Low footfalls force quick service restaurants to focus on home delivery

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Mumbai | Updated: August 10, 2015 11:08:39 AM

Falling footfalls, coupled with rising rentals in malls, are forcing quick service restaurants (QSRs) and fast-food joints to revisit their location strategies.

Currently online ordering — or home delivery — accounts for close to half of Dominos’ revenues while for McDonald’s, it’s just about a third of sales. Currently online ordering — or home delivery — accounts for close to half of Dominos’ revenues while for McDonald’s, it’s just about a third of sales.

Falling footfalls, coupled with rising rentals in malls, are forcing quick service restaurants (QSRs) and fast-food joints to revisit their location strategies. Among those that now plan to focus more on home deliveries are McDonald’s, KFC, Pizza Hut and Dominos.

As Amit Jatia, vice-chairman, McDonald’s India (west and south), points out, given the slowdown in the economy, even the more popular malls aren’t able to generate high spends and footfalls. And without footfalls, QSRs and fast food chains aren’t doing the kind of business they would like to.

Even otherwise, average mall vacancies across major cities are running at a fairly high 20%, an evidence of subdued consumer demand, according to global real estate consulting firm Jones Lang LaSalle (JLL). Under the circumstances, running up expenses on rents in expensive malls doesn’t make sense. Instead, outlets to service home deliveries located in less-expensive premises may work better. As Anuj Puri, country head, JLL India, points out, if QSRs focus on home deliveries, and can make do with basic kitchen amenities, they don’t need to fork out high rentals at malls.

Currently online ordering — or home delivery — accounts for close to half of Dominos’ revenues while for  McDonald’s, it’s just about a third of sales. But same-store sales at malls are slowing down for a host of QSRs so they too may opt for a stronger home-delivery focus. In Q1FY16, for instance, Dominos’ same-store sales grew 6.6% but came after five quarters of negative growth. McDonald’s disclosed recently it saw a drop of 2% in same-store sales in Q1FY16; for players like KFC and Pizza Hut, the dips are more than 10%.

Not surprising then that companies are investing more heavily in bringing their delivery model up to speed rather than opening stores for dine-ins.

For example, Pizza Hut’s dine-in restaurants have remained steady at about 179-180 stores in the past two years but over the same time, the number of home service outlets has doubled.

While the number of KFC outlets has gone up by a third in the last two years, 60% cater to home delivery.

A bigger focus on home deliveries will allow QSRs to keep prices affordable. “Where the price point is lower, say between R250 and R280, the model is shifting towards delivery from dine-in,” said Nirzar Jain, vice-president of Oberoi Mall in Mumbai. Jain observes that it’s also possible that people choose to order in for food that costs less and eat out if they intend to spend more on a gourmet meal. That means the occupiers of malls are likely to be the more up-market restaurants that can attract an affluent clientele.

With the proliferation of online food aggregators QSRs could be up against some stiff competition when it comes to home deliveries. The presence of a Foodpanda or a Zomato has allowed  smaller brands–even mom-and-pop stores — to compete on the same platform as a Dominos. Ajay Kaul, CEO of Jubilant Foodworks, agrees that consumers expect a discounted price or “deals” online but asserts that will not put pressure on margins. “We offer discounts based on an analysis of consumer behaviour,” Kaul explains, adding that with the online ordering it is possible to target each individual. However, analysts point out that since food aggregators will shell out discounts only for a limited period, ultimately the companies will need to offer discounts which could then pressure margins, unless volumes increase sufficiently. Of course, the savings on the rentals will cushion the margins.

Ajay Singhal, chairman of Technopak Advisors, believes that since food is not necessarily consumed the way other goods are, the threat of online discounts may be far less in the food ordering business. “The brand preference is of paramount importance,” Singhal said pointing out some QSRs have built a top-of-the-mind brand that should help them generate business.

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