Sales in slow lane for fast food segment: QSR industry expect demand revival from Q3

Industry sales growth YoY continues to be led by store-count expansion which itself has started to moderate. Despite muted demand and lower-than-expected new-store openings in Q1, companies have retained their annual store-opening guidance.

Written by Tanya Krishna

August 23, 2023 13:33 IST

QSR, revenue, growth, demand, Q2FY24, SSSG, margins, store expansion, festive season, raw material prices, operating leverage, inflation, Jubilant FoodWorks, Westlife, Devyani International, Sapphire Foods

The QSR companies have been seeing sustained demand deceleration over the past few quarters. Image: Reuters

The Quick Service Restaurant (QSR) industry in India posted weak Q1 results which resulted in FY24 Bloomberg consensus earnings estimates being lowered by 4-8 per cent for most companies since 1 July 2023. Earnings estimates for QSR industry companies have been lowered by 7-48 per cent YTD for FY24, said BNP Paribas report. “Industry sales growth YoY continues to be led by store-count expansion which itself has started to moderate. Despite muted demand and lower-than-expected new-store openings in Q1, companies have retained their annual store-opening guidance which remains at risk, in our view,” Kunal Vora, CFA, Head-India Equity Research, BNP Paribas.

Adjusted EBITDA margin (including rental costs) for the industry has come off sharply over the last few quarters due to a combination of 1) moderation in SSSG 2) raw material cost inflation 3) increase in employee costs and 4) increase in rent expense due to store-count expansion.

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In terms of offerings, burgers and chicken portfolio grew much ahead of pizzas with the category continuing to be under pressure given increased competition, muted demand, lower footfalls in stores, down trading and higher impact of raw material inflation (dairy). Further, BNP Paribas said that despite challenged demand, companies have largely retained their aggressive store-count expansion plans and while the pace of expansion was very low in Q1, managements expect a pick up in the later part of the year.

During Q1FY24, QSR players stated that the demand scenario continued to be under pressure given high inflation and downtrading by customers even as few players indicated that mall stores were doing well in Q4FY23 but that too saw slowdown in Q1FY24 and the overall demand was subdued in both metros and non-metros. Further, the companies stated that Q2FY24 demand would also remain soft given Hindu festivities in that period and they expect a recovery from the third quarter of FY24.

According to BNP Paribas, Q1FY24 saw sales growth decelerate across players except Burger King, with negative to low single-digit SSSG/LFL (same store sales growth/like-for-like) YoY growth across most categories. While demand is yet to fully recover, the managements expect a gradual recovery Q3FY24 onwards.

In Q1FY24, companies highlighted that RM prices remained high on-year. “While there is some moderation sequentially, especially in dairy, cheese prices do remain significantly elevated vs those of last year,” said Kunal Vora. “For KFC, the bigger ingredients are chicken, oil, flour and packing material. All of these input material prices have seen stabilisation. For Pizza Hut, in the quarter, the cheese and milk prices continued to increase. However, cheese and milk prices have started to stabilize. Having said that, companies are finding internal efficiencies and opportunities to improve their margins,” he added. High YoY dairy prices, coupled with an inferior product mix and a decline in average ticket size, impacted operating margins YoY, which managements expect will recover. Also, with inflationary pressure and people downgrading, companies are trying to build a value layer in their offerings and are launching new variants and ranges across their product offerings.