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Devyani International Ltd
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Ladies and gentlemen, good day, and welcome to Devyani International's Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Devyani International Q1 FY '21 Earnings Conference Call. We have with us Mr. Ravi Jaipuria, Non-Executive Chairman of the company; Mr. Virag Joshi, CEO and Whole-Time Director; Mr. Manish Dawar, CFO and Whole-Time Director; and Mr. Rahul Shinde, CEO Yum Brands and Whole-Time Director of the company.
We'll initiate the call with opening remarks from the Chairman, followed by financial highlights by the CFO. After this, we will open the forum for a question-and-answer session. Before we begin, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with you earlier.
I would now request Mr. Ravi Jaipuria to make his opening remarks.
Good afternoon, everyone. I warmly welcome you all to our earnings conference call to discuss the business performance for the first quarter of the financial year 2023, '24. I'm pleased to share that we have started the new fiscal year on a healthy note despite facing challenges from a difficult macro environment and depressed consumer spending.
Our commitment to customer first always driving product innovation and enhancing scalability has been instrumental in supporting our overall consistent performance. DIL consolidated revenues reached a new milestone of INR 847 crores for the quarter, backed by store additions across brands and continued healthy performance from existing stores.
On the operational front, our efforts have been marked by the successful opening of 47 net new stores in Q1 '24. Each contributing to the growth of our diverse portfolio of brands. Our Core Brands have a presence of more than 240 cities across India. We are actively seeking opportunities to expand into new trade areas and simultaneously deepen our presence in existing locations.
The strategic expansion aims to bring our brands even closer to our valued customers and further solidify our foothold in the domestic market. This will also help us to reinforce our position as a key player in the industry.
As on June 30, 2023, DIL network was expanded to encompass 1,290 stores across our portfolio of countries and brands. Overall, we are confident of achieving our goal of opening 275 to 300 stores this fiscal year as we continue working towards our ambitious target of reaching 2,000 stores by 2026. With a dedicated focus on customer satisfaction, innovation and growth, we are poised for success in the dynamic and evolving QSR landscape.
Vaango, our own South Indian cuisine brand is shaping up nicely and we are bullish on this brand given the popularity of South Indian cuisine in the entire country. South Indian food is considered to be a healthy meal options and therefore, it resonates well with the age groups among our target customers. We have opened 52 stores in Vaango so far and Vaango is expected to become a INR 100 crore brand by the end of this fiscal year.
The consistent performance and potential of DIL India was acknowledged by Franchise India and DIL has been awarded the prestigious Master Franchisee of the Year Award for 2023. In addition to operational excellence, we have successfully introduced a range of new menu additions and innovative campaigns for our Core Brands. The market response to these new offerings was highly positive, with stronger consumer acceptance.
Our innovation pipeline remains healthy and strong. We are easily waiting to introduce our new products in the upcoming quarters. High inflation across industries and categories had led to a short-term impact from consumer sentiment and demand in the last few quarters. Despite this, our performance continues to be resilient and we have continued to invest in the business for long-term growth.
To sum up, our store additional strategy stands as a testament of our firm belief in the immense long-term potential of the Indian QSR. By continuously expanding our footprint and staying attuned to emerging opportunities, along with maintaining the financial discipline and operational excellence, we remain poised to capitalize on this huge opportunity and deliver a sustainable growth and value acceleration to all our shareholders. With this, I would like to conclude my address and now I hand over to Manish for the financial highlights. Thank you.
Thank you, Mr. Jaipuria. Good evening, everyone. A warm welcome, and thanks to all of you for your valuable time for attending our Q1 FY '24 earnings conference call, our 8th such call since the listing of DIL in August '21. In quarter 1 FY '24, we've opened 47 new stores across our brand portfolio. With this, we globally now have a footprint of 1,212 stores across our Core Brands. This consists of 564 stores for KFC, 525 stores of Pizza Hut and 123 stores for Costa Coffee in our portfolio as of the end of quarter 1 FY '24.
Our metro and nonmetro distribution of stores in India continues to remain marginally in favor of non-metro destinations with 52% of total core store count in India. We are planning to add 275 to 300 stores in the current financial year across our portfolio and geographies. Operating revenue for quarter 1 FY '24 stood at INR 847 crores, representing a 12% quarter-on-quarter increase. This was supported by a 4% increase in store footprint and remainder as higher throughput led by KFC.
