With demand worries mounting, most sectors were forced to improve volumes in the September quarter at the cost of profitability. However, one sector that has bucked the trend, ensuring superlative volume growth while improving margins, is the quick service restaurants or QSRs. The trend is likely to sustain in the coming quarters too.
Jubilant FoodWorks (Jubilant), Westlife Development (Westlife) and Yum! Brands reported year-on-year sales growth in the range of 21-32 per cent. The growth was not only driven by new stores but also existing units, which contributed to the top line and helped beat the Street expectations. Same store sales (SSS) growth for Jubilant, which runs the Domino’s Pizza outlets, came in at 20 per cent over the year-ago quarter. SSS reflects the sales trend of outlets in existence over a certain period, providing a like-to-like comparison. In addition to the value offers and customers moving to higher value products, strong growth in online ordering helped the company report robust SSS growth. Westlife, which is a McDonald's franchisee, too, reported a 25.7 per cent increase in SSS. Strong growth came from brand extensions, McCafe and McDelivery, the introduction of a new rice platform and overall higher footfalls driven by existing and new customers. Growth in the QSRs was not limited to the listed players. Yum! Brands whose portfolio includes Pizza Hut, KFC and Taco Bell also reported a healthy performance. KFC, for example, reported sales of 25 per cent, its highest in the last eight quarters. Pizza Hut’s growth of 20 per cent was in line with peer Domino’s growth.
While a favourable base helped for all the players, the revival in consumption demand led to the strong performance. The trend of growth has been consistently above the 20 per cent-mark in each of the last three quarters. Analysts led by Abneesh Roy of Edelweiss Securities believe that the double-digit growth in SSS was on the back of demand revival, attractive promotional activities, wider product offerings, and strong mobile/online ordering.
In fact, SSS growth contributed to 95 per cent of revenue growth for Jubilant over the last four quarters. What this does is that it drives higher sales per store and brings operating leverage into play. Naveen Trivedi and Siddhant Chhabria of HDFC Securities highlight that operating profit margins for Jubilant expanded by 550 basis points during this period to about 16.7 per cent currently. For Westlife, the strong performance of margin-accretive platforms (breakfast/rice) led to a better product mix and, thereby, 140 basis points improvement in gross margin. Gross margins are arrived at by reducing the cost of goods sold from sales, and excluding other operating expenses such as power and selling. The company posted a 70-basis-point improvement in operating profit margins to 8 per cent despite the higher advertising expenditure. Unlike other sectors, which are struggling to maintain margins, the QSR segment has been able to grow both the top line as well as margins consistently.
While growth has been robust for the past year, the sector is not without its challenges. One is the intense competition from food-technology applications such as Swiggy and Zomato. The Jubilant management highlighted that rising competitive intensity will lead to increased personnel costs as traditional QSRs, food tech and e-commerce platforms vie for manpower to deliver the orders. Analysts believe the growth trajectory of QSR would be monitored, especially post the festival season as the base effect catches up and the level of competition both from food apps as well as from competitors increases.
Any slowdown in growth of these companies (given the high base) could lead to a correction in stock prices. While some of the correction has come through, with the Jubilant stock down 27 per cent over the last two months following the fall in markets, more adverse news
such as higher losses at Dunkin’ Donuts could be a setback. The stock, which had doubled over the past year prior to the recent correction, is trading at 41 times its FY20 profit estimates and can be looked at on dips.
Westlife stock, too, has corrected about 16 per cent over the last couple of months. While the high base will be a challenge, analysts at Axis Capital expect the company’s operating profit margins to expand by 200 basis points over the next couple of fiscals, driven strong top-line growth and operational benefits. The stock trades at 52 times its FY20 earnings estimates and investors should wait for a correction before considering the stock.