Domino's Loses Pandemic Gains As Indians Flock Back To Restaurants

Indians love their pizza, particularly when it's delivered. No company knows that better than Domino's, with delivery making up three-quarters of its sales.

But as the economy recovers, rising footfalls at outlets have erased its pandemic gains. Peers, however, are regaining revenue share lost in the last two years.

Domino's Pizza has lost over 1,100 basis points from its peak pandemic revenue share, according to an Emkay Global Financial report analysing April-June earnings of quick-service restaurants.

The pizza chain, operated by Jubilant FoodWorks Ltd., enjoys an edge over peers with its own last-mile delivery fleet, the report said. "Most of its orders originated from its own app even before the Covid-19 outbreak."

The online shift during the pandemic increased Jubilant's mobile app ordering contribution to online orders from 38% in FY16 to 97% in FY22, according to its annual report.

"Jubilant has historically had the best business model for QSRs in India, with its emphasis on delivery,” said Motilal Oswal. "More than 70% of the company’s delivery orders are now being delivered in less than 20 minutes."

Its customer satisfaction scores grew to their highest-ever levels and are now best-in-class in the industry, the brokerage said in an Aug. 22 note.

Its freight and delivery spending stood at 6.2% of sales in FY22, up from 3.3% in FY21 and 3% in FY20.

Domino’s growth, however, tapered off as peers aggressively expanded their dependence on food service aggregators to cash in on the rising off-premises consumption that has sustained post-Covid period. Recovery in dine-in, notwithstanding high inflation, also aided rivals.

KFC, according to the Emkay, has gained 500 basis points over Domino’s Pizza in terms of revenue share, helped by a rise in store count and better revenue per outlet. McDonald's Fast Food Co., Pizza Hut Restaurant Co., and Burger King India have also been able to recoup the lost share as consumers begin dining out again, the report said.

Within the pizza giants, Pizza Hut gained 300 basis points in revenue share in the first quarter against Domino's, led by a rise in its store count share, Emkay said in the note.

Emkay estimates suggest that Westlife Development Ltd., which holds the master franchise for McDonald's in the western and southern parts of the country, has "completely" recouped the revenue share lost during the pandemic. “Despite a drop in its store-count share due to slower store additions, Westlife regained its revenue share with industry-leading growth of 31% in terms of annualised revenue per store over pre-Covid levels,” the brokerage said.

That was followed by 14% growth for KFC, 11% for Burger King and about 0-5% growth for Pizza Hut and Domino’s Pizza, said Emkay. The stronger performance in McDonald’s and KFC formats was primarily led by recovery in dine-in, continued delivery-sales and strong traction in gourmet burgers and fried chicken, according to its analysts.

The same-store-sales growth, according to Nirmal Bang estimates, slowed for Domino's to 26% in the first quarter versus 97% for McDonald's and Burger King's 66%.

CEO exit raises execution worry

The slowdown in the same-store sales growth will be a key challenge for the incoming chief executive officer of Domino's, analysts said.

The sudden exit of Pratik Pota as CEO of Jubilant FoodWorks has put a question mark on the company's ability to continue with its aggressive growth plans, especially given the tough demand environment, according to analysts. This prompted several brokerages and investment banks to slash their earnings estimates and downgrade the company.

Pota, who was with the company for five years, is credited with turning around Jubilant FoodWorks and for spearheading its diversification beyond the pizza business.

"A leadership change at this juncture would likely slow down the growth engine due to some inevitable execution slippage," said Kotak Institutional Equities in a report. The brokerage said the company's management bench strength is weak, and it competes with startups for talent.

According to Morgan Stanley, Pota's exit brings "uncertainty" on the lines of new store expansion, scale-up of non-pizza cuisines that are still in early stages of operations, and the company's strong focus on cost efficiency. The company has an aggressive target of doubling the number of Domino's outlets to 3,000, and these "aggressive growth plans could be revisited with a new CEO coming on board", according to the investment bank.

Sameer Khetarpal will take over as chief executive officer and managing director of Jubilant from Sept. 5. His vast experience in consumer companies like Amazon Inc., Hindustan Unilever Ltd., coupled with his strength in building digital-first businesses in related spaces is expected to provide the necessary leadership to Jubilant, noted Motial Oswal.

Opportunity for QSRs, Not For Pizza

The Indian foodservice market was valued at $44 billion in 2021, rebounding sharply from the low of $32 billion in 2020. It, however, is still below the pre-Covid level of $58 billion registered in 2019.

The opportunity is massive in the QSR space, according to analysts.

According to Motilal Oswal, India has the second-largest urban population in the world in absolute terms, at 482 million in 2020, second only to China. "The pace of urbanisation is a key trend to note for its implications on India’s economic growth," the brokerage said in a note. Besides, United Nations Population Division estimates, India’s population is likely to increase by 37% by 2025.

"This trend is forecasted to reflect greater purchasing power in the urban centres with stronger growth opportunities across industries," said Motilal Oswal.

QSR penetration is low in India at 8% versus 20-40% in the U.S., China, and Brazil, offering scope for continued growth. "Our estimates factor in QSR penetration improving to 11%/15% by FY25/ FY35E, leading to an annualised revenue growth of 15% over FY25-35E," according to Emkay.

With the increase in discretionary incomes, urbanisation and hectic schedules among the students and working class, there is an increasing preference for hygienic, quick and affordable food at a location which the consumer prefers. According to Emkay, the Rs 35,000-crore QSR industry is well positioned to meet these changing consumer preferences, propelling QSRs to grow at a 17% CAGR in FY15-20, compared to the overall Rs 4.2 lakh crore foodservice industry's 8% annualised growth.

Within QSRs, however, Emkay expects the market share of chicken QSRs to increase by 300 basis points over FY20-35E with the annual per capita chicken consumption expected to triple to 9 kg by 2030 with the rise in per capita GDP, according to the Ministry of Agriculture & Farmers Welfare.

According to the brokerage, the rise of new cuisines would reduce the share of pizza QSRs. "We expect pizza QSRs’ share to fall by 300bps over FY20-35E as cloud kitchens and delivery aggregators ramp up."

"Despite a share loss," Emkay expects Pizza Hut to gain share among pizza QSRs and grow faster at a 16% CAGR over FY25-35, driven by improved profitability and aggressive expansion plans of the two Yum Brands franchisees.