Fast food chains now count on pricing power as volumes fall

Noida-headquartered Jubilant FoodWorks, the franchisee of Domino's and Dunkin Donuts, will raise prices of its products by six per cent in two rounds in FY14. The Bhartia-group company follows archrival McDonald's, which announced two days ago that it was raising prices by five to six per cent for the second time in four months.

In a price-sensitive business such as fast food, pushing up the unit value of products is always last on a player's mind. Yet, these price hikes, say analysts, have been warranted not only because food inflation has been high, but also because sales volumes have been gradually falling for players as consumers cut back on discretionary spends.

Jubilant reported a same-store-sales growth (SSSG) of just 7.7 per cent for the three months ended March 31, the lowest in 15 quarters for the company. Its net profit rose 11.6 per cent to Rs 32.7 crore for the quarter, while net sales increased 29 per cent to Rs 366 crore in the same time.

While archrival McDonald's did not disclose India-specific numbers in its just declared April sales figures for its restaurants across the globe, the company did admit to a "persistently challenging macroeconomic environment". April sales were down 0.6 per cent worldwide and 2.9 per cent for the Asia, Africa and West Asian regions--the highest drop the company had seen for a geographic cluster that month. Europe came next with a 2.4 per cent drop in April sales.

Given the drop in sales that fast food chains are seeing in terms of volumes, improving value growth is what players appear to be doing now, analysts say. "Even when companies were holding price lines, there was no significant improvement in volumes," says Nitin Mathur, analyst (consumer and retail) at Mumbai-based Espirito Santo Securities. "It makes sense to take up prices. At least value growth will improve," he said.

It may be noted that McDonald's joint venture partner for the north and east Connaught Place Restaurants had cut prices by six to 15 per cent in August last year to push up volumes. Jubilant, on the other hand, has resorted to judicious price hikes in the last three to four years in response to food inflation.

Ajay Kaul, chief executive officer, Jubilant FoodWorks, says: "Price hikes are really a last resort, but a six per cent hike spread over two rounds should be reasonable."

Both companies incidentally remain bullish about India's growth prospects despite flagging sales. Jubilant said it would spend in excess of Rs 250 crore in FY14 in setting up new Domino and Dunkin Donuts stores, as well as factories in the country. McDonald's, meanwhile, has said it will spend Rs 500-1,000 crore in India over the next three-five years to set up close to 100 stores in the country.