QSR chain market has been the largest contributor in terms of profitability to the overall Indian food services sector & has been growing at a flourishing 18% CAGR compared to 8% CAGR of industry in last 6 years.
A 🧵on one of the top QSR players Devyani International Ltd (DIL)
Devyani has stores of KFC, Pizza Hut & Costa coffee in its Core brand category which contributes 58%, 25% & 2% to the total revenues of the company.
Non-core brand category includes few international & other brands like Vaango, Food Street etc.
1/n
KFC is the largest store format of Yum brands in India, of which 55% is operated by Devyani followed by Sapphire foods- 41% & Yum itself operates 4%.
DIL operates 2 types of KFC stores, a) large format with full service dine in b) small format with limited seating.
2/n
DIL’s KFC store count has increased faster than other franchisees i.e. DIL’s share of Yum India’s KFC store has grown from 29% in FY18 to 52% in FY21.
3/n
There is a clear demarcation of states between 2 largest franchisees- DIL & Sapphire. This means wherever Devyani international operates its KFC stores Sapphire foods is not present which reduces the competitive intensity.
4/n
While the network expansion of KFC has been higher than McDonald's, Burger king & Sapphire foods, the same store sales growth (SSSG) of KFC is lowest on both pre and post covid levels.
5/n
Pizza Hut is 2nd largest chain for Yum brands in India with 550 stores of which 64% stores are operated by Devyani. Its store count has grown at ~8% CAGR (materially lower than KFC)
It also faces stiff competition from Domino’s which is 5x of Pizzahut- on rev basis.
6/n
Pizza Hut’s (PH) rev. share from dine-in has been declining i.e. from 70% in FY19 to 30% now, this indicates that the store costs to be borne is declining.
As now focus is more on the cost reduction, overall EBITDA margins should sustain at 22-24% over the next 2-3 years.
7/n
Sapphire’s PH stores are limited to dine-in whereas DIL can operate both delivery & dine-in. This means DIL has larger network in 100 cities (290 stores) compared to Sapphire’s network in 35 cities (160 stores)
Still, Avg daily sales/store of sapphire is higher than DIL.
8/n
Company operates 309 stores of KFC which is lower than Pizza Hut’s store count of 351 but KFC contributes the higher share in the total revenue & contribution margin of 20.4% when compared to Pizza hut’s contribution margin of 15.3% from 309 stores.
9/n
Avg daily transaction/store for all core brands have reduced in FY21 but avg transaction size for KFC & PH has increased
Avg daily sales/store for all brands has again picked up in H1FY22 & in fact, PH’s avg daily sales in H1FY22 itself is higher than pre-covid levels
10/n
Costa coffee has been an underperforming business for the company. There have been many Costa store closures in FY21. The EBITDA margins are in double digits but sales growth has been poor.
11/n
International business-Devyani operates 37 stores in Nepal & Nigeria. Out of these 37, ~32 stores are of KFC
Nepal’s share in revenue & EBITDA has declined in FY21. Contribution margins & EBITDA margins of this segment have increased significantly in H1FY22.
12/n
Company operates other brands like Vaango, The Food Street, Ile Bar, Crussh Juice bar etc. Out of this, Vaango is the largest format store chain (52% of the other brands category) which was very impacted as it is majorly located in Airports, malls etc.
13/n
The unit economics of co. has not been attractive in past years especially driven by the Pizza hut segment (PH EBITDA margins 3-8% compared to 15% of Domino’s) but now there is a possibility of a turnaround in this segment.
14/n
Turnaround might happen due to high focus towards delivery vs dine-in, closure of many stores & newer stores are 30% smaller. Even from these small stores the avg daily sales is stable.
Also, there are many lease rental negotiations done by the company to reduce costs.
15/n
We can see improvement due to these initiatives in additions of stores (93 in FY21 v/s 1 in FY20 & 24 in FY19), Gross margins (increased from ~74% to ~76%), per store operating expenses as a % of sales declined from 10% in FY20 to 6.2% in FY21.
16/n
Capex spend incurred by the company will increase to expand its network (1-1.2crs required/store) but unlike the past, as profits might increase, CFO will also increase.
So internal accruals will be sufficient to fund expansion & acquisitions unlike in the past.
17/n
Key risks-
Food inflation is increasing continuously, COGS as a % of sales might increase
Even in the best performing segment- KFC, Same store sales growth is declining
The dynamics of PizzaHut business might not improve even after the initiatives taken by the co.
18/end
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