Barbeque-Nation Hospitality Ltd Management Discussions.

COMPANY OVERVIEW

Barbeque-Nation Hospitality Ltd (BNHL) is one of Indias leading casual dining restaurant chains and operates Barbeque Nation restaurants. It also owns and operate Italian restaurants (under the brand name of Toscano, Collage and La Terrace) and UBQ by Barbeque Nation.

Key differentiators

Pioneered the format of ‘over the table barbeque

Popular destination for celebration - fixed price, wide range of offering and prompt service

Strong emphasis on customer service – customer feedback through internally devised and managed Guest Satisfaction Index ("GSI") Strong business process and back-end systems leading to efficient operations High proportion of revenue from weekday sales and lunch covers Ranked 7 amongst Indias best companies to work for in 2020 by Great Place to Work

ECONOMIC REVIEW

Global economy

Impact of the COVID-19 pandemic was felt across the world. Lockdowns announced by countries had unprecedented impact on global trade, more so in the first half of FY 2020-21. Gradual unlocking of the economies, coupled with stimulus packages introduced by countries led to growth recovery in second half of FY 2020-21. As per World Economic Outlook (WEO) released by IMF in April 2021, global growth is projected at 6% in 2021, moderating to 4.4% in 2022. The projections for 2021 and 2022 are stronger than in the October 2020 WEO estimates. The upward revision reflects additional fiscal support in a few large economies, the anticipated vaccine-powered recovery in the second half of 2021, and continued adaptation of economic activity to subdued mobility. High uncertainty surrounds this outlook related to the path of the pandemic, the effectiveness of policy support to provide a bridge to vaccine-powered normalisation, and the evolution of financial conditions.

Indian economy

India went into a complete lockdown starting from the fourth week of March 2020 up until May 2020. The lockdown has been one of most stringent, with virtually the whole population staying indoors.

COVID-19 had a massive impact on the Indian economy in FY 2021, with GDP in Q1 FY 2020-21 contracting by 24% as compared to the same period last year. The contraction in Q1 FY 2021 was not uniform; it varied from state to state and sector to sector. The aviation sector was the worst hit, followed by tourism, realty, etc. However, as the government eased lockdown restrictions and the economy started to open, things started getting better by the end of Q1 2021. Indias economy started recovering by Q2 FY 2020-21, with de-growth of 7.5% and growth of 0.4% in Q3 FY 2020-21, respectively. The Indian economys recovery has been one of the most decisive among major economies, validating Indias long-term growth potential. Thus, the road ahead for the Indian economy still stands promising.

According to the latest IMF report, the Indian economy is projected to grow by 12.5% in FY 2021-22 and then moderate to 6.9% in FY 2022-23. The resurgence of COVID-19 cases in Q1 of FY 2021-22 and restriction announced by various state governments could be a dampener.

INDUSTRY REVIEW

As per Technopack, the share of food services in the Indian GDP is expected to increase to 2.2% by FY 2025 from 2.1% in FY 2020 on account of faster growth rate as compared to GDP growth. The size of the food services market in India is estimated at INR 4.24 lakh crore in FY 2020 and is projected to grow at a CAGR of 9% over the next 5 years to reach INR 6.51 lakh crore by FY 2025. Some of the implications driving growth of the food services market is as follows: Pre-COVID Indian consumers had been dining-out more frequently. Younger Indians have shed the biases of their elders against eating-out.

With higher disposable income, the younger population, who are well-travelled, brand conscious and well-connected through social media, along with rise in presence of branded retail chains, have been spending more on eating-out and this trend is expected to continue post-COVID. National and international chains are endorsing Tier-I and II cities as engines for growth and expansion.

It is estimated that Indians spend 8-10% of their food expenditure outside the home in restaurants, cafeterias and other food establishments. This trend is expected to strengthen in the future. However, due to COVID, this trend has undergone some changes. A lot of consumers now prefer delivery and takeaway in comparison to dine-in. Considering this as an isolated occurrence, it is expected people will again start to dine-out post-COVID vaccination drive.

Post-COVID, customers have started giving immense importance to safety and hygiene. Hence, restaurants will have to provide their services keeping both these factors in mind.

The trend of delivery and takeaway has risen in the past few months due to COVID, hence most formats of restaurants, whether it is QSR (Quick Service Restaurants), CDR (Casual Dining Restaurants) or cafes, have started these services apart from dine-in to remain competitive in the food services market.

