Demand For Pizzas To Burgers Falters As Menu Prices Soar
Diners are cutting back on the items they order, making fewer visits to restaurants and are eating at home more often.
The revenue growth of burger to pizza chains in the second quarter masks the pinch consumers face.
Higher revenue in July-September was driven by price hikes. And inflation is eating into household budgets, forcing diners to cut back on the items they order, reduce restaurant visits and eat at home more often.
“In the current highly inflationary environment, consumers, of course, are making choices,” Ashish Goenka, chief financial officer of Jubilant FoodWorks Ltd., the operator of Domino's Pizza, told analysts in a recent post-earnings call. "Consumers are downtrading to some extent and also reducing items per order."
Quick service restaurants' experience mirrors what other consumer-facing sectors have witnessed as inflation remains sticky. Outlets have raised menu prices to cover costs, making consumers even more selective.
Jubilant FoodWorks, for instance, faced multi-decadal high inflation. The price of cheese—a key ingredient—has risen to a level not seen in the last 10 years, said Goenka.
The spike also differs from previous instances as prices are high across the board, he said. “We are also seeing very high levels of inflation in fuel, in manpower cost as overall inflation has gone up, minimum wages have gone up."
Price Hikes Drive Sales
Devyani International Ltd., the largest India franchisee partner for Yum! brands—the operator of Pizza Hut, KFC and Costa Coffee—registered sales growth of 45% year-on-year and 6% sequentially, courtesy price hikes. Demand, however, slowed.
“There has been high input inflation in the first half of the year. And obviously, we've taken a price increase,” said Manish Dawar, chief financial officer at Devyani International. “Volume growth was a little slow (compared to what the company is used to see) and that got replaced with the pricing growth during the quarter.”
Pizza Hut volumes fell and like-for-like stores sales were muted as the chain raised prices and consumers downtraded to the new value range 'Flavour Fun' pizzas launched in July, the company said.
Overall pricing levels remain higher year-on-year even as input cost inflation is stabilising.
Jubilant FoodWorks' revenue rose 17% year-on-year and a 3.7% sequentially to Rs 1,286.8 crore in the quarter ended September. Again, that was aided by price hikes.
The three-year compounded annual growth rate for revenue was modest 9%, despite 10-12% price hikes and introduction of 7% delivery charges, according to estimates by global brokerage Jefferies.
According to Goenka, the entire benefit of price hikes has "not translated into revenues on account of downtrading".
Dine-In Versus Delivery
Increase in prices didn't deter consumers from dining out as mobility eased after the third Covid wave at the start of the year.
KFC's same-store sales — a measure of performance of outlets operational for over a year — rose 31.5% in the first quarter ended June, while they rose 63.6% for Pizza Hut and 28.3% for Domino's.
Consumers grew more price sensitive as inflation persisted. KFC was seeing a pick-up in the dine-in mix, but then it fell 1% sequentially in Q2 in favour of delivery, indicating people are making fewer visits to restaurants.
While for Domino’s dining-out is growing, it is yet to cross pre-pandemic levels. And delivery sustains growth despite a high base.
Restaurant Brands Asia Ltd., the Burger King chain operator, also saw a 2% decline in the dine-in mix sequentially to 57%, in favour of delivery.
More than 60% of the company’s stores in India are in malls and since movies are not doing well, "some negative impact" on revenue was visible during the quarter, it said.
Its revenue rose 9% to Rs 337 crore in the second quarter.
Bucking The Trend
Food companies and restaurants started passing on higher cost of ingredients used to make pizzas, burgers and fried chicken, and packaging materials to customers to protect margins. Yet, the hikes were not enough for most to offset the impact of unrelenting inflation.
Still, Westlife Foodworld Ltd., which holds the master franchise for McDonald's in west and south India, has reported its highest ever quarterly sales at Rs 572 crore, up 49% year-on-year and 6% quarter-on-quarter.
The company bucked the trend in margin pressure, reporting a gross margin expansion of 70 basis points given price hikes in previous quarters. Its gross margin performance was better than Jubilant FoodWorks (-200 basis points), Devyani International (-80 basis points) and Sapphire Foods India Ltd. (-320 basis points).
Westlife's 2% price hike in October is likely to expand margin further. Including a 5% increase in April-June, Westlife has raised prices by 10-12% price in the first half ended September.
Entry-Level Price Points
Between FY13 and FY15, when inflation had spiked, restaurant chains passed on costs to protect margins.
For instance, Jubilant passed on the entire input inflation and the ripple effects were seen in the years that followed with the pizza category becoming more expensive in comparison to other fast-food categories.
This time, however, QSR players are better placed given improved appetite, relatively lower price hikes, cheaper offerings and increased investment in the sector, analysts at Dolat Capital said in a report.
Jubilant's offerings during FY13-FY15 were restricted to pizzas, which had a fairly sizable ticket size relative to other QSR chains, it said. “But this time, most QSR operators have introduced entry-level price points to make their offerings more pocket-friendly."
McDonald's' McSaver combos; Jubilant's Taco Mexicano, Zingy Puff, Meatballs; Stunner menu from Restaurant Brands Asia is likely to help players manage volume decline during the high inflationary periods, it said.
Moreover, chains like Jubilant are adopting new ways to pass on the rise in material costs to consumers, Dolat Capital wrote, citing delivery fees.
"This has few advantages: the offerings appear to be less expensive when compared to other food categories, and secondly in comparison to aggregators, overall delivery charges are cheaper," the brokerage said. "These charges cushion margins in an inflationary environment.”
Sapphire Foods, the second largest franchise operator of Yum! brands in India with operates 301 KFC stores and 249 Pizza Hut outlets, has seen average daily sales for KFC fall from Rs 1.34 lakh in Q2 compared to Rs 1.44 lakh in the previous quarter.
For Pizza Hut, however, the average daily sales came in at Rs 64,000 in Q2 as compared with Rs 61,000 in Q1. It was driven by its omni-channel strategy and introduction of the ‘Flavour Fun’ range of pizzas, starting at Rs 79, to bridge a key value gap with peer Domino's. Prior to launching this range, the cheapest offering was Rs 200.
“Undoubtedly, it is leading to transaction growth,” Sanjay Purohit, chief executive officer at Sapphire Foods Group, said. He sees the value layer under Rs 100 as an “important future driver of growth”.
Forecasts for India's quick service restaurants remain robust.
From FY15-20, the market grew at 19% CAGR to Rs 18,800 crore ($2.5 billion), according to Statista. It estimates to reach Rs 52,400 crore ($6.8 billion) in the following five-year period, implying 23% CAGR.
Companies expect the recent softening in prices of chicken, edible oil and cooking gas from peak levels to aid demand and margins.
“We are seeing the input prices stabilising over the remainder of the year and therefore, we expect our margins to come back,” said Dawar of Devyani International.
Purohit said recovery in demand is likely in the ongoing festive quarter, after a seasonally weak second quarter due to the inauspicious period of Shraadh, when most people avoid meat and chicken.