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Sales momentum strong; price increases absorbed

In this report, we present the key takeaways from our recent channel checks in the two tier-1 cities of Western India across QSR players.

Our channel checks indicated continued strong sales recovery momentum for QSRs across the board.

Dine-in players are doing better, as expected, while delivery has not only sustained at much higher levels than pre-Covid but has also received a sequential fillip in Apr’22. This is due to: a) the ongoing Indian Premier League (IPL) cricket tournament that began towards the end of Mar’22 and b) the start of summer vacation for students.

Importantly, none of the stores we visited indicated any adverse impact to demand from the 3-6% price increases taken across brands in Apr’22.

We remain positive on the QSR space in India. Not only has there been a structural shift in favour of the industry post-Covid as pointed out in our thematic report in Nov’21, but also as pointed out in our recent note on RBA, the sales recovery momentum has remained strong unlike other consumer sector peers. With 65% gross margin, even for value players such as McDonald’s, pricing power is also higher than Staples peers. JUBI continues to be our top pick in the space despite some short-term headwinds as elaborated in our recent company update. We also remain positive on DEVYANI and RBA.

Three key factors to monitor

Our channel checks indicated an anecdotal increase in attrition rates. Although, this movement of staff has largely been confined within QSR players. If this situation sustains and QSR players have to increase salaries, employee costs in FY23E for all QSR players could be higher than our current estimates.

In Mumbai, mall-based stores have still not recovered to the pre-Covid levels in terms of footfall, unlike standalone/high-street stores that have largely reached/ surpassed pre-Covid levels for dine-in. Thus, while mall-based stores are also seeing strong recovery as the dine-in momentum remains strong, the incremental delta v/s standalone outlets may not be significantly different.

The base remains favourable for 1QFY23 and to some extent even for 2QFY23. Beyond that we need to watch out whether CPI sustains at high levels and its subsequent impact on discretionary demand that is holding up well for now.

The key positives

Similar to Feb’22 and Mar’22, our channel checks indicated strong sales growth momentum for QSRs across the board for all brands.

Reversal of restrictions continues to boost mobility, contributing to the healthy recovery in dine-in for both high-street as well as mall outlets.

KFC, McDonald’s, and Burger King are all reporting healthy sales momentum. Further, while delivery-focused players such as Domino’s and Pizza Hut are growing relatively slower in an environment of stronger dine-in momentum, these brands too are reporting healthy YoY growth. This growth is on expected lines until 1QFY23E, after which the base gets relatively more challenging for dine-in players.

Importantly, price increases of ~3-6% across brands implemented in Apr’22 have not dented the demand momentum. This is expected since the gross margins for QSR players (~65% even for value players like McDonalds) are not only much higher than Staples, but their ability to take price increases is also better. This is particularly true given the discipline exhibited by QSR brands on price increases in the past few years. None of the 15-16 stores that we visited indicated any negative impact of price hikes.

Dine-in recovery momentum remains strong with high-street stores now rebounding to pre-Covid level while delivery continues to sustain at much higher levels than pre-Covid period.

The average bill amount has increased compared with the pre-Covid level and adding beverages to meals has become a strong trend among most of the young consumers.

The beginning of the IPL cricket tournament and the ongoing summer vacation for students has led to a spike in delivery numbers in recent weeks compared to our channel checks in Feb and Mar’22.

The pace of opening new outlets remains positive. Cafés across brands/outlets are receiving positive responses.

Things to watch out for

The footfall recovery in malls has been extremely strong led by: a) increasing customer confidence to step out, and b) reversal of restrictions such as presenting mandatory vaccination certificates at malls. However, footfall recovery in malls is still not back to the pre-Covid levels.

Various factors such as getting accustomed to the convenience offered by delivery, the absence of blockbuster movies in recent weeks in Western India, and the severity of summer were cited as reasons for the slower-than-expected revival in footfalls. Mall outlets expect the footfalls to rebound fully to the preCovid levels over the next few months.

One cause of potential concern in our latest round of channel checks has been the increased attrition levels in recent months. While the silver lining is that a majority of this attrition appears to be a movement within QSRs, if this situation persists, employee costs may increase higher than our expected levels.

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