Within the food services industry, the organised market (chain and organised standalone outlets, excluding restaurants in hotels) is estimated at INR 1.60 lakh crore in FY 2020 and is projected to grow at a CAGR of 15% to reach a size of INR 3.27 lakh crore by FY 2025, gaining a share of 50% from 38% in FY 2020. The organised market is expected to outpace the unorganised sector.

In the chain market, QSR and CDR (Casual Dining Restaurants) constituted 81% in FY20. As per Technopack, the CDR market in India has been flourishing over the last few years. The chain CDR segment represents the 2nd largest share in the chain food services market in India after QSR. In FY 2020, the size of the Chain Casual Dining market is estimated at INR 134 billion. This segment is expected to grow at a healthy CAGR of 18% to reach INR 302 billion by FY 2025.

Key growth drivers

 

Demographic profile

India has one of the youngest demographics as compared to other leading economies. The countrys median age will continue to remain under 30 years till 2030. Thus, Indias sizeable young population augurs well on two counts. First, it is contributing to a declining dependence ratio; the ratio of the number of elderly people and children to the working-age (aged 15-64 years) population declined from 64% in FY 2000 to 50% in FY 2019.

Second, substantial rise in the working age population (from 36% in FY 2000 to 50% in FY 2019) augurs well for the growth momentum of the Indian economy going forward, as it will lead to rising income levels. Moreover, a younger population is naturally pre-disposed to adopting new trends and exploration given their education profile and exposure to media and technology. This backdrop manifests as an opportunity for domestic consumption in the form of brand-conscious behaviour, organised retail and product design.

Increasing urbanisation

India is second largest urban community in the world after China, with an urban population of about 472 mn (FY 2019). Though, India fares lower than the global average in terms of urban populations share in the total population with only 34.5% (FY 2019) of Indias population classified as urban compared to the global average of 54%. It is the pace of Indias urbanisation that is a key trend to note for implication on Indias economic growth. It is estimated that by FY 2027, 37% of Indias population will be living in urban centres and will contribute to 70-75% of the nations GDP. The urbanisation trend is expected to continue and by FY 2050, India will have half of its total population that will stay in urban areas and account for well over 80% of the GDP.

Growing middle-class

The number of households with annual earnings of between US$ 5,000-10,000 have grown at a CAGR of 12% during the period of FY 2012-18 and is expected to grow at the same CAGR of 12% to reacRs. 153 mn by FY 2020. Households with annual earnings of between US$ 10,000-50,000 have also grown at a CAGR of 25% during FY 2012-18.

Increase in the number of households with annual earnings of US$ 10,000-50,000 will lead to increase in discretionary spends, which is likely to create a structural trend of premiumisation, thereby leading to higher expenditure on food and beverages, apparel and & accessories, luxury products, consumer durables and across other discretionary categories.

Nuclearisation

The growth in the number of households exceeds the increase in population growth, indicating increasing nuclearisation trend in India. According to census data of 2011, 74% of urban households have five or less members as compared to 65% in 2001. It is expected that fall in the average household size coupled with rising disposable income will lead to more number of urban household units that are pre-disposed to discretionary expenditure, viz. for jewellery, fashion, packaged food, food services, etc.

COVID impact

In FY 2021, due to COVID-19, the food services market is expected to register a dip of 53% in comparison to FY 2020. Similarly, in FY 2021, chain market is expected to record a dip of 42% in comparison to FY 2020.

In the beginning of RS. 1 FY 2021, most of the restaurants were closed in the country. With state governments starting to ease out the strict lockdown-related restrictions in their respective states, restaurants gradually started opening in April and May 2020 but only delivery was allowed from these restaurants. Thus, with renewed focus on delivery, Barbeque-Nation introduced "Barbeque in a box", "Grill in a box", among other products.

Post lockdown, restaurants started dine-in operations but with strict rules and regulations on hygiene and social distancing. Chain restaurants adopted contactless dining and sanitisation protocols.

In some states such as Delhi, UP, Tamil Nadu, etc., dine-in was also started gradually with limited capacity, but the operating hours of restaurants was reduced.

Central and state governments had created "containment zones" for areas having a large number of COVID cases. These containment zones observed complete lockdown and restaurants in these areas were closed, impacting sales in such locations.