Improved gross margins in EPS numbers resulted in better brand contribution margins in quarter 1 FY '24 at 18.2% versus 16.4% in quarter 4 of FY '23. Reported EBITDA, which is post-IND-AS, was INR 173 crores with margins at 20.5% versus INR 151 crores in the previous quarter, a 15% quarter-on-quarter growth.
Company operating EBITDA on a pre-IND-AS basis was INR 111 crores versus INR 91 crores in the previous quarter. Operating EBITDA margin at 13.2% was up 110 basis points on a quarter-on-quarter basis. Profit before tax stood at INR 13 crores versus INR 41 crores in the previous quarter.
Please note that there has been a very significant devaluation in currency in our Nigerian operations. The devaluation in the month of June is more than 60% on the base official currency rates that prevailed in the country. As a result of this, we've had to take a hit on account of outstanding USD-denominated liabilities at the local level. This has been accounted for as an exceptional item in the P&L and has impacted our consolidated profit before tax and profit after tax numbers to the extent of INR 47 crores during the quarter. On a normalized basis, therefore, the PBT and PAT would have been INR 60 crores and INR 46 crores, respectively. Please note that there is no cash impact because of the aforesaid devaluation impact.
Taking the discussion to our Core brands, KFC in India added 20 net new stores in quarter 1 FY '24, reaching a total count of 510 stores at the end of the quarter. Average daily sales for quarter 1 FY '24 was INR 117,000 versus INR 106,000 in the previous quarter on an expanded footprint of stores.
Revenue at INR 516 crores grew 16.3% on a quarter-on-quarter basis. Gross margin at 69.7% was higher by 1.1% due to a marginal price increase at the beginning of the quarter, along with a stable input material cost regime. Brand contribution margin at 21.1% improved by 3.6% on a quarter-on-quarter basis, mainly due to better leverage. On-premise consumption was 63% versus 62% in the previous quarter.
During the quarter, Pizza Hut added 15 stores. Revenues at INR 184 crores was up 8% quarter-on-quarter. ADS was slightly higher at INR 40,000. Gross margins for the quarter came in at 74.9% with an improvement of 1.6% versus the previous quarter. Brand contribution was INR 18 crores for the quarter with margins at 10.1%, which was up by 80 basis points on a quarter-on-quarter basis.
Costa Coffee, our third Core Brand added 11 stores during the quarter, reaching a cumulative store count of 123 stores as of June 30, 2023. There was a slight revenue drop at Costa during the quarter due to lower ADS at INR 33,000. Gross margins were 77.3% because of some milk and coffee bean pricing inflation during the quarter.
Quarter 1 FY '24 brand contribution improved by 70 basis points and stood at 20.9%. We are expanding Costa at a rapid pace. You would have noticed that we have more than doubled the store count over the last 4 to 5 quarters. The new stores take some time to stabilize and reach the maturity level. And hence, this has impacted the overall brand performance and we expect this to stabilize as we go along during the course of the financial year.
To conclude, I want to reiterate our commitment to our ambitious growth within the Indian QSR market. We have set a target of reaching 2,000 stores by 2026, a milestone that signifies the tremendous potential in demand for our brands. I would like to highlight that the entire CapEx required for the significant expansion is primarily being planned through internal accruals.
Our ability to self-fund this growth underscores the financial strength of DIL. Furthermore, you would have also noticed that despite our aggressive expansion, we have remained focused on maintaining strong financial performance. It is noteworthy that our store expansion has not had any significant impact on our operating margins. We have efficiently managed our operations, leading to an accelerated breakeven for these stores.
Moreover, as we continue to expand, we remain committed to suitably increase the ROCs, reflecting our emphasis on prudent financial management and creating long-term value for our shareholders. On that note, I would like to request the moderator to open the forum for any questions or suggestions that you may have. Thank you.
[Operator Instructions] The first question is from the line of Vivek M from Jefferies.
A few questions. First, on the demand environment, Manish, what is your sense how the next few quarters will be? Because last quarter, you did highlight that because of seasonality, IPL, things started looking up. What is your outlook for next 2, 3 quarters now?
