Assessing the Viability of Fast-Food Franchising in India Amid Rising Costs and Sluggish Demand

India's fast-food sector, once a beacon of explosive growth, now faces a complex crossroads. Rising input costs, shifting consumer preferences, and macroeconomic headwinds have forced franchise operators to recalibrate their strategies. Devyani International Limited (DIL), a dominant player in the quick-service restaurant (QSR) space, offers a compelling case study of resilience and risk in this evolving landscape. By analyzing its financial performance, recent acquisitions, and operational adaptations, we can gauge the long-term viability of fast-food franchising in India—and whether DIL's model holds lessons for investors.

Cost Inflation: A Double-Edged Sword

The Indian QSR sector is grappling with inflationary pressures on key inputs such as dairy, flour, and edible oils, which together account for 25–30% of store-level costs. For DIL, this has translated into margin compression, with EBITDA margins dipping from 18.3% in FY24 to 17.0% in FY25. However, the company's response to these challenges reveals a strategic edge.

DIL has leveraged centralized sourcing and multi-brand distribution to optimize procurement. For instance, its KFC and Pizza Hut units share supply chains for ingredients like chicken and cheese, reducing redundancies. Additionally, the company has renegotiated vendor contracts and invested in central kitchens to minimize waste and improve unit economics. These measures have helped stabilize EBITDA margins in recent quarters, with Q2 FY26 reporting a 16.9% margin—a 60-basis-point improvement from Q2 FY25.

Yet, the cost of labor and rent remains a persistent headwind. With wages rising in urban centers and rental costs spiking in high-traffic areas, DIL's ability to pass on costs to consumers without deterring demand will be critical. Its recent introduction of value menus and bundled deals—such as KFC's “Feast for Less” campaign—suggests a focus on affordability, a key driver in a price-sensitive market.

Operational Scalability: The Store-Count Gamble

DIL's aggressive expansion strategy has been a cornerstone of its growth. By FY25, the company had added 257 net new stores, bringing its total to 2,039 across India, Thailand, Nigeria, and Nepal. This scale is both a strength and a vulnerability.

On one hand, DIL's vast network allows it to leverage economies of scale in supply chain management and marketing. Its cluster-based expansion model—targeting Tier 2 and Tier 3 cities—reduces transportation costs and taps into underserved markets. For example, the company's 100th Costa Coffee store in India, opened in FY25, reflects its ability to replicate successful formats in new geographies.

On the other hand, rapid expansion risks diluting store-level performance. Same-store sales growth (SSSG) for core brands like KFC and Pizza Hut has slowed, with KFC reporting a modest 7.1% year-over-year revenue growth in Q2 FY25. This underscores the challenge of maintaining profitability as the market matures. DIL's shift toward prioritizing “store efficiency over volume” in FY26—targeting 275–300 new outlets—signals a more disciplined approach.

Strategic Diversification: A Lifeline in a Fragmented Market

DIL's recent acquisitions and brand partnerships highlight its pivot toward diversification. The acquisition of Sky Gate Hospitality (owner of Biryani By Kilo) in April 2025 for ₹419.6 crore marked a strategic entry into the Indian cuisine segment, a category with strong cultural resonance and affordability. Biryani By Kilo's “handi biryani” model, which emphasizes fresh, made-to-order meals, complements DIL's existing portfolio and appeals to a broader demographic.

Simultaneously, DIL has expanded its global brand portfolio through master franchise agreements with Tealive (handcrafted tea), New York Fries (fresh-cut fries), and Sanook Kitchen (Thai cuisine). These additions cater to youth-driven trends and urban consumers seeking variety. The first New York Fries store in Mumbai, for instance, has drawn attention for its premium yet accessible pricing, bridging the gap between fast food and casual dining.

This diversification mitigates brand-specific risks and broadens revenue streams. However, it also requires significant capital and operational bandwidth. DIL's integration of Sky Gate's 100+ outlets into its existing infrastructure will be a test of its ability to manage complexity without compromising service quality.

Long-Term Investment Potential: Navigating Uncertainty

For investors, DIL's trajectory raises key questions: Can it sustain growth amid inflationary pressures? Will its diversification strategy translate into market share gains? And how resilient is its franchise model in a slowing demand environment?

The company's financials suggest cautious optimism. Despite margin pressures, DIL's revenue growth (39.2% in FY25) and EBITDA resilience (₹840 crore in FY25) indicate strong operational leverage. Its focus on cost optimization and digital promotions—such as loyalty programs and app-based discounts—positions it to retain customers in a competitive market.

However, risks remain. The Indian QSR sector is highly fragmented, with local players and street vendors offering low-cost alternatives. DIL's reliance on urban centers also exposes it to macroeconomic volatility, such as rising gold prices and consumer sentiment shifts.

Conclusion: A Franchise Model for the New Normal

Devyani International's approach to fast-food franchising in India reflects a blend of resilience and reinvention. By addressing cost inflation through supply chain efficiencies, scaling operations with a focus on profitability, and diversifying its brand portfolio, DIL has positioned itself as a leader in a challenging sector.

For investors, the company's long-term appeal lies in its ability to adapt to India's evolving consumer landscape. While the path forward is not without risks, DIL's strategic agility and operational depth suggest that it is well-equipped to navigate the uncertainties of the next decade. In a market where convenience and affordability reign supreme, DIL's franchise model offers a blueprint for sustainable growth—one that balances scale with innovation.

Investment Takeaway: DIL's stock remains a high-conviction play for those willing to tolerate short-term volatility. Its diversified brand portfolio, disciplined expansion strategy, and cost-conscious operations provide a strong foundation for long-term value creation. However, investors should monitor macroeconomic indicators and same-store sales trends to gauge the effectiveness of its adaptation to India's shifting demand dynamics.