Sales were primarily driven from chain restaurants doing home delivery and takeaways, cloud kitchens, and from a few dine-in restaurants.

OPPORTUNITIES

Larger focus on value meals

In the Indian food services market, value for money will continue to be the order of the day as Indians are eating-out and ordering-in much more at an average of 6-7 times per month per household. Indian consumers, irrespective of their economic class and the type of city they live in, are eating-out/ordering-in more. This is primarily to experiment and socialise and unwind over food. Indian consumers, though willing to spend more and more on experiential eating, are cost-conscious and look at value for money concepts, or for cost-efficient functions when ordering-in.

Streamlining standard operating procedures

With high focus on craftsmanship and fresh produce, the very format of chain CDR with limited usage of standardised products in the ready to cook/eat food, restricts the fast scalability of this format, along with expansion in smaller cities. QSRs have been able to penetrate Tier-II markets due to their robust supply chain and central commissary. CDR brands can also expand at a faster pace with the backing of commissary and building robust supply chains.

Creating digital assets

The connection between end-consumers and businesses has always played a pivotal role in the development and growth of any business. Brands which invest in digital assets, such as loyalty programs, are in a better position to sustain growth coming out of the COVID-19 crisis. Thus, it is imperative to invest in mobile app, analytics, loyalty program, personalisation and integrated delivery partnerships or owned delivery. All of these pieces are critical to retaining and growing digital share. As per BCG research, loyalty programs significantly enable digital sales. On average, nearly 60% of loyalty program members use the brands mobile app (and engage digitally with the brand), compared with only 5% of all restaurant users.

Increasing importance of hygiene

COVID has changed eating habits of people to a very large extent. People have now become concerned about hygiene and safety issues. This change in habit is bound to stay post-COVID. When things go back to normal, there will be an increased demand for safe, hygienic and clean places for eating-out. CDR chains are well-equipped to cater to the demand for safe and hygienic places.

CHALLENGES

The food services industry remains fragmented with increasing competition. Inadequate supply chains, high fixed cost and shortage of quality manpower continues to pose challenges. Investing in building strong supply chains, improving operational efficiencies and standardisation would remain the key focus areas. Standardisation/scaling up in ethnic Indian cuisine is more challenging vs. western cuisine. Post COVID-19, consumers are likely to be more cautious and would prefer to dine-in at restaurants which can showcase high safety and hygiene standards.

BUSINESS & FINANCIAL REVIEW

Restaurant portfolio

Particulars Number of Outlets as on March 31, 2020 New additions in FY 2021 Permanent closures in FY 2021 Presence in number of cities as on March 31, 2021
India
Barbeque Nation 147 3 3 77
Italian restaurants 11 0 0 3
Overseas
Barbeque Nation 6 0 0 4

As of March 31, 2021, the Company, on consolidated basis, had 164 restaurants owned and operated by us, which includes 147 Barbeque Nation restaurants across 77 cities in India, 6 international Barbeque Nation restaurants across four cities outside India, and 11 Italian restaurants across three metro cities in India, of which nine are operated under the brand name "Toscano", and one each under the brand names "La Terrace" and "Collage". In addition, the Company has one Barbeque Nation restaurant which is operated by a third-party on a franchisee model.

Statement of Profit & Loss

Particulars Consolidated Standalone
Year ended March 31, 2021 Year ended March 31, 2020 Year ended March 31, 2021 Year ended March 31, 2020
Revenue from operations 5,070.82 8,469.70 4,532.74 7,870.52
Other income 460.48 38.24 405.42 33.06
Total revenue 5,531.30 8,507.94 4,938.16 7,903.58
Expenses
Cost of food and beverages consumed 1,782.48 2,921.99 1,641.56 2,752.97
Employee benefits expenses 1,351.90 1,975.08 1,181.10 1,778.63
Other operating expenses 1,472.61 1,930.48 1,311.14 1,776.51
Total expenses 4,606.99 6,827.55 4,133.80 6,308.11
Earnings before exceptional items, finance costs, depreciation and amortisation (EBITDA) 924.31 1,680.39 804.36 1,595.47
Finance costs 848.68 755.92 705.93 631.61
Depreciation and amortisation expense 1,211.70 1,339.63 1,011.61 1,045.73
Profit/(loss) before exceptional items and tax (1,136.07) (415.16) (913.18) (81.87)
Exceptional Items (20.67) (163.80) (20.67) 766.86
Profit/(loss) before tax (1,115.40) (251.36) (892.51) (848.73)
Total tax expense (196.55) 77.92 (189.57) 77.92
Profit/(loss) after tax (918.85) (329.28) (702.94) (926.65)