So Vivek, you would know that quarter 2 normally is seasonally the lowest quarter. And because we have Sawan also in this quarter and therefore, a lot of people turn vegetarian. But we do expect with now the input material inflation also stabilizing because we've seen now, I think, for KFC, the input material prices are very stable. Pizza Hut in the quarter that has gone by the cheese and milk prices continue to increase. Whereas now with good monsoons and if you were to look at some media reports even the cheese prices and milk prices have started to stabilize. So therefore, we are hoping that the demand environment will start to pick up from quarter 3 onwards. So let's see how the other things shape up, and that is how we are also planning our business.
Okay. Okay. And Manish, I did see the SSS for, let's say, KFC. But when we look at ADS, which is down quite a bit on a Y-o-Y basis, that will be a function of SSS plus the incremental stores as well?
You're right. And again, Vivek, as you also know that last year quarter 1 was one of the strongest quarters and we were riding back on the wave 2 and wave 3 of COVID. And therefore, the dine-in was very strong. The overall demand because people were kind of coming out. So quarter 1 last year was very strong, and therefore, the comps are kind of in that zone. But if you were to look at our performance in the current quarter, KFC at INR 117,000 ADS fares much better versus INR 106,000 in the previous quarter. So we do believe that the overall demand is coming back. But I guess it will take another 1 or 2 quarters to kind of stabilize these numbers.
Okay. Okay. Got it. And on the gross margins, overall numbers are also quite good. The expansion that we have seen and in both the core brands, KFC as well as Pizza Hut, there has been a smart recovery. So can you elaborate on -- and is this -- so basically the worst is behind on the gross margin side? Because whatever we are reading, hearing about food inflation and all, it seems like -- at least looking at your number for this quarter, the worst seems to be behind. Is that a fair position?
So Vivek, if you look at -- let me kind of give you the perspective for KFC and Pizza Hut separately because they both behave very differently given the current situation. So if you look at KFC, the bigger ingredients are chicken, the oil, flour and packing materials. So all of these 4 materials, which constitutes big material input on KFC, we have seen stabilization happening.
At the same time, if you also remember, we talked about a small price increase in the last earnings call that we took, I think, sometime in the beginning of April. So that has also flown in. At the same time, we also talked about introduction of the value meal layer in KFC, which was slightly margin dilutive, but on a combo meal basis, that kind of gets utilized. So we think if the current situation were to prevail from the input pricing perspective, the worst on the gross margin as far as the KFC is concerned, is behind us.
Coming to Pizza Hut. As I've talked about earlier, we are hoping that in the current quarter, the milk prices and the cheese prices will start to stabilize because the monsoons have been good. There is excess supply of milk now in the country. So once that is done, at the same time, we also took a very, very small pricing on Pizza Hut. Just to balance the overall mix and the headwinds that we faced from the fun flavor launched last year same time or maybe it was, I think, quarter 2 beginning. So Pizza Hut, I would not like to kind of say with certainty that the worst is behind us because we still want to kind of experience what we've looked at KFC for the last few quarters.
And once, let's say, we have a clear visibility on the cheese prices and milk prices that's where we'll be able to talk from a certainty point of view. At the same time, you have seen in the current quarter, the vegetable price is going up, so the tomato prices, which again is one of the important ingredients for Pizza Hut brand. So that is kind of facing a huge inflation menace. But overall, if we have to look at, let's say, from an overall portfolio perspective, I think we're in a good shape.
Okay. Okay. Got it. And a couple of more, if I may. One is on staff and other expenses. There is a reasonable rise on both Y-o-Y, Q-o-Q basis. Anything to call out? Or are these the number that we should work with seasonally adjusted?
Vivek, there are 2, 3 factors that I think you need to understand as to why the staff cost is behaving the way it is. So one is, obviously, as you know, that we normally effect our increments in the month of April. And therefore, compared to, let's say, last year, the wage will kind of goes up a little bit, and that impact is coming in. Secondly, we've seen in quarter 1, there has been some significant minimum wage increases in some of the states. And that also kind of tends to take place. Although there are some states which kind of go about the minimum wage revision even twice or thrice a year as well. But Karnataka is what I would like to kind of call out specifically where we've seen a huge amount of impact coming in for our business.
