Fast food chains bounce back in Jan-Jun as GST, note ban woes fade
The worst seems to be over for quick service restaurants (QSR) in India, at least for the time being. Recent earnings of companies operating in the segment show that fast-food chains have finally managed to overcome the stress caused by the introduction of the goods and services tax (GST), lingering effects of demonetization and other challenges.
In the first half of the year, Jubilant FoodWorks Ltd, which runs Domino’s Pizza and Dunkin’ Donuts outlets in India, has reported same-store sales growth—a measure of sales at outlets that have been open for at least a year—at a six-year high of 26.2%. This resulted in the company’s profit for the June quarter to more than triple.
Jubilant is not alone. Same-store sales growth during the first half of 2018 for Westlife Development Ltd, owner of Hardcastle Restaurants Pvt. Ltd that operates McDonald’s outlets in the west and south India was also at a six-year high at 24.6%. The trend is similar for the Indian entity of Yum! Brands Inc., owner of fast food chains KFC, Pizza Hut and Taco Bell. The company reported around 20% sales growth (store level) at its KFC and Pizza Hut outlets in India during the first six months of 2018. The growth has been a result of companies rationalizing store count, trimming store sizes, moving out of expensive locations, and other cost-cutting initiatives along with the move to drive same-store sales growth instead of adding new ones.
“The strong growth in Domino’s came on the back of a superior product, value for money delivery and growing digital contribution. This together with our focus on achieving break-even in Dunkin’ Donuts by the end of the financial year will continue to drive profitable growth for us,” Shyam S. Bhartia, chairman, and Hari S. Bhartia, co-chairman, Jubilant FoodWorks, said in the company’s latest quarterly results statement. In the past couple of years, Jubilant FoodWorks has shut down most of its unprofitable Dunkin’ stores, reduced “operating costs and overheads” at each restaurant, focused on core categories, and launched innovations including tea, to push sales. This helped the company to halve losses. “Dunkin’ Donuts saw encouraging growth and made good progress towards profitability on the back of successful innovations and disciplined cost management,” according to Pratik Pota, chief executive officer and whole-time director, Jubilant FoodWorks.
Amit Jatia, the vice-chairman, Westlife Development, said a “tight control on costs” was one of the key reasons that led to strong profit growth of the company.
The year ahead for the QSR chains is bound to be good as there’s revival in demand. “Store expansion in large cities (where store density is high) has been relatively muted over the past three years. Latent demand should drive solid earnings growth in Fy220,” said Nillai Shah, an analyst with Morgan Stanley, in his note on Jubilant FoodWorks, dated 25 July.
Brokerage firm Phillip Capital, in its note on Jubilant FoodWorks dated 25 July, said the company’s shift to focus on “revenue maximization, as most of the benefits of cost optimization have already been captured”.
Taking note of the recent quarterly results of listed QSR firms and investors’ interest in the food tech space, brokerage firm Philip Capital said: “We reiterate our positive stance on the QSR sector based on a reduction in GST rate and massive funding received by online food tech players (Swiggy, Zomato).”