The Companys business was significantly impacted due to COVID-19, which led to our restaurants being temporarily closed from the third week of March 2020, therefore impacting covers and sales. As and when, restrictions on operations were lifted by the concerned regulatory authority, we ramped up operations of our restaurants. The business started recovering in RS. 2 FY 2021, which helped in the partial recovery of losses incurred in RS. 1 FY 2021.

Financial ratios

Particulars Consolidated Standalone
Financial Year 2021 Financial Year 2020 Financial Year 2021 Financial Year 2020
Debtors turnover (times) 211.50 240.28 127.65 193.02
Inventory turnover (times) 11.54 21.36 11.86 21.89
Interest coverage ratio (times) (0.23) 4.53 (0.18) 6.07
Current ratio (times) 0.82 0.25 0.88 0.25
Debt-equity ratio (times) 0.63 41.41 0.40 2.54
EBITDA margin (%) 16.71% 19.75% 16.29% 20.19%
Net profit margin (%) -16.61% -3.87% -14.23% -11.72%
Return on net worth (%) -37.67% -556.59% -27.01% -122.28%

Key Focus Areas

 

Re-opening of outlets

As of March 31, 2021, the Company had a consolidated store network of 164 restaurants, which included 147 Barbeque Nation restaurants, 6 international Barbeque Nation restaurants and 11 Italian restaurants. With restrictions lifted gradually by the concerned regulatory authority, the Company ramped up operations of restaurant outlets. The quarter-wise status of restaurants is set out below.

Number of restaurants March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 March 31, 2021
Operational (A) - 73 123 159 160
Temporarily closed and under construction (B) 167 92 41 5 4
Permanently closed (C) 0 2 1 - -
Total store network (A+B) 167 165 164 164 164

Sales recovery

Sales have recovered month on month post lockdown and easing of various supply-side restrictions, like restrictions on operating hours, restrictions on operational capacity, and restrictions on sales of liquor. While some of these restrictions have eased across a few states, the Company continues to face some restrictions across some cities. The recovery of the Companys monthly sales has been driven both by an increase in dine-in sales and delivery sales.

Delivery focus with product innovation

The Companys delivery business has grown from RS. 260.93 mn in FY 2020 to RS. 769.69 mn in fiscal 2021. The Company will continue to focus on the delivery segment and will continue to work on improving its product offering in relation to consistency, quality, recipes, delivery menu and meal combos. One of delivery products, "Barbeque in a box" that the Company launched in June 2020 provides a wide range of starters, main course and desserts. This is in addition to two other products, "Grills in a box" and "Meals in a box", which are offered through delivery, among other offerings. The Company will continue to work towards increasing the average daily sales of these products and variants. The Company currently receives delivery orders both from its own BBQ app and website as well as various aggregators.

Strengthened digital assets

The Company had updated its BBQ app. This updation includes:

(i) option to make dine-in reservations;

(ii) online order placement for its delivery products; and

(iii) exclusive offers through digital coupons. The BBQ app also provides a payment option for its dine-in customers. The apps cumulative mobile downloads have increased from over 1.28 mn at the end of November 30, 2019, to over 2.6 mn at the end of March 2021.

Under our Smiles loyalty program, we currently provide 5% of the bill value (subject to certain terms and conditions) to customers as Smiles points, which can be redeemed within a defined timeline during the customers next dine-in visit or delivery order from the BBQ app or website. As of March 2021, the average rating of the BBQ app on an internet app store was 4.5 out of 5.0.

Cost optimisation

The Company has undertaken various cost optimisation efforts, such as seeking rent reliefs from landlords, renegotiating commercial terms, temporarily reducing senior management salaries and realigning store operating costs and structures.

Liquidity status

The financial impact of COVID-19 has had an adverse effect on the Companys liquidity. This also led to temporary delays in compliance with payment obligations to lenders and payment of statutory dues. The Company has recently completed a private placement of equity shares for an aggregate consideration of RS. 1,499.69 mn and an IPO of RS. 1,800 mn. This has helped the Company pare down its debt and be better prepared to handle ensuing COVID-19-related impact.

The Company has also engaged in rent relief negotiations with landlords and arrived at negotiated agreements with respect to reduction in rent and rental obligations during the COVID-19 pandemic with a large proportion of them. In addition, salaries of senior management and certain other support centre employees were reduced temporarily. The Company has also negotiated revised commercial terms during the COVID-19 pandemic with some of its other service providers, and it has managed inventory through promotions, re-organisation and liquidation of stock. This has provided the Company with working capital support and additional liquidity.

ADEQUACY OF INTERNAL CONTROLS

Barbeque-Nations internal controls are commensurate with its size and nature of operations. The Company has built internal controls into operating processes. Many of these internal controls have been implemented through IT modules and ERP. Further, an internal audit firm of repute performs audit of the Companys operations, which covers outlets operations as well as functional audit. The scope of the audit is as approved by the Companys Audit Committee. The Audit Committee reviews reports presented by the internal auditors on a routine basis. The committee makes note of the audit observations and takes corrective actions, wherever necessary. It also maintains constant dialogue with statutory and internal auditors to ensure that internal control systems are operating effectively.

HUMAN RESOURCES

The Companys core values prioritise being customer-focused to provide excellent products and services and employee-focused by maintaining a superior quality work environment.

The Company was ranked amongst the top-10 retail companies to work for by the Great Place to Work Institute in 2020 in collaboration with the Retailers Association of India and was ranked #7 amongst Indias best companies to work for in 2020 by the Great Place to Work Institute in collaboration with The Economic Times.

None of our staff is represented by a labour union or covered by a collective wage bargaining agreement. We emphasise employee welfare by offering our employees bonuses and other incentives. We transfer our employees across our restaurant network to maintain our core values.

Employee training

We have a defined learning and development structure which includes: A certified restaurant-level trainer

Strengthening behavioural and technical competencies for business managers Launching learning management systems Training for hygiene audits

RISK MANAGEMENT

The Audit Committee of the Company ensures effectiveness of our risk management framework, which includes risk identification, mitigation and monitoring.

Key Risk Mitigation Strategy
The Company has worked on product innovation by developing "Barbeque in a box", "Grill in a box", among other products. This expanded our delivery revenue stream.
Business model disruption owing to pandemic Sales plummeting due to closure of dine-in and preparedness to shift from dine-in to delivery. We developed a re-opening plan with social distancing and sanitisation protocol. This helped us open up the maximum number of restaurants as and when lockdown restrictions were eased.
We launched #No Compromise Dining with operating procedures outlining physical distancing, contact-free experience, sanitisation protocols and customer experience.
Staff and guest infection at the outlet Resumption of dine-in business also brought risk of staff and guest infection at the outlet During the COVID-19 pandemic, we implemented high standards of safety and hygiene protocols across all our Barbeque-Nation and Toscano restaurants in India covering guest safety, employee safety, sanitisation, physical distancing, temperature checks and safe deliveries.
We made required changes to the seating layouts and restricted movement of crowds to maintain physical distancing.
The outlets are subject to audit by FSSAI designated agency and have scored more than the required threshold in 2020.
Food safety compliance Non-compliance with regulations stipulated for food safety standards can lead to actions by regulators and loss of guest confidence. Our outlets are also subjected to regular hygiene audit, process audit and mystery shopper audit. The recommendation of these audits is implemented to close gaps.
Further, regular training sessions are conducted for outlet and commissary staff.
We have undertaken various cost optimisation efforts, such as seeking rent reliefs from our landlords, renegotiating our commercial terms, temporarily reducing senior management salaries and realigning store operating costs and structures.
Liquidity stress due to lockdown COVID-19 had a major impact on the Companys profitability and cash flow. We have also negotiated revised commercial terms during the COVID-19 pandemic with some of our other service providers, and have managed our inventory through promotions, re-organisation and liquidation of stock. This has provided us with working capital support and additional liquidity.
The Company raised equity of RS. 3.3 bn through pre- IPO and IPO, which bolstered liquidity and helped pare down debt.

CAUTIONARY STATEMENT

The statements made in this section describe the Companys objectives, projections, expectations and estimations, which may be ‘forward-looking statements within the meaning of applicable laws and regulations.