Mint Explainer: What's behind the slowdown in fast-food sales?

Westlife Foodworld Limited, which owns the master franchisee of McDonald's in West and South India, reported same-store sales growth of 1% year-on-year in the September quarter (Photo: Madhu Kapparath)
Westlife Foodworld Limited, which owns the master franchisee of McDonald's in West and South India, reported same-store sales growth of 1% year-on-year in the September quarter (Photo: Madhu Kapparath)

Summary

  • Several leading fast-food companies underperformed in the September quarter thanks to a combination of factors, such as relatively more religious days and increasing competition from smaller players.

New Delhi: Several leading fast-food companies, including Devyani International Ltd, Sapphire Foods, Jubilant Foodworks, and Westlife Foodworld Limited, reported sluggish sales in the September quarter. This was due to a combination of factors, such as an extended period of religious days, which adversely affected the sale of non-vegetarian food, and increasing competition from smaller players.

How did fast food chains fare?

Most restaurant and fast-food chains underperformed in the September quarter. Westlife Foodworld Limited, owner of Hardcastle Restaurants Pvt. Ltd., the master franchisee of McDonald's in West and South India, reported same-store sales growth of 1% year-on-year in the quarter. This, analysts said, was "well below" the average of the past four quarters – 20% year-on-year – albeit on a high base. 

For Devyani International, which operates brands such as KFC, Pizza Hut and Costa Coffee in India, September-quarter sales growth was largely driven by store additions. Same-store sales growth for KFC and Pizza Hut declined 4% and 10% respectively. Jubilant Foodworks Ltd (JFL), which operates Domino's pizza outlets in India, reported a 1.3% dip in same-store sales growth during the quarter. Same-store sales growth measures the performance of existing stores in the company's ecosystem and excludes new stores added during the period under review.

What's the reason for the weak performance?

Companies and analysts attributed it to a combination of factors. Firstly, local competition is gaining traction as small pizza and burger chains mushroom across India. High inflation has also been weighing on household budgets. The quarter also saw high inflation in vegetable prices. 

Companies meanwhile hiked prices to counter the high food inflation. Take, for instance, the price of cheese, which affected the margins of pizza chains. Same-store sales growth at Pizza Hut was down 10% year-on-year owing to a weak macro picture and elevated competition, said analysts at Jefferies. "Higher menu prices due to cheese inflation resulted in consumers preferring non-pizza cuisines," the analysts said. The pizza category is also seeing greater competition as consumers downgrade to lower price points. KFC introduced value meals in new stores to attract more customers. This led to a slight drop in gross margins.

Meanwhile, Karan Taurani at Elara Capital said Jubilant Foodworks was affected by restaurant aggregators scaling up aggressively, increased competition in the pizza segment, and the fried chicken and burger categories growing faster than pizza post-covid. The quarter also had relatively more religious days, which affected demand for non-vegetarian fast food.

What could help lift demand?

Despite a sluggish September quarter, companies are seeing plenty of tailwinds in the ongoing quarter thanks to the ongoing cricket World Cup and festival season. Jubilant Foodworks reported higher than average sales during the World Cup, especially on India matchdays. Companies also reported a jump in online deliveries on these days. However, not all companies sounded positive on commodity deflation.

In a note on Jubilant Foodworks, Elara's Taurani said profitability continues to lag pre-covid levels and the gross margin was 113 basis points lower in the September quarter. "This is been primarily due to higher inflation in cheese and vegetables. We believe cheese prices may cool off by Q1 FY25, which may improve profitability," he said.

But Ravi Jaipuria, non-executive chairman, Devyani International Limited, remained hopeful of a rebound in consumer spending over the next few quarters. "High inflation across industries and categories from a macroeconomic perspective has led to a short-term impact on consumer sentiment and spending in the last few quarters. Despite this, our performance remains resilient and we continue to invest in the business for long-term growth. We are hopeful that a rebound in consumer spending will take place in the next few quarters, positioning us for success in the dynamic and evolving QSR landscape," Jaipuria said during the company's earnings announcement.

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