As you know, Bangalore and Karnataka is a big play for us. So that has also impacted. And then as you know, last year, from a management perspective, our performance was a little behind our internal plans and therefore, in quarter 4 we had reversed some of the variable base provisions, which were not payable. So I think it's a combination of these 3 as we kind of go along and the business picks up, it will kind of come back to the original levels.
Okay. And anything on other expenses, Manish?
I think other expenses are broadly in line. There's no big material difference which is there. So I think you can assume those to be in the range we are in.
Got it. And last very small question on Vaango, you have had detailed slides this time around. Anything to read into that also?
So, Vivek, we've been kind of continuously getting this feedback from -- so from various investors and analysts that you don't share the, Vaango numbers, and you would like to see what is happening on that brand. We as a business and as a group remain bullish on the South Indian cuisine opportunity in the country, and that's the reason we've started disclosing Vaango. At the same time, we think by opening about 52-odd stores.
I think we've experimented. We've seen how the brand is performing. We feel confident about the brand. We've stabilized the entire supply chain piece, and that's the reason we started disclosing the numbers specifically for Vaango. So we believe by the time we exit this year, which is the financial year '23, '24, we should be seeing a run rate of almost about INR 100 crores for Vaango, which I think was a significant number, and that's the reason we thought we will talk about Vaango separately. So nothing else. So it is pure good [ retention ].
So that doesn't signal anything. Although I know it's still a very small part of the business but that doesn't signal anything in the next few years being a big focus for you. It's more of the same. It's just a disclosure, no change or, let's say, positivity around -- incremental positivity compared to where we were until last quarter.
So we are seeing some incremental positivity and you will see that in the numbers also. But again, given the way KFC and given the way the other Core Brands are growing, obviously, Vaango would remain a small part of the business.
[Operator Instructions] The next question is from the line of Nihal Jham from Nuvama.
First question was on the gross margins in PH where you highlighted how things are looking ahead. Even for this quarter, there has been a slight improvement. So is it that from this quarter itself, we've already seen the benefit of PM prices? Or was there a mix impact which you alluded to in the last quarter?
So Nihal, as I said, we've taken a very small price increase also in Pizza Hut. And plus, I don't know whether you remember, I talked about the premium range of pizzas in terms of that whole Pizza Hut refresh menu that we talked about in the last call, and we were introducing at that point in time. So the whole idea was that how do we increase and how do we focus on the PM side so that the value contribution from the value layer that we introduced gets balanced out. And obviously, once that starts to happen and with the combination of a little bit of price increase, you will see the gross margin improving. So as far as the raw material prices are concerned, even in quarter 1 of FY '24, we've seen a small hit on the milk and the cheese prices, which we are expecting to stabilize because now they are not going up. So we are expecting that milk and cheese prices should start to stabilize from the current quarter.
That's helpful. My second question was on the corporate overheads. Now there has been a reasonable increase. Is this purely explained by the salary revision or there's some other aspect also?
So again, I mean, as I was talking to Vivek, the primary reason is the employee cost. And I had talked about the reasons for that from increment which is coming in the month of April. We've talked about the minimum wage revision and so on and so forth. So again, we are hoping it will get balanced out as we go along. But those are the main reasons why the corporate overheads look high.
But the minimum wage would only be applicable to the store employees. The corporate overheads would be more for the employee base which would be beyond that [indiscernible] revisions, I would assume.
So if you look at the employee expenses, Nihal, in the financials, that line is inclusive of both because that is how as for the accounting standards, we are supposed to disclose. Whereas in the management presentations, when we come to the brand, obviously, it gets detailed a little bit.
Sure. Just one final question, Manish. So the Vaango in our earlier discussion was, at that time, primarily a food court and a local brand. Does it still stay back? Or is there a change in terms of how things are going to play out? And between Costa and Vaango would any of the 2 would be bigger of?
So Vaango, the broad strategy remains the same because as we've communicated earlier, we still believe that Vaango can do well in the high footfall locations. And therefore, the focuses, the efforts, the focus is the high footfall locations like food courts in the mall, it could be hospitals. So it is basically the confined environment where the footfall is very significant. So that is what the strategy is. And once we, let's say, we have a basic brand size, we would like to spend some money on marketing. And that said, we start to get into a little bit of bigger stores on high street and so on and so forth. But that journey is to be covered. It's not going to happen on an immediate basis.
