India is evolving. Today, tier II and tier III cities are emerging as new financial hubs. These markets have enormous revenue generation potential for new businesses, particularly in the Quick Service Restaurant (QSR) industry.
There are a number of QSR entities everywhere in the world today. A string of businesses that first began nearly six decades ago, today, make up some of the most popular brands in the world like McDonalds and Taco Bell. Since then, this market paradigm has changed, especially in India.
“There is a huge scope of success for QSR brands in tier II and tier III cities as these cities are the emerging markets for fast food chains,” says Kabir Jeet Singh, Chief Executive Officer (CEO) and Founder, .
Of late, people residing in these cities have developed an intrigue for quickly served food. This is largely driven by an increase in purchasing power of the people. Steadily, people are moving towards picking up a branded product over something that does not have a brand. All of these points towards the QSR industry growing at a rapid pace, leading to a $134.3 million industry in tier II and tier III towns alone.
Lower costs, higher ambition
The cost to set up units in these areas is cheaper than bigger, metropolitan cities. “Small cities can be a treasure trove for businesses due to the numerous advantages they provide, such as low rental costs, lower operational costs, less competitive brands, and the availability of a talent pool,” says Farman Beig, Co-founder and CEO, .
As a result, several brands of late have flocked to these cities. According to Kabir Jeet Singh, CEO and Founder of Burger Singh, the annual spending of middle-class households on fast-food restaurants in India’s Tier II and III cities has grown by 108% in the last two years, from Rs 2,500 to Rs 5,400.
Then there is the matter of delivery. “The average time spent by partners per delivery is also much lower as traffic situations tend to be better—thereby contributing to quick deliveries to customers,” says Nidhi Singh, Co-Founder of .
Sustaining these businesses
As the name would suggest, with QSR timing is key. These restaurants specialise in serving food that can be quickly cooked, usually within five minutes. In order to achieve this timing, most of the ingredients the cooks use in these restaurants are in a ready-to-cook state.
To ensure consistency in taste, these brands prepare the raw materials at a single location, after which they are delivered to respective kitchens. As far ensuring standardisation of taste across the brand is concerned, raw materials are prepared at a centralised location and are then delivered across different outlets. As Kushang, Co-Founder and CEO of puts it, these brands often tie up with distributors to procure supplies at a reasonable cost.
But in order to sustain these businesses, industry experts say that implementing a tier-wise pricing strategy based on the consumer and city type can help these brands to sustain themselves and earn higher margins in these markets.
“For smaller towns to engage with brands is still aspirational, which helps in a steady flow of business if you select the right set of locations,” says Rajat Agarwal, CEO of Barista.
With the aspiration to consume branded products growing it is only a matter of time before QSR companies take note. “Smaller cities require a lower number of outlets and take less time to gain traction, visibility, and overall revenue generation is more positive in a shorter amount of time,” Nidhi Singh, Co-Founder, .
The opportunity is eminent
There are 490 QSR brands in India, out of which 428 are currently operational. It has also been a hot segment for investments, with several of these brands within India having raised $1.3 billion so far in about 64 deals. In this year alone, Burger Singh raised $3.7 million in June and Wow Momo raised $15 million.
Investment trends in sector
According to ResearchAndMarkets, the Indian QSR industry increased by 17.27% and is expected to reach Rs. 827.63 billion by 2025.
“These brand-hungry markets don’t have brands matching the quality and service they need. To sustain in these markets, brands need tailor-made menus with standardization, great product quality, and a customer-focused approach,” says Himanshu, Co-Founder & CEO, Bakingo.
And while the cards are in the companies’ favour, they will also be required to adjust their existing business models in order to harness the true potential of these cities.
The payoff will take time
“Tier II-III cities are difficult to penetrate for brands that intend to focus solely on delivery-based business because these areas have yet to mature in terms of accepting cloud-based deliveries,” says Sarvesh Chaubey, Chairman, The Biryani House.
It will also take a little bit of time for a breakthrough, “It has been our learning that people in tier II and III cities prefer going out and enjoying the dine-in experience, whereas a higher percentage of people in metros like to order delivery. Hence, our stores in smaller cities are on average 30% larger than in metros. We also have a lot higher repeat rates in tier II and III cities because of the lower competition,” says Kabir.
One of the other factors is also training, as Rajat puts it, though these markets are better and can be seen as greater sustainable business environments, hiring skilled manpower and upskilling them on a regular basis is difficult.
But nonetheless, the opportunity is immensely large, still. With several people returning back home, a process known as reverse migration, the dynamics within bigger metropolitan cities is likely to change.
“One of the major challenges in operating in smaller cities could be that the average order value tends to be a bit lower. However, with reverse migration, this trend is now changing and will evolve,” says Nidhi.
This is besides the fact that these cities have a multifaceted spectrum of people, with customer demands and preferences varying from location to location. Speaking about consumer behaviour in tier II and tier III cities, Kabir states that it is similar in some ways and different in others, however in terms of taste profile, it seems to be almost the same across the country.
With nearly 57 tier II and tier III cities in India, per data by , including Gurgaon, Noida, Chandigarh, Indore, Vadodara, Jaipur, Lucknow, Surat, Coimbatore, Kozhikode, Ludhiana, Vijayawada, Bhopal, Faridabad, Ghaziabad, Kochi, Kollam, Mohali, and Mysore—the market size is worth $56.3 billion.
The pandemic has undeniably influenced the work culture of the QSR industry, from receiving orders to delivering them. It has put in place a new market that is currently ripe for opportunity.
