Serving up a slump: QSR players grapple with a side of demand downturn

Margin pressures could remain as sales dip and cost inflation take a bite

After a lacklustre performance in the April-June quarter (first quarter, or Q1), quick-service restaurant (QSR) players disappointed the Street once again with weak operational metrics in the July-September quarter (second quarter, or Q2) of 2023–24 (FY24).

Same-store sales, reflecting the like-to-like performance of stores operational in both periods, were either flat or experienced a decline compared to the year-ago quarter.

Despite ongoing network expansion efforts in the sector, most brokerages have revised down their operating profit and earnings estimates, anticipating at least a couple of quarters before normalisation.

Commenting on the Q2 performance, research analysts Devanshu Bansal and Vishal Panjwani of Emkay Research point out that listed companies posted 9 per cent and 11 per cent revenue growth in Q2 and the first half of FY24, respectively. This indicates a moderating growth trend compared to the annual growth of 15 per cent seen from 2019-20 through 2022–23, driven by inflation-led demand challenges.

While pizza and burger chains experienced a sequential share gain at the expense of chicken due to the extended Shravan period in Q2, the trend is expected to reverse in the second half (H2).

“We believe headwinds persist for the pizza category due to intense competition and a shift to lower price points amid inflation,” say Bansal and Panjwani of the domestic brokerage.

Some of this was reflected in the performance of Devyani International and Sapphire Foods India. Sapphire Foods is among the largest franchisees of Yum! Brands, Inc. in the subcontinent, with more than 700 Kentucky Fried Chicken (KFC), Pizza Hut, and Taco Bell restaurants across India, Sri Lanka, and the Maldives.

Devyani International claims to be the largest franchisee for Yum! Brands (KFC and Pizza Hut) in India and is also the sole franchisee for Costa Coffee brands and stores in India.

It reported 10 per cent year-on-year (Y-o-Y) revenue growth, led by 24 per cent Y-o-Y store additions, which were offset by weak same-store sales growth (SSSG) for both KFC and Pizza Hut and the devaluation of the naira (Nigerian operations).

Analysts at Motilal Oswal Financial Services, led by Aliasgar Shakir, state, “Due to the challenging environment, SSSG has remained weak, and recovery is expected to take a couple of quarters more with the Pizza Hut format further seeing the impact of intense competition.”

The brokerage believes that strong store addition guidance of 250–275, an expected recovery in SSSG for H2FY24, and moderating inflation would enhance profitability going forward.

Even as Sapphire Foods delivered an inline performance, the divergence between KFC and Pizza Hut, according to Nuvama Research, has increased further. While KFC had flat SSSG, that of Pizza Hut was down a steep 20 per cent in Q2 compared to a 9 per cent fall in Q1.

KFC’s performance in the backdrop of higher vegetarian days is positive, but Pizza Hut’s has worsened since the gap with Jubilant FoodWorks or Domino’s (SSSG down 1.3%) and other QSRs is increasing, say analysts of the brokerage, led by Nihal Mahesh Jham.

Jubilant FoodWorks’ standalone revenue growth of 4.5 per cent in Q2 was disappointing and resulted from delivery channel revenues, which grew 7.9 per cent.

Store growth of 12 per cent was offset by a fall of 6-7 per cent in average sales per store; SSSG fell 1.3 per cent.

Weak sales growth and elevated input costs weighed on operating profit, which was down 10 per cent. Operating profit margins fell 341 basis points to 20.9 per cent Y-o-Y due to inflationary pressures and higher operating expenditure.

IIFL Research has cut the operating profit estimates for FY24 through 2025–26 by 5–9 per cent, given the weak performance, and expects the demand and margin pressures to persist.

Westlife Foodworld, which operates McDonald’s fast food chain across West and South India, has been outperforming its peers for the last few quarters. However, the company too fell short of analysts’ expectations, both on the revenue and operating profit fronts.

After an SSSG of 7 per cent in Q1, the company’s SSSG moderated to 1 per cent in Q2. The muted show was on account of a consumption slowdown and a high base. Higher store-level staff costs and increased royalty, coupled with a rise in administration expenses, weighed on its operating profit.

While some brokerages have pulled back their sales and operating profit estimates in the backdrop of the Q2 showing, JM Financial Research believes that the company remains well-placed to navigate the current challenges and remains constructive on the stock. Any weakness should be viewed as an opportunity to buy, it adds.