The next question is from the line of Ashish Kanodia from Citi.
Manish, the first question was on the KFC side. So from the chicken roll range, can you just highlight in terms of performance, how that is panning out? And is it basically helping you to get more footfalls? Or is it driving, say, higher ticket size? And also from a margin perspective, is it kind of diluting the overall margin for KFC?
Ashish, you talked about -- sorry, can you just -- I missed that initial part. Are you talking about the value there, yes?
I'm talking about the chicken roll range, right, which you launched. Yes.
Got it. Got it. So the entire focus behind this introduction was how do we utilize the assets that we have. And as you know, KFC works very well towards the evening hours and the lunch hours were muted. And therefore, this whole promotion in terms of the value layer in terms of a combination for KFC lunch. That whole focus is around the lunch hour so that we are able to get better data and utilization for the brand. So it is a little margin dilutive. But if you look at the way we've kind of built the combinations around this as KFC lunch because on a stand-alone basis, it is a little -- the little impact is there. But on a combination as KFC lunch, it kind of gets neutralized.
So therefore, there is no dilution when it comes to a lunch combination meal, which comes at INR 149. So therefore, we want to build a layer because, as you know, it is -- it has been an inflationary environment, during the inflationary environment people tend to kind of downgrade. So we are trying to build a value layer for KFC also so that we are able to kind of focus on the number of transactions, and we are able to get more footfalls into our stores, which will be good for the brand as we go along.
Sure. That's helpful. And then on Pizza Hut, I think the brand contribution margin remains vague, right. So I just wanted to understand that when you expect the overall impact of, say, the fun flavor range to kind of taper off? And maybe the premiumization, the range refresh to kick in. So what I'm trying to understand, assuming that the gross margin remains stable and you don't see any further inflationary trend in milk and cheese prices. When do you expect this brand contribution margin to move back to, say, 15% plus kind of a range?
So I guess it will take a few quarters more, Ashish, because obviously, one is -- one big piece was on the gross margins from the material cost side, which we are seeing the stabilization is happening. And we do expect that the milk and the cheese prices will stabilize in the current quarter. Apart from that, obviously, there is this whole comp issue because if you remember, the value layer was introduced last year July. And that is where the dilution started happening. And around the same period, the inflation was also very high and therefore, our own consumers kind of down-traded. And the value layer was having an impact on the margins.
So now with this whole Pizza Hut menu refresh, which is the premium end of pizzas. We are getting very good response from the consumers. So once that starts to build up, we will see that brand contribution margins are going to be starting to improve. At the same time, we do believe that now with the inflation regime kind of stabilizing, people will start to kind of come back in the next few quarters in terms of what the regular are used to consuming from premium end of pizzas.
So at the same time, we are going to be taking in very shortly as far as the media is also concerned, because we are -- so from a basic product perspective, having done the value layer, having done the premium end refresh I think we are now talking about a mass communication around that whole thing so that the awareness gets built up and people will start to coming into the stores. So obviously, there will be some additional funding that will go for the marketing that we are talking about. But overall, you will see that in the next few quarters, the brand contribution will start to increase.
Sure, Manish. Just last bit is on the subsidiary, which has been set up in Dubai. So I mean it fails to hold overseas investments and [ render ] business-related management and technical services. So I mean if you can throw some more light, is it just to hold your the Nepal and Nigeria business? Or are we looking at something else as well within that subsidiary?
So as of now, there is nothing there, Ashish. But our view is that whenever, let's say, something were to come up, or the expansion happens on an international side, we have set up a legal structure so that we are able to kind of use the subsidiary operations. But the whole idea as of now is to kind of stabilize and put Nepal and Nigeria there. That will be the next step.
At the same time, you'd have noticed that on the corporate restructuring side, we've got the approval from NCLT as well as the 2 other subsidiary operations are concerned. And we are planning to file because we are going to get the certified copy from the court, I think probably in the next 1 or 2 weeks. We will file that with ROC. And therefore, those 2 subsidiary operations will get subsumed into the main parent company. So I mean -- so it's a corporate restructuring exercise that we are undertaking.
