The Indian Quick Service Restaurant (QSR) industry is seeing a slowdown in demand post Diwali as household cut expenses and due to rising inflationary pressures, according to a report by BNP Paribas. However QSR players like Pizza Hut, KFC, McDonald’s and others have continued their expansion plans. Many have also increased their brand building campaigns and marketing spends, leading to higher operating expenses. This will further impact their EBITDA growth, said Kunal Vora, Head – India Equity Research, BNP Paribas.
The slowdown in discretionary consumption has hit the strong demand that the industry had witnessed in the past few quarters, thereby hurting revenue growth and margins of brands. The report maintained that the third quarter of FY23 saw sales growth moderating as compared to the second quarter of FY223, with negative to low single digit same store sales growth (SSSG) on-year across most of the categories. However despite this, companies are continuing with their aggressive store expansion targets.
Store expansion will not be curtailed
Kunal Vora said that store expansion may need to be toned down if demand weakness persists and as industry players are facing cost pressure and are even hesitant to hike prices in fear of further risk to an already slow demand. Zomato recently announced that it has exited 225 towns. Furthermore, QSR brands have also continued to launch new variants and ranges across product categories in hope to revive demand. “While we like the long-term growth prospects of the QSR industry, we believe the industry is facing near-term headwinds, and has reflected in Jubilant’s recent financial underperformance,” he said.
QSR players have also increased their brand building campaigns and marketing spends which is leading to higher operating expenses.
Westlife Development’s capex remained in the range of Rs 1.5b-2.25 billion, of which 60-80% will be spent on opening new stores.
Barbeque Nation incurred a capex of Rs 1.1 billion in 9MFY23, out of which Rs 0.9 billion was for new restaurants.
Even as the store expansion plans are not being curtailed, some of the QSR players have been reducing their store sizes while continuing to increase the number of stores to improve their reach and visibility.
The QSR industry showed sales growth in double digits courtesy of store expansion strategy and while this was working for the industry players, margins started getting adversely impacted by RM inflation (wheat and cheese) and negative operating leverage. Delivery, which was till now comprising a large chunk of market share in QSR, too is underperforming as dine-in started recovering. In terms of categories, pizza showed softer demand owing to larger delivery salience, relatively higher penetration and elevated competitive intensity.
Pizza Hut posted a decline in sales on a quarter-on-quarter basis.
Domino’s reported a flat like-for-like growth on-year.
KFC witnessed a decline in average daily sales per store, both sequentially and on-year because of weak consumer spending and more store additions in non-metro cities.
McDonald’s (Westlife) defied the trend, reporting a 20% on-year same store sales growth due to higher guest count and average order value, courtesy of its ‘meals and omnichannel strategy’.