MUMBAI/BENGALURU: It was a mixed first quarter for Indian quick service restaurants as headwinds such as the LPG crisis and raw material price increases weighed heavily on the sector in the April-June period even as some companies did better in terms of same store sales growth (SSSG), higher customer traffic and value offerings.
Yet, a sense of optimism prevails, with companies anticipating a stronger recovery during the upcoming festival season.
After three consecutive loss-making quarters in the previous fiscal year, Devyani International, which operates KFC, Pizza Hut and Costa Coffee, reported a net profit of ₹17.1 crore in Q1 compared with ₹2.2 crore a year earlier.
Jubilant FoodWorks’ Popeyes delivered 97% revenue growth to ₹70.3 crore in the quarter, one of the strongest performances. The company, which also operates Domino’s India, said India’s fried chicken category is large and growing.
However, Westlife FoodWorld, the operator of McDonald’s restaurants in west and south India, reported a 52% decline in consolidated net profit to ₹59 lakh in Q1. Restaurant Brands Asia, which runs Burger King restaurants and BK Cafes in India, posted a consolidated net loss of ₹33 crore, narrowing it from a year earlier.
“Management commentary during the 1QFY27 results indicated that the QSR sector recovery is gradually strengthening,” analysts at Motilal Oswal said in a 4 August report. “Companies reported improving demand, with positive or better SSSG across most brands, supported by higher customer traffic and strong value offerings.”
The broader resilience in spending on travel, dining, leisure and entertainment has helped support the recovery in the QSR sector, said Arvind Singhal, chairman and founder of The Knowledge Company, a management consulting firm that works in the retail, consumer goods, manufacturing and services sectors.
Impact of war
QSRs faced a tough time due to the war in West Asia, which broke out on 28 February. The closure of the Strait of Hormuz resulted in a drop in crude oil and natural gas supplies, initially disrupting the availability of India’s cooking gas and increasing prices.
“We have seen some food commodity inflation along with the hike in minimum wages and annual increments. LPG prices have significantly gone up in the last few months,” Manish Dawar, president and group chief executive officer at Devyani International, told analysts on 29 July.
Singhal said the LPG disruption was ultimately less severe than initially feared.
“It was more, let’s say, a fear, less a reality. The disruptions were not as intense as they were made out to be,” he said.
Singhal added that consumers appeared to have accepted the modest price increases by QSR companies, helping support their revenue and profitability as the hikes were not necessarily commensurate with the increase in input costs.
Restaurant Brands Asia did not increase prices in the quarter, while Sapphire Foods India, the operator of Pizza Hut and KFC, passed on some of the costs.
“We have taken a small amount of price increase (2%) in this particular quarter, which has helped improve gross margin and, thereby, it has helped the bottom line as well,” Vijay Jain, chief financial officer at Sapphire Foods, said on an analyst call on 24 July.
The board of directors of Sapphire Foods and Devyani International approved a merger scheme on 1 January.
Jubilant Foodworks said labour costs had gone up in the quarter.
The Jubilant management expects the second quarter to be better than Q1, counting on the onset of the festive season to spur growth. The company is confident of building a business capable of delivering 5-7% medium-term like-for-like (LFL) growth. LFL growth refers to the percentage change in sales from established locations over a period, excluding new stores, closures and acquisitions.
Singhal expects the recovery to gather pace through the festive season, saying the October-December quarter could be a “very, very good period” for consumer product companies and services, including QSRs.
Value offerings
QSRs are increasing their value meal options with prices starting at ₹49 or ₹99 and improving their store metrics to ensure profitability. The sector faced a similar trend almost a decade ago. Jubilant then focussed on improving value offerings and menu innovation to improve SSSG and profitability.
“Lower store rollouts, better SSG growth – that is helping in terms of the margins for the company,” said Ajay Thakur, an analyst at brokerage Anand Rathi.
Singhal said entry-level pricing is a standard strategy aimed at bringing customers into stores.
“It is no different than” the strategy used when McDonald’s started in India with sharply priced entry-level products, he said. While some consumers may opt for the cheapest offerings, a significantly larger number eventually trade up to products at regular price points.
“We have had a very good start to Q2 as well. So, I can say that some of the things we have put in place are driving more people into our restaurants,” said Rajeev Varman, group chief executive officer of Restaurant Brands Asia, referring to meals at ₹99 and 2-for-79 in the value segment, apart from the introduction of some premium offerings.
The lower minimum order value has helped maintain the competitiveness of the Domino’s app for Jubilant in Q1. This increases repeat orders, but it is a near-term margin headwind because of the delivery costs incurred on lower-value orders.
Experts said company commentary on the increasing share of dine-ins and takeaways is a good signal.
“That improves your mix because when you have a higher dine-in, you don’t have to pay as much to the aggregators or the delivery fees, which helps improve margins,” Anand Rathi’s Thakur said.