The next question is from the line of Arnab Mitra from Goldman Sachs.
My first question was on KFC. So what -- as you mentioned, is...
This is the conference operator. Requesting you to please speak a bit louder. Your audio is not audible.
Is it better now?
Yes, sir, you may go ahead.
My question was on KFC where while Y-o-Y, we have a deterioration in the SSSG, you mentioned it was possibly due to the base effect. So from your understanding, sequentially between March and June quarter and as we see now, is the demand environment stable largely? Or has it worsened a little bit because you have also added some parts of the value layer but it has not led to the SSSG improving. So just wanted a sense on the sequential stability.
Arnab, overall, KFC continues to be the #1 choice as far as the consumers are concerned. There is no issue as far as the KFC brand is concerned. But again, you know that during the inflation time, obviously, people were trying to downgrade. We also introduce the value layer pizza. We are coming out of strong comps because if you see the quarter 1 of last year was a very strong quarter for KFC. And then because of the inflation and the demand environment the business was impacted a little bit. So we are coming back on that. Overall, we don't see any big issues as far as the consumer sentiment or the demand environment is concerned, it's only temporary in nature.
And the way we look at it, for example, let's say, if this is the kind of environment, you need to build the capacity on a very judicious and prudential basis. And that's the reason we keep on adjusting the store counts between KFC and Pizza Hut. So let's say, once -- because overall, if we are bullish on the Indian market, we are bullish on the brand and KFC is a very, very -- has got a very strong leadership position. We will not be able to create that capacity overnight. So that's the reason we have to be at it and we have to be kind of -- so we could be, let's say, a quarter in advance or so. But overall, we don't see any larger issues.
Understood. My second question is on Pizza Hut. You mentioned you've taken a small price increase in Pizza Hut also. Is that correct? And could you quantify how much it is? And is it only you or has competition also taken up prices in the category?
So I would not say it was a price increase, I would say it was more of a price adjustment, which has had a positive impact on us and that's the reason I called it out separately. On an overall basis, you can say it is a little under 1%. So as far as the pricing was concerned because we were trying to resolve in terms of some bit on the delivery option versus the dine-in option and some bit of reorganization on the fun flavor range. So it just had a positive impact.
Okay. Understood. And my last question was, again, on Pizza Hut, given the very weak kind of comps that everybody in the pizza industry has been giving, you've already obviously slowed down the expansion a little bit, is there merit in further slowing down Pizza Hut expansion till the category kind of show some stability in the environment?
Arnab, we continuously evaluate what you are saying. And therefore, as I've said, I mean, earlier, we used to talk about 100-plus Pizza Hut stores in a year. We are talking about close to 70, 75 stores now. So let's see how the next few quarters go. And if need be, we will consider what you're saying.
The next question is from the line of Percy Panthaki from IIFL. [Operator Instructions]
Yes, Manish, since we don't have a very long listed history on a quarterly basis, I just wanted to understand pre-COVID because looking at your numbers post-COVID on a quarterly basis really is showing up a lot of noise. So pre-COVID, what was normally the sequential increase in ADS in Pizza Hut for Q1? So Q1 versus the preceding quarter of Q4, what did, generally, Pizza Hut see as a sequential increase in the sales per store? Percentage-wise?
Sure. Percy, look, even if I were to give you the numbers, the numbers would not make sense because as you know, I mean, just before COVID, we had started restructuring the brand. So Pizza Hut earlier was focused on dine-in, large-format stores. And then we were working on small format levy focused stores. At the same time, we kind of shut a lot of large-format dine-in stores during that period. And obviously, the ADS was a little higher when that time was there. But if you were to look at on a per square feet basis, on Pizza Hut, we are much more efficient versus where we used to be, both from top line and bottom line perspective. So if you go to, let's say, go back to the -- to, let's say, pre-COVID kind of history, Pizza Hut was a loss-making Brand.
