Home >Companies >Fast food chains resort to price cuts as consumers reduce spending

Mumbai: Aditi Roongta, 18, a student of Thakur College of Science and Commerce in Kandivili, a western suburb of Mumbai, has given up on fast food. Prices at Kentucky Fried Chicken (KFC) and Pizza Hut, her favourite restaurants, have risen over the past two years.

A meal at KFC that would have cost around 130 has gone up to 150. At Mad Over Donuts, a quick-service restaurant chain, prices of donuts have increased from 35 to almost 50 in the same period.

Even families are feeling the pinch. Deepal Mehta, 19, and her family in the Kandivili East suburb of Mumbai used to eat out every Sunday. They have cut that down to once a month. “All costs from conveyance to taxes have increased, making going out expensive," explained Mehta.

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With consumers spending less amid a slowdown, fast food chains are keeping their prices table and making very attractive offers

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This cutting back has not been lost on restaurant chains and fast-food outlets such as McDonald’s, Café Coffee Day, Domino’s and KFC, which are introducing special promotions, discounts, value offers, avoiding further price hikes and, in some cases, even cutting back prices to revive flagging sales.

“At this time, we have reduced prices… as we are ready to take a hit on our margins to give them compelling and exciting reasons to continue to come to McDonald’s," said Vikram Bakshi, managing director and joint venture partner, McDonald’s India, north and east.

Popular products on the regular and breakfast menu at McDonald’s are now cheaper by 6-10% in north and east India. Bakshi said his company is keeping a close eye on input costs and expects food inflation to continue to remain high.

Jubilant FoodWorks Ltd, which runs the Domino’s pizza chain in India, delayed its usual price hikes of 2-3% from April to June due to weaker consumer sentiment.

As the company focused on promotions and delayed price increases, margins moderated.

In the June quarter, Jubilant FoodWorks “gross margins disappointed at 73.4%, down 110 basis points or bps year-on-year, and 120 bps quarter-on-quarter", said JP Morgan India Pvt. Ltd in a 25 July report. One bps is one-hundredth of a percentage point.

Jubilant FoodWorks has indicated that in fiscal 2013, its overall pricing growth will be restricted to 5-6% compared with the 12% price increase effected in fiscal 2012.

The promoters of HT Media Ltd, which publishes Mint, and Jubilant, are closely related. There are no promoter cross-holdings.

KFC has decided not to increase prices this year in India.

“We are not taking any price increases this year as we want to be responsible in these tough times," said Tarun Lal, general manager, KFC, and added it would review the decision in December.

Moreover, KFC is focused on aggressive pricing at both the low and high ends as it looks at widening its reach to a broad range of consumers.

In the past few months, it has increased its offerings of items priced at 25 and introduced special discounts and promotions on combination meals. It currently offers four dips free with its chicken bucket, which the company said effectively translates into a 20% discount.

Restaurant chains are also introducing products at similar price points to each other. Two weeks ago, Domino’s introduced a new entry price point of 25, with a side dish of Spicy Twistyz. The 25 entry price used to be more commonly associated with McDonald’s.

Costa Coffee and Cafe Coffee Day have launched offers at 49. Costa Coffee launched a new range of snacks at that price and Café Coffee Day started selling a combination of a beverage and snack at that price in June. Previously, the minimum a consumer had to pay for a snack and beverage at the Café Coffee Day chain was 73.

“These combos increase volumes and walk-ins," said Venu Madhav, chief operating officer, Café Coffee Day.

These measures may not be enough. Experts predict that with a rain-deficient monsoon, there may be no relief in inflation in the medium term. Moreover, consumer sentiment is unlikely to improve.

At Domino’s, despite the delay in price hikes and focus on promotions, same-sales store growth for the June quarter was 22% lesser than the 25% same-sales store growth it had in the prior nine quarters. This measures growth of stores that have been in operation for at least a year.

“In the medium term, same-sales store growth will taper down to 18-20% from the level of over 30% witnessed during last two years," said a 27 July report by Aditya Birla Money on Jubilant FoodWorks.

The slowdown in quick-service restaurant business is unlike what happened in the wake of the financial crisis in 2008.

“That time the sector was resilient as salaries between 2005 and 2008 grew at close to 33%, giving consumers more disposable income to spend," said Dhananjay Sinha, co-head of institutional research, economist and strategist, Emkay Global Financial Services Ltd. “Now, salaries are growing at close to 10%. Moreover, even as there was a global crisis, consumers still had visibility to the future as there was economic growth. Now there are a lot of uncertainties and across sectors topline and profit growth are slowing down, making consumers cautious."

India lost its top ranking on Nielsen’s consumer confidence rankings for the first time in nine quarters in the three months ended June, dislodged by Indonesia, as rising prices, slowing growth and a weak rupee took their toll.

The drop in India was sharper than the global confidence level decline, which was down two points in the June quarter to 99, driven by global uncertainties and the euro crisis.

Sector experts, nevertheless, remain optimistic about the Indian consumption story.

“We continue to look for investments in the food and agri space," said a TVS Capital spokesperson who has invested in Om Pizza and Eats Pvt. Ltd, which runs Papa Johns Pizza. The fund is now in the midst of closing its new 500 crore fund.

“The opportunity is large," said Amit Burman, chairman, Lite Bite Foods Pvt. Ltd, and vice chairman, Dabur India Ltd, while pointing out that sectors such as consumer packaged food are still resilient and showing robust growth.

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