No early light for fast food chains

Overall FMCG market expects urban recovery now but this segment's outlook is pessimistic, with consumer spending not expected to pick up for quite a while

A likely rise in urban sales by the third or fourth quarters of this financial year has brought cheer back to executives in the Rs 2.5 lakh crore fast moving consumer goods (FMCG) market. However, this does not seem the case with fast food chains or, as they’re termed, quick service restaurants (QSR).

The latter entities derive the bulk of their sales from urban areas but most have cut their growth forecasts for the next three to four quarters, as the markers or indicators of improvement, they say, remain weak.

Jubilant FoodWorks, master franchisee of Domino’s and Dunkin Donuts in India, saw its same-store sales growth (SSSG) decline consecutively and sharply from minus 2.4 per cent in the June quarter to minus 5.3 per cent in the three months ended September. SSSG measures  sales growth in stores a year and more in existence.

Yum Brands, which owns chains such as Pizza Hut, KFC and Taco Bell, also had nothing great to report on sales. Its SSSG declined from levels of minus two per cent in the June quarter to minus four per cent in the September one. Westlife Development, which runs McDonald’s stores in the west and south of India, contained the fall but only just so. From minus nine per cent in the June quarter, the SSSG was minus 7.9 per cent for the September one.

And, none of these expect the scenario to change anytime soon. “My sense is that it will take at least a year for QSR players to recover from this negative growth in SSS,” says Gautam Duggad, vice-president, research, at brokerage house Motilal Oswal. “Footfalls are not adequate,” explains Kaustubh Pawaskar, retail and consumer goods analyst at Mumbai-based brokerage Sharekhan.”Which is why SSSG is negative. Consumption of pizzas, burgers and donuts is something that can easily be slashed when the going gets tough for urban householders. Most would be inclined to get their basic consumption expenditure in order before they look at discretionary expenditure, which is why QSR sales recovery will take time.”

When recently announcing the company’s September quarter results, Ajay Kaul, chief executive officer of Jubilant, remained cautious about its near-term prospects. He said a return to high-single digit growth in SSS was likely only in four to eight quarters. The reason, he said, for this long road to recovery was the lack of real consumer spending. “While consumer sentiment has picked up, it has not translated into actual spending,” he explained.

Amit Jatia, vice-chairman, Westlife Development, said on the company’s second quarter results, “We expect economic challenges to persist in the near future. This was reflected in our SSSG numbers. But despite the current challenges, we remain optimistic that the market will grow, as it remains under-penetrated.”

According to retail consultancy Technopak, the Indian food services market, nearly Rs 3 lakh crore in size, will cross Rs 5.5 lakh crore by 2020. This will be led by the chain market — that is, outlets that are more than three in number (which includes fast food or QSR chains), which will grow at 15 per cent annually in this period.

Arvind Singhal, chairman of Technopak, says for QSR chains to bounce back in sales growth, some things have to fall in place. “Interest rates have to come down, job creation has to recommence, the investment cycle has to kick in and food inflation has to moderate. At this stage, much of these factors are still work-in-progess. By the time the impact is felt on the ground, it will take at least a year or so.”

Till that time, the SSSG story for fast food chains is not expected to be healthy.