So I tell you where I'm coming from Manish. If I look at Domino's where we have the data and look at 3, 4 years Q1 before COVID. The general trend is that Q1 sales per store was about 7%, 8%, 9% higher than Q4, okay? Now this quarter -- again, Domino's Q1 this quarter versus the immediately preceding quarter, the growth is only 3%. And we have seen similar outcomes for a Pizza Hut from Sapphire, Pizza Hart from Devyani. They are all up Q-o-Q in this 3% to 4% band versus a historic trend of about 7%, 8%. So what I want to ask is that is it just on a Y-o-Y basis that we are seeing a slowdown? Or is it even incrementally on a sequential basis, the numbers seem to suggest that we are seeing incremental slowdown because the normal quarterly jump on a sales per store, which should come in a Q1 is not coming.
Percy, if you go back, let's say, pre-COVID, which is where you're starting point was. And therefore, let me kind of answer from rather than a pre-COVID, post-COVID. Let me just take a scenario of, let's say, if you were to go back, say, 3 to 5 years back. Now 3 to 5 years back, if you look at the Indian QSR industry, it was equivalent to only pizza, right? So whereas take, let's say, last 5 years, the other formats have rapidly expanded. So KFC is much bigger compared to where we used to be earlier. McDonald's has expanded a lot. Burger King was very small at that point in time.
So therefore, from a consumer perspective, there are a lot of additional choices which are available, what used to happen, say, pre-COVID. And obviously, let's say, once that starts to happen, the demand also gets shifted to some extent. So I would say it is more of that. There is nothing fundamentally wrong with the pizza market as such because the pizza market is still growing despite the fact that it is the largest QSR segment in the country. So it is just kind of the demand getting balanced out with the other choices available, with other brands available and the fact that all of the other brands are also now expanding very rapidly and very aggressively.
Sir, I agree with that, Manish, but here we are just talking about a short period of 3 months. So with the fact that other options are available, was there even in Q4 FY '23 versus that a normal seasonal uptick in Q1 FY '24 is expected, and that has come lower than expected. So you understand what I'm saying, right, Manish?
Yes, yes, I agree with you. And that is what I said, for example, if you remember my earlier comments, I mean, within the QSR category, pizza is one of the most expensive subcategories, right? So whenever, let's say, there is high inflation, and it could get impacted depending on which region wherever you are and people tend to downgrade. And that is what is happening. So there are, let's say, cheaper QSR entree options available, and people have shifted there. So coupled with that in terms of the additional -- the brands which are available, the additional choices which are available to the consumers. So that kind of tends to get impacted.
Understood. My second question is on pricing versus the input cost. So if, let's say, the input costs -- you were saying the input costs have stabilized, right? Now in a scenario where hypothetically, the input costs see some amount of deflation. What do you think you would pass this on either in terms of additional offers or anything else? Or would you like the benefits to flow to the EBITDA? And you can answer this separately for KFC and Pizza Hut.
So look, our fundamental philosophy is that we would not like to kind of reduce the headline pricing because I don't think -- I mean, if you look at as of now, things are only stabilizing. There's not a huge amount of deflation, which is kind of happening within our categories or within the economy. So what was the hyperinflation in a way or, let's say, high inflation scenario has started to stabilize.
At the same time, our focus always remains that we should have more and more transactions, more population coverage, more footfalls in our stores, more consumers coming into the QSR portfolio. And therefore, we try and give it back in some shape and form, and that could be additional offers. That could be some promos. That could be some value meals and that is where we introduced the Pizza Hut value layer, that is where we've introduced the KFC value layer also. So that is the whole idea that how do we continue to expand the footprint as far as the consumer footfalls are concerned. So -- and we've continuously done that.
The next question is from the line of Kaustubh Pawaskar from Sharekhan.
My question is again on the competition front. As you just mentioned that during the inflationary environment, we normally see downgrading happening, given other value brands available in the market. So in that context, what kind of strategy you are trying to implement because we have seen competition launching pizza in the mid-price range. So on menu front, are you also looking to have such kind of a gap bridger going ahead or something which will help you to compete better to bridge brands which are available at a lower price on other platforms?
So Kaustubh, as I've said, I mean, we've also done pretty much similar things. So if you remember last year, around quarter 2, we have infused a value layer in Pizza Hut, which we call fun flavor pizza. And fun flavor pizza, we've seen going very, very strongly and very well with the consumers. It's helped us to build the transactions also. At the same time, on KFC also, we've recently launched a KFC Snacker range, which starts at INR 99. As I've also talked about that we have a focus on KFC lunch, which starts at INR 149 as a meal combo. So we are also doing the same thing, and that is the best way to kind of expand the market. That is the best way to kind of get the consumers into the stores. And therefore, that's what we are doing.
