Jubilant Foodworks, which owns the Dominos and Dunkin’ Donuts brands, has fared poorly throwing up questions on whether the quick service restaurant (QSR) has saturated or not. Edelweiss has recommended a ‘Hold’ call to its clients
Jubilant Foodworks (JFL), which runs the Dominos and Dunkin’ Donuts brands in India, has reported second successive poor quarterly results, which puts a question mark on the possible saturation of the quick service restaurant (QSR) sector. Its March 2013 quarterly profit barely rose to Rs32.71 crore for when compared to Rs29.33 crore for the same quarter last year. Its net sales stood at Rs365.75 crore for the reporting quarter compared to Rs282.95 crore for the corresponding period last year. Margins have also taken a beating in the last few quarters. Total expenditure in Q4 FY13 was at Rs319.75 crore when compared to 240.72 crore in the same period last year. A rise in raw material and total expenditure reflects the increased operations in both Domino’s Pizza and Dunkin’ Donuts.
Edelweiss has recommended a ‘Hold’ on the stock and pegs the target price at Rs1,034 per share, compared to the current price of Rs1,028. It has said in its report, “JFL will benefit on recovery in consumer sentiments over the long-term. However, same store sales (SSS) growth slowdown is a concern in the medium-term.” Edelweiss also expects inflation to remain higher than 10%, which only further will dampen discretionary spending.
The poor showing was due to decline in SSS growth, which stood at 7.7% in the March 2013 quarter—the lowest level in the past four years. The management has guided for 10% SSS for FY14, which is not that impressive. SSS is the figure used to measure sales performance without considering new stores which otherwise would distort comparison. Slowdown in consumer discretionary spending on account of economic uncertainty was an important factor. The trend in SSS growth rate is worrying not just for JFL but for the entire QSR industry as well. A lot of money from private equity funds is betting on the QSR business. A look at the chart below is a possible sign that the market has saturated.
A slowdown has prompted the company to spend more on advertising and promotions, including discounts and offers. Additionally, its Dunkin’ Donuts stores have not delivered as hyped earlier. The brand has made losses during the quarter which impacted EBIDTA margins by roughly 80-90 basis percentage points, according to Edelweiss report. At the moment, there are only 10 Dunkin’ Donuts stores. It remains to be seen whether Indians take to Donuts.
Furthermore, changes in service tax is expected to dampen demand and SSS further. According to Edelweiss, “Amendments in service tax will be applicable from 1 April 2013, and the same will be passed on to customers. The same appears as a separate line item in the bill. As per the management, the service tax hike can impact SSG.”
JFL is one of the early movers into the QSR segment which is now being highly sought after by venture capitalists and private equity firms. Rabobank expects the segment to grow at 30% per annum till 2015, while Technopak Advisors expect it to grow 25% per annum till 2017. Yet, these rosy predictions will be under cloud following the slowdown at JFL. If the sluggish growth persists, it would be a cause of concern for several venture capitalists and private equity firms who have poured several millions of money in recent years in several startup chains, with the expectation cashing out later on.
It is not just JFL which is performing poorly. Even Yum Brands, which runs Pizza Hut and Taco Bell chains, has fared poorly as well. Consider the chart below drew up by Edelweiss:
Experts say that it typically takes around 5-10 years to establish a strong foothold and around 500 stores to be a leading player with brand recognition in an otherwise extremely fragmented and competitive market dominated by the unorganised sector. JFL is one of those players which has done well and has 576 stores across the country, a feat that took over 17 years. The economics of setting up a fast food chain is not favourable, as it is characterised by high capital requirements, including high real estate costs in metros and high training costs to deliver consistent and exemplary service. Scaling up is a hit-or-miss affair and entirely depends on brand loyalty and consistency of SSS. If market leader JFL has displayed poor showing in the two quarters could be the first indication that the market for QSR is not such a sure thing?