Jubilant feels the bite of faltering demand

Quick service restaurants are fighting to keep growth intact as the overall consumer appetite for discretionary spending wanes

A week after the surprise resignation of Jubilant FoodWorks Chief Executive Ajay Kaul, the stock remains volatile. On Monday, the company’s share shed gains made on September 23 to decline 3.53 per cent on the Bombay Stock Exchange. While it recovered marginally on Tuesday, experts pin the overall weakness on broader growth concerns that are now beginning to take centre stage.

In Jubilant’s case, these concerns have been acute owing in part to its large base of stores. In four years, Jubilant took Domino’s stores to 1,049 from 489, adding on an average 140 outlets every year.

While this ensured that India emerged as Domino’s second largest market after the US, same-store sales growth, or SSG, has been hit  as the June quarter results indicated recently. It was the lowest in seven quarters, declining to about 3.2 per cent. The other listed player, Westlife Development, which runs McDonald’s stores in the west and south of India, was better off, but only just.

SSG for Westlife Development in the June quarter was 3.4 per cent, lower than the 8.4 per cent it reported in the March quarter, and marginally higher than the 3.1 per cent it reported in the December quarter.

Religare analysts Varun Lohchab and Manish Poddar in a recent report said that consumer sentiment remained weak in the last few quarters, putting pressure on food service companies. It hasn’t helped that fragmentation remains high and that new and existing players continue to seek opportunities in a market that is diverse and where consumer needs and behaviour vary from region to region.

No change in plan
The Jubilant management indicated recently that it would continue to add around 130-140 new Domino’s stores in 2016-17 despite a decline in SSG. Westlife Development has also said that it will continue to add 30-50 new restaurants annually to double its store count to 500 in five years.

The rationale behind the expansion, say companies, is that long-term growth prospects remain intact in food services.

“We are thoughtfully pursuing big bets and building exciting new platforms, that position us well for long term growth. With a focus on building greater differentiation, accelerating profitable growth and increasing shareholder value, we will continue to make small but meaningful strides against our Vision 2022 strategy,” Westlife Development Vice-chairman Amit Jatia  said when announcing the company’s earnings in June.

In a joint statement, Jubilant Foodworks’ Chairman Shyam Bhartia and Co-chairman Hari Bhartia said, “We have continued to make investment in enterprise resource planning, digital technology and commissaries. All these investments will help us in bringing in efficiencies in supply chain, enhance customer experience and capture growth through expansion of the network.”

According to a recent report by the National Restaurant Association of India, or NRAI, and management consultancy Technopak, the domestic chained food services segment, which includes restaurants, bars, pubs, cafes and lounges that have more than three outlets, will constitute 10 per cent of the overall market by 2021, touching Rs 50,950 crore from 7 per cent (or Rs 20,400 crore) today.

The report adds that the chained food services segment along with the standalone segment, which includes single restaurants, bars, pubs, cafes and so on, will help the unorganised food services market shrink by eight percentage points to Rs 2.93 lakh crore by 2021.

But, while the overall picture appears rosy, experts say the incessant store addition by players is putting pressure on profitability as rentals and manpower costs escalate.

Cost calculations
According to estimates, while raw materials are a key cost component for most players, rentals constitute 12-15 per cent of a store’s total revenue. Depending on demand, rentals can increase up to 18-20 per cent of a store’s revenue, putting pressure on margins. Staff costs, on the other hand, while varying between 10 and 12 per cent of a store’s revenue, could increase to around 15 per cent if hands required are more at the store level.

Typically, food service players operate on thin margins and attempt to offset rental costs by pushing up sales aggressively. But, while offers and promotions help to some extent, eating out still takes a backseat as budgetary constraints and the need to save gain precedence.

Nielsen’s quarterly consumer confidence index bears out this trend. For the June quarter, for instance, India’s consumer confidence index dipped after a nine-year high in the March quarter as consumers chose to save rather than spend. A bleak outlook towards job prospects and personal finances were contributing factors, Nielsen said, for unnecessary expenditure being slashed by consumers.

It is an open secret that eating out still tends to be lower down the pecking order for consumers in India. According to NRAI and Technopak, India’s per-capita spend by urban population on food services is the lowest among key markets. It stands at $110 in comparison to markets such as the US, China, Brazil, South Africa, UAE, Thailand and Indonesia, where per-capita spends could vary between $145 and $1870. Clearly, India has a broad gulf to bridge.