And on the KFC value meal, it was supposed to be launched in fewer stores earlier just to test market and then the plans were to launch pan-India. So how is the situation now? Is this product available pan-India?
So we've done the test market. We've rolled it out to the stores, and now we are going to be aggressively pushing that and therefore, it will become widely available.
The next question is from the line of Niket Shah from Motilal Oswal Asset Management.
I have 2 questions. One is on the aggregator side, has there been a price increase in this quarter, and if yes, what would be the quantum for that? And the second is when you look at expanding some stores whether it is Pizza Hut or KFC, do you think human resource availability becomes a challenge in some point of time when you want to grow at this pace?
So Niket, we took KFC price increase around April month, and that was a little under 3% from a brand perspective. And obviously, we kind of compensated that price increase with a value layer from a rolls perspective, from the snacker range and lunch and so on and so forth. So therefore, we did try to give some portion of that back to the consumer. So that we are able to build the transaction and we are able to get additional footfalls into our stores.
We've done the same thing for Pizza Hut. So Pizza Hut, as I said, the price increase was somewhere in the later part of April. And that was more of a price adjustment rather than a price increase. The overall impact was under 1%.
To your other question and challenge in terms of the expansion of stores and the availability of staff, obviously, as you know, I mean, this business people-intensive business, as we open the stores, we need more and more people. But our HR engine is working very, very well. It's a well-oiled machine. And therefore, that whole piece kind of we've never faced any difficulties. We've never had any issues.
We've never had to kind of delay our store opening because the staff was not available or the trained staff was not available. And Yum also has their processes in place because in terms of training of the new employees, in terms of upgradation of the existing employees. They control that piece very, very closely so that kind of make sure that we are well disciplined, and we are not taking any short-term calls. So therefore, this side of the business kind of works very well, as a well-oiled machine.
[indiscernible].
Niket, your audio is not audible. Requesting you to please speak from a [indiscernible].
My question was more from an aggregator standpoint, the price increase, have you given a price increase to the aggregator, that was in terms of -- that was actually the question.
So we've always had, Niket, some bit of pricing premium for the orders that flow in from Zomato and Swiggy, and that has continued. So there's nothing different that we've done recently.
The next question is from the line of Sabyasachi Mukerji from Bajaj Finserv.
My first question is on the competition.
Sabyasachi, can you speak a little loudly, please?
Yes. Am I audible? Hello?
Yes. Yes. You're better.
Yes. So my first question is on the competition in the KFC chicken part of the business. In some geographies, we have seen, especially in the south Southern market, we have seen MACD or there is other competition that has come up. So in terms of specific impact, what is your thoughts in terms of the chicken business?
So we welcome competition in the category. As you know, India is a large nonvegetarian market. 70% of the population is nonvegetarian. And within that, almost 80%, 85% of the people chicken is the medium of choice as far as the nonvegetarian food is concerned. So therefore, the kind of potential that this country has from a chicken QSR brand perspective, we don't think that a single brand will be able to do the justice. So therefore, as the new brands come in, the market will get expanded. The noise will be there. The marketing efforts will be there, the recruitment of consumers will be there.
So which is as a market leader, we are well positioned. We are in a good shape. So therefore, if at all, it will start to -- and it will benefit us also. But competition and a healthy competition is the only way the market will get expanded. And India will be able to reach the potential that we've seen, for example, let's say, I'm not saying that India is China. But as you know, in China, there are 10,000 KFC stores. It's not going to happen overnight in India, but the competition and the new brands that come in, will help to open the consumer preferences and choices and it will help us to expand KFC also.
Right. And coming to your store addition guidance of 275 to 300 stores per year. Pizza Hut, I believe, you are talking about somewhere around 100 stores a couple of quarters back, but now that has kind of trimmed down to 70, 75. Costa Coffee is another 60, 70. That must -- then KFC store opening, is it a fair assessment that probably we are looking at a number of 120, 125 store additions per year going ahead?
Yes, you are right.
Okay. Lastly, on the marketing campaign for Pizza Hut to increase