The quick service restaurants (QSR) industries in India is facing tepid growth despite players refurbishing menus and sweetening offers and promotions. With increased competition from online players and private equity (PE) funded food players, the QSR industry would face rough weather in medium term, says a research report.
In the note, Edelweiss Securities Ltd, says, "The frequency of 'buy 1 get 1 free' (BOGO) offers in second quarter of FY17 surged substantially compared to the base quarter. Further, global player like Wendy, which is world’s third largest burger chain, has cut prices to shore up India sales. This will make the QSR players to face rough weather in medium term. However, improvement in consumer sentiments over the next two-three years aided by good monsoon and the Seventh Pay Commission payout are anticipated to benefit QSR companies in the long term."
The report talks about promotional offers launched by market players, which failed to beat slowdown blues. Jubilant Foodworks (JFL) is trying to boost its same store growth (SSG) via BOGO offers, as Dominos increased frequency of BOGO offers during second quarter of FY17 compared to the base quarter. Subway too has jumped on the BOGO bandwagon.
"It implies that the QSR industry is going through a slowdown induced by low urban spending. IRCTC’s e-catering service for passengers travelling on trains is likely to benefit Dominos, Kentucky Fried Chicken (KFC), Delhi Darbar, Haldirams, Chaayos, among other local QSR players. Other developments like focus on health conscious consumers (McDonald's is further reducing sodium content of French Fries and McNuggets) is bound to bolster incremental growth. However, 14.5% fat tax imposed by the Kerala government on junk food to make people more conscious about food choices may negatively impact QSR companies," the report added.
During July 2016, JFL launched a significant new innovation in the Indian market, Burger Pizza. In addition, the company also launched a new variant Pizza Mania Extreme to drive SSG. It has discontinued Subwich, Junior Joy Box and Custard Bliss as these products failed to meet its internal benchmarks. Edelweiss says, "Though we do not expect the new launches to spur SSG in the short term, we appreciate JFL’s strategy of harnessing innovations to boost sales."
"Over the past few quarters, McDonald’s (Westlife) SSG has revived and bulk of sales is from burgers. Hence, it makes sense for Dominos to expand its product offerings to the burger category. Further, Burger Pizza is a healthy offering. Since in India, pizza is perceived as a meal and burgers are considered on-the-go items, JFL’s novel offering is anticipated to boost its SSG. However, it is pertinent to note that burgers are also offered by Dunkin Donuts (part of JFL)," Edelweiss added.
Pizza Hut has announced a new social ordering platform or "chatbot" which will enable conversational ordering of pizzas and other menu items on Facebook Messenger and Twitter. Pizza Hut has partnered with technology company Conversable which will helped it launch the service from August. Pizza Hut will be competing against Dominos, which had introduced an ordering system through Twitter in CY15. Once an order is confirmed, Pizza Hut will email the customer a receipt and an order confirmation message will be sent in the messenger conversation.
"Till now, none of the QSR companies offer these services in India," Edelweiss says, adding, "We expect the services to be launched in India once the QSR industry milieu improves. We expect players like JFL and Yum Brands to launch these services in India."
According to the research note, the second quarter is estimated to be optically strong for most QSR companies due to the mismatch of Ramadan.
Edelweiss says, total food services stand at Rs3,091 billion in CY16 and projected to grow to Rs4,981 billion at a compounded annual growth rate (CAGR) of 10% by CY21. "Key trends emerging in the space include virtual kitchens, stores at travel hubs such as airports, railways and highways, ordering-in and food trucks. India's exponential growth and consumption in terms of frequency of eating out and experimentation with cuisines and concepts have given the services sector a huge fillip. The restaurant industry is estimated to contribute close to 2.1% to India’s GDP by CY21," it concluded.