Sales in Slow Lane for Fast Food Segment: QSR Industry Expects Demand Revival from Q3

Sales in Slow Lane for Fast Food Segment: QSR Industry Expects Demand Revival from Q3

Industry sales increase YoY continues to be driven by store count growth, which is starting to level out. Companies have maintained their yearly shop-opening projections despite a lack of demand and fewer new store openings than anticipated in Q1.

Since 1 July 2023, most firms’ FY24 Bloomberg average profit expectations have been reduced by 4–8% due to India’s Quick Service Restaurant (QSR) industry’s dismal Q1 performance. A BNP Paribas analysis shows that QSR industry businesses’ YTD FY24 earnings projections have been cut by 7 to 48%.

“Store-count expansion, which has started to decrease on its own, remains the primary driver of industry sales growth year over year. Despite weak demand and fewer new store openings than anticipated in Q1, firms have maintained their yearly store-opening projection, which is still being determined. The head of India equity research at BNP Paribas is Kunal Vora, a CFA.

The industry’s adjusted EBITDA margin (including leasing expenses) has decreased significantly over the past several quarters as a result of:

• A deceleration in SSSG.
• Rising raw material prices.
• Rising labor expenses.
• Rising rent costs result from an increase in the number of stores.

Burgers and chicken portfolios outgrew pizzas in terms of offers, and the category is still struggling because of increasing competition, tepid demand, decreased shop traffic, declining sales, and a more significant effect of raw material inflation (dairy). Furthermore, according to BNP Paribas, firms have maintained their aggressive store-count development plans despite the challenging demand. Although the expansion rate was extremely slow in Q1, management anticipates a pick-up in the latter half of the year.

During Q1FY24, QSR players reported that despite a few players saying that mall stores were doing well in Q4FY23, that trend also slowed down in Q1FY24. That overall demand was muted in metro and non-metro areas due to high inflation and customer downtrading. In addition, the businesses said they expected Q2FY24 demand to be weak due to the Hindu holidays and anticipate a recovery from the third quarter of FY24.

Except for Burger King, all players’ sales growth slowed down in Q1FY24, according to BNP Paribas, with most categories experiencing negative to low single-digit SSSG/LFL (same-store sales growth/like-for-like) YoY growth. Even if demand hasn’t entirely recovered, management anticipates a rebound that starts in Q3 of FY24.

Companies emphasized that RM prices were high on-year in Q1FY24. Although there has been some sequential decrease, particularly in the dairy industry, cheese prices are still much higher than a year ago, according to Kunal Vora. The main components of KFC are chicken, oil, wheat, and packaging material.

Prices for all of these raw materials have stabilized. For Pizza Hut, the price of cheese and milk increased during the quarter. The cost of milk and cheese has started to level out, though.

Businesses are discovering internal synergies and chances to increase their profits,” he continued. Operating margins YoY were hurt by high dairy prices YoY, a poor product mix, and a drop in average ticket size, although management anticipates a recovery.

Additionally, businesses are developing new varieties and ranges throughout their product offers to add value to their goods in response to inflationary pressure and consumer downsizing. 

Here is a quick look at major QSR brands’ performance during Q1:

Devyani International reported a profit for the first quarter of its fiscal year of Rs 11.76 crore, down 84.1% from Rs 73.85 crore during the same quarter of FY23. It reported operating revenue of Rs. 846.63 crore, an increase of 20.1% over Q1FY23’s operating income of Rs. 704.72 crore. 

Sapphire Foods reported a net profit of Rs 24.87 crore for the first quarter of 2023–24, down 34.8% from Rs 38.14 crore in the equivalent quarter of FY23. It reported operating revenue of Rs 654.38 crore, an increase of 19.8% over Rs 546.27 crore during Q1FY23. EBITDA for the business was Rs 121.3 crore, up 9.9% over the previous year.

Barbeque Nation Hospitality reported a loss of Rs 4.05 crore during the first quarter of the financial year 2023–24 as opposed to a profit of Rs 16.03 crore during the equivalent quarter of FY23. It reported operating revenue of Rs 323.89 crore, up 2.9% from the prior year.

Westlife Foodworld Limited, the owner-operator of McDonald’s restaurants in West and South India, reported its fiscal first-quarter profit at Rs 28.83 crore, up 22.3% from Rs 23.58 crore in the first quarter of FY23. The company reported operating income of Rs. 614.54 crore, an increase of 14.2% over the prior year.

Jubilant FoodWorks, the company that controls Domino’s pizza franchise in India, reported a fiscal first-quarter profit of Rs 28.92 crore, below expectations and down 74.4% from Rs 112.75 crore in the same period last year. It said operating revenue of Rs 1334.54 crore increased 6.3% over the previous year.

The Quick Service Restaurant (QSR) industry, a significant segment of the global fast-food market, has recently found itself in the slow lane regarding sales growth. 

After decades of booming business, characterized by quick expansions, franchise-model successes, and a consistent customer base, the industry has experienced a notable slump. Industry experts, however, forecast a demand revival by the third quarter of the current fiscal year. 

Widespread economic instabilities have led consumers to cut back on discretionary spending, including eating out. Rising costs of raw materials have resulted in menu price hikes, affecting consumer turnout.

A growing emphasis on health and wellness has caused a segment of consumers to turn away from traditional fast food. With the rise of remote working, more people are cooking at home, reducing the frequency of fast-food visits.

While these have increased accessibility, they have also slashed profit margins due to commission fees. While it has reduced costs, the impersonal nature of automated services can affect customer loyalty.

Summer and early autumn often see an uptick in fast-food sales due to travel and holiday seasons, which could contribute to a Q3 resurgence.

Economic stimulus packages are expected to restore consumer purchasing power, indirectly benefiting the QSR industry.

Many QSR chains are scheduled to launch new marketing campaigns and limited-time offers (LTOs) in Q3 to attract lost customers.

With vaccinations reaching critical mass, easing restrictions can lead to increased footfall in QSR outlets.

The fast-food giant managed to reverse a sales slump through menu innovations and an emphasis on quality.

By focusing on online orders and delivery, Chipotle navigated through rough waters in recent years.

Strengthening online platforms for a better customer experience.Introducing healthier options and customizable menus to attract a broader customer base.

Adopting eco-friendly practices can enhance brand image and attract conscious consumers. Employing dynamic pricing or value-based pricing can mitigate the impact of inflation.

While the fast-food segment, particularly QSRs, is going through a period of slowed growth, the industry is optimistic about a turnaround starting in Q3. 

Combining the lessons from past case studies with proactive strategies like digital transformation, menu innovations, and value-based pricing can pave the way for the sector’s revival. Only time will tell if these predictions come to fruition, but there seems to be a light at the end of the tunnel for this once-unstoppable industry.