Home >Industry >Retail >Quick-service restaurant chains go deep on promotions

Mumbai/New Delhi: As consumers continue to hold back spending amid a prolonged economic slowdown and high inflation, fast food outlets—or quick service restaurant (QSR) chains—are running deeper promotions in a bid to lure consumers with a wider range of items and price options.

The strategy, though, is proving to be double-edged, as margins and profitability shrink at the cost of boosting volumes.

The size of the QSR industry was estimated to be $48 billion in 2013, according to Technopak Advisors Pvt. Ltd, a consultancy. While no reliable growth estimates for the industry are available, companies and consultants say growth has petered out.

“We did not expect the slowdown to prolong for so long. Our like-to-like sales have come down from double digits in 2012 to single digit in 2013 and it’s now completely flat," said Joseph Cherian, chief executive officer GFA Global, a franchisee for Pizza Corner, Cream and Fudge, The Donut Baker and Coffee World in India with over 100 stores.

To beat the slowdown, the restaurant chain has stepped up the pace of new launches at PizzaExpress, which has close to 70 stores, to one every two months. In the past, new launches averaged four a year.

Fresh additions to menus create excitement and help attract more customers as they start off at price points like 50 and 75, said Cherian, whereas earlier they did not offer any products at these prices.

Likewise, Subway is planning to launch products at 50 and 75 by June. “We are considered a premium offering and are looking at fixing that with a larger menu and portfolio of cheaper products," says Chetan Arora, master franchisee, Subway India.

Among cafes, Costa Coffee is looking at increasing business in the 3-7pm time band, where consumers tend to walk in for coffee and a quick bite. “We have to ensure consumers keep coming back and innovate," said Santosh Unni, chief executive at Costa Coffee India.

According to Harneet Singh Rajpal, vice-president, marketing Jubilant FoodWorks Ltd, new products help drive customer acquisition and expand existing consumers’ order size. Moreover, the introduction of more non-pizza food items priced below 100 works well in creating “snacking occasions", especially in shopping malls and busy main streets, he said.

In line with this strategy, pizza maker Domino’s launched four new products in the first six months of 2013 and supported the launches with heavy promotions at a time when people were holding back spending on out-of-home food. The company launched Lebanese Rolls, apart from running offers such as one-plus-one pizza every Wednesday in the first six months of financial year 2013.

It’s raining offers at rivals Pizza Hut, too. Over the 26 January Republic Day weekend, it came out with a Family Fun Days promotion, where kids got to eat free.

In September, the chain ran an offer of unlimited pizza slices starting at 199. A Don’t Cook Wednesdays promotion was started to match Domino’s’ buy one, get one free scheme for Wednesdays.

“Yes, the promotions are much more aggressive than the previous year, as were the products launches," said Rajpal. “You need to be cautious and give more incentive, promotions and discounts to ensure that consumers sustain consumption."

The interesting challenge has been that consumers are demanding more innovation apart from more value-oriented meals, said Sanjiv Razdan, general manager and country head, Pizza Hut India at Yum! Restaurants while admitting the last few quarters have been tough.

The buy-one-get-one-free trend has caught up across chains like KFC and Cafe Coffee Day as well, which are also running similar promotions on Wednesday.

“Running a promotion like buy-one-get-one-free perks up demand during the week and we see spike in sales," said K. Ramakrishnan, president, marketing, Cafe Coffee Day, which launched an egg wrap for 49 three months ago.

In 2013, India’s economic growth slowed down to a decade’s low, coming in at 4.8% in the September quarter. Moreover, consumer prices have risen by an average of 10% annually for the past five years. This has impacted India’s private final consumption expenditure (PFCE) which grew at its slowest rate in over three years in the June and September quarter, said India Ratings and Research, the local arm of Fitch Ratings Inc. in a report released on 3 December.

“The industry growth has plateaued since 2012 and in fact the impact has been far worse in 2013 as there has been no respite from inflation," said Arvind Shetty, president, Indian Hotel and Restaurant Association (Aahar).

According to a September report by the ratings agency Crisil Ltd, “same-store-sales growth is expected to decline considerably due to intensifying competition in tier I cities, coupled with the economic slowdown. Same store sales refer to sales growth of stores that have been in existence for over a year, as against growth coming from the opening of new stores.

The slowdown’s impact on stand-alone eateries has been far worse as they have been unable to absorb costs and sustain operations. According to Shetty, close to a 100 eateries in the business district of South Mumbai alone have closed in the past two years.

QSR firms are also having to battle high costs. Most organized restaurant chains have selectively passed on the cost increases, but have had to absorb a part of the same to avoid hurting demand.

For instance, Subway has seen its costs go “through the roof with 10-12% inflation at the franchisee level," said Arora of Subway, adding that same store sales growth has slowed down from 20% a couple of years ago to a single digit now. Earlier this month, Subway took price hikes of 5 on an average for a sandwich. “We haven’t passed on the entire cost and have absorbed some ourselves," said Arora.

Companies, however, are pressing on with expansion plans, confident that demand will rebound eventually.

Cherian plans to increase the number of restaurants across various chains from 125 to 150 by 2014-end. Subway plans to take up the number of outlets from 414 across India to 500 by the end of the year.

The promoters of HT Media Ltd, which publishes Hindustan Times and Mint, and Jubilant FoodWorks are closely related. There are no promoter crossholdings.

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