgers to combat the loss of business to inflation, which is heightening price-sensitivity in consumers.

"All around, you are seeing pressure on macro spending," Akshay Jatia, executive director of Westlife Foodworld, told Reuters, noting that both the informal dine-out category and Western fast food are facing growth constraints: "Eating out frequency remains low."

Westlife Foodworld was one that introduced discounted meals priced at Rs 179 in June. However, this strategy only resulted in a 1 per cent growth in same-store sales, a significant decline from the 7 per cent increase in the first quarter and the 40 per cent surge reported last year.

Westlife Foodworld's shares are experiencing their worst day in over two years and seven months, reducing gains to approximately 5 per cent for the year.

Despite its early resilience to the fast-food slowdown due to higher demand for fried chicken, burgers and coffee, the impact of the economic downturn is finally being felt.

While the October–December quarter is typically a period of increased consumer spending, with holidays like Dussehra, Diwali and Christmas in play, one Westlife Foodworld executive indicated that the factors negatively affecting sales last quarter look unlikely to change significantly in the third quarter.

The rising cost of dairy products has hindered the industry's growth, too, though somewhat offset by the moderation in chicken prices, which supported the sales of fried chicken and chicken-based sandwiches and burgers.

The Kotak Institutional Equities' Consumer Forum 2023 has revealed that the fast-food industry in India has experienced minimal growth due to rising inflation. Feedback from major quick-service restaurant chains, including Sapphire Foods (KFC) and Devyani International Ltd (McDonald's, KFC, Pizza Hut and Subway), indicated that the sector has either struggled or remained stagnant in recent months.

One common challenge the fast-food companies face is the lack of demand growth during the ongoing quarter.

Different players in the industry are implementing various strategies to stimulate growth in response, from menu adjustments to expansion strategies.

A decline in pizza consumption has impacted brands like Pizza Hut, prompting franchisees to shift their focus to more value-for-money options. The increase in milk and cheese prices, combined with stable chicken prices, has pass over pizza. The surges in tomato and then onion prices couldn't have helped the case either — there's not much left to a pizza if you subtract both and the cheese!

Devyani International is adjusting its store expansion strategy based on macroeconomic conditions and consumer trends, focusing on allocating more stores to KFC over Pizza Hut, again due to declining pizza consumption.

Sapphire Foods too has prioritised store expansion and same-store sales growth.

As the fast-food industry navigates these challenges, adaptability and innovation will be vital to surviving and thriving in this changing landscape. The emergence of delivery services offering fresh and quick-to-process foods has reshaped consumer preferences and the fast-food industry's dynamics, underscoring the need for the industry to adapt to evolving consumer expectations.