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McDonald serves up scalable cafes


McDonald's serves up scalable cafes
Viveat Susan Pinto | Mumbai
October 17, 2013

Its McCafe shop-in-shops signal the chain's designs on coffee retail, which is expected to more than double in five years



It was a matter of time before the world's second-largest fast-food chain entered coffee retail, a space that has been stirred up with international players coming in.

However, McDonald's was still able to keep the details of its plan to bring its coffee retail brand McCafe into India under wraps; there was only speculation that the shop-in-shop coffee house would find its way into the country.

But throwing open the first McCafe in October in Mumbai, McDonald's, which in India has been synonymous with burgers, has now staked its claim for a share of the Rs 1,700-crore domestic coffee retail market.

As Amit Jatia, vice-chairman, Hardcastle Restaurants, the franchisee for McDonald's in the west and south of India, says, "Coffee (retail) is a phenomenal story in India." The segment is growing at 15-20 per cent per year.

While the consumer slowdown has affected discretionary spends and therefore, eating-out, in the last few quarters, there is no denying the long-term potential the coffee retail market presents as disposable incomes and aspirations of Indians grow.

A report by the international brokerage CLSA says that the $100-billion (or Rs 6.1 lakh-crore) food-services market in India, which includes the quick-service restaurant (QSR)or fast-food segment, is expected to touch $175 billion (or Rs 10.67 lakh-crore) in five years.

The QSR segment, which stands at 15 per cent of the existing market (Rs 91,500 crore), is expected to touch at least 20 per cent (Rs 2.13 lakh-crore) of the overall food-services market by then.

Within QSR, coffee retail is expected to more than double to Rs 4,270 crore in five years, experts says. Naturally, national and international brands are rushing in to capitalise on the growth. And most of them are quickly expanding their footprint.

The world's largest cafe brand Starbucks has already launched 24 stores in three Indian cities - Mumbai, Delhi and Pune - in a year. It plans to ramp up to 100 as it attempts to catch up with rivals such as Cafe Coffee Day (CCD), Costa Coffee and Barista Lavazza.

The haste is not without reason. CCD has nearly 1,500 stores, with plans to add another 500 by the end of 2015. Costa Coffee has over 100 stores, while Barista Lavazza has over 150 stores in India.

Shop-in-shop: A winning combination
What makes the McDonald's model compelling is its scalability. Jatia says, "McCafes around the world are located within McDonald's outlets. But there is a distinct seating, ambience and menu for the brand. So, while it is part of the McDonald's family, McCafes do have an identity of their own."

Even without a stand-alone store, McCafe, according to Jatia, can still be counted as a distinct coffee house brand. The shop-in-shop format while allowing the fast-food giant to move quickly in a competitive market, has a couple of other advantages too. Jatia explains, "Setting-up costs are minimal and the new brand also benefits from the crowd dropping into a store for a burger."

The full scale of McDonald's new operations is unfolding now: 75-150 restaurants in three to five years in the south and west of the country. A possible rollout in the north and east, where McDonald's is currently at loggerheads with existing joint-venture partner Vikram Bakshi. Jatia does hint that McDonald's is likely to take the McCafe brand to other parts of the country. "I can only speak for the western and southern regions. But I would imagine that McDonald's would take the McCafe brand across the country."

The average cost of setting up a McCafe is expected to be around Rs 30-35 lakh, says Jatia. That would mean putting up 75 to 150 restaurants would cost Hardcastle between Rs 22 and Rs 50 crore - a fraction of the cost that rivals have to incur for setting up stand-alone stores.

Jatia says that he has already factored in the additional area required for McCafes by going in for stores that are atleast 3,500 to 4,000 square-feet in size.

"Earlier our store size would be 3,000 square-feet. Now our store size is more keeping in mind the McCafe we propose to set up within existing as well as new stores that will come up," he says.

There are already 174 McDonald's restaurants in the west and south of India. Hardcastle has said in the past that it proposes to put up between 75 to 100 stores in the next two years for which the company even raised Rs 180 crore from Arisaig Partners three months ago.

Merging coffee and burgers is also part of McDonald's "integrative" business model, which has seen it launch an elaborate breakfast and dessert menu in its outlets in the last few years.

Other fast-food giants such as Pizza Hut, KFC, Domino's are also beginning to do the same by expanding their offerings to ensure the ticket size goes up.

McDonald's has priced its coffee at Rs 90 - lower than Starbucks' Rs 110 for a mid-sized cup of cappuccino - but higher than its Indianised burger which comes for Rs 25. Consumers will also have other hot and cold beverages to go with their burgers and french fries.

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