SSSG decline is here: IIFL Capital Services

22 Feb 2023 , 10:27 AM

Key trends were: 

• Pizza QSRs were impacted the most, posting negative SSSG
• Devyani will open more KFC than Pizza Hut (PH) (earlier guidance of 100 each in both formats), but no such change by Sapphire
• Westlife (WLDL) saw higher footfalls, driving QoQ growth in sales per store, compared to QoQ decline for Burger King on lower footfalls
• Store growth for WLDL remained the lowest in the industry
• Sapphire clocked higher restaurant margins (ROM) than Devyani for the first time in both KFC and PH
• Drag from new stores in Barbeque will continue till FY24 end
• BK expanded its India ROM on lower employee/other expenses, which management believes is sustainable.

 

Store opening

• Pizza Hut (PH) additions in the quarter reflect contrasting view between Devyani (17 additions) and Sapphire (25 additions), where Devyani intends to allocate more capital towards KFC. While KFC is a market leader in an underpenetrated fried chicken market, PH operates in a highly penetrated/cluttered pizzas market. Jubilant added 61 stores (net) in the quarter, maintaining its 3-year CAGR store growth.
• KFC additions of 38 outlets by Devyani were far higher than 24 additions by Sapphire.
• No pickup in store additions by Westlife (WLDL) with the store 3-year CAGR remaining flat at 3% versus last quarter and is the least among peers. In contrast, Burger King (BK) picked up store addition with 45 openings and store 3-year CAGR at 14%.
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ADS/revenue performance

• SSSG for Pizza players slowed down significantly, compared to burger and fried chicken QSRs. JUBI’s SSSG declined by ~2% and Pizza Hut SSSG fell by 6%/4% for Devyani/Sapphire. KFC SSSG was muted at 3% falling from 13%/15% for Devyani/Sapphire in Q2FY23.
• Further, JUBI’s ADS were 7% below pre-COVID level (point to point) with fall acute in on-premise channel than off-premise. On-premise ADS was down 22% over Q3FY20 level, compared to 6% growth in off-premise ADS.
• WLDL outperformed the industry, posting SSSG of 20% driven by higher guest count.
• WLDL sales per store grew by 5% QoQ, compared to 7% decline witnessed by Burger King (BK). There was divergence in management commentary as well where WLDL highlighted that growth was driven by higher guest count; but as per BK, footfalls post Diwali were softer.
• Part of this can also be explained by lower store additions by WLDL, which is resulting in lower drag on the overall sales.
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Cost and margin performance

• For the first time, we saw Sapphire’s restaurant operating margin (ROM) in both Pizza Hut and KFC higher than that of Devyani. ROM for Pizza Hut-Sapphire at 14.4% was above Devyani’s 14.1%, largely due to 80 basis points higher gross margin. However, ROM for KFC-Sapphire (20.2%) was 50 basis points higher than Devyani, despite lower gross margin due to better control of overhead costs by Sapphire.
• WLDL clocked similar EBITDA margins to JUBI on pre-IndAS basis compared to ~500-600 basis points higher margin for JUBI in the history. This is also on account of lower new store additions by WLDL compared to JUBI, which result in higher margin drag in the beginning of operations.
• Barbeque’s (BBQ) pre-IndAS EBITDA margin of 10.3% contracted sharply by 420 basis points YoY, impacted by 190 basis points drag from negative SSSG and operating leverage, 220 basis points impact from higher mix of new stores and 60 basis points drag from higher corporate expenses.
• BBQ expects drag from new stores to peak by next year. Till then, the drag of ~2% will continue before falling to traditional drag of ~1% from new stores.
• Burger King’s ROM of 10.4% expanded by ~220 basis points QoQ, despite flat gross margin due to lower employee/other expenses. As per the management, this was achieved through 16-17% QoQ reduction in headcounts and efficiencies in utilities.
• Despite this, BK’s EBITDA margin (pre-IndAS) of 4.2% is the lowest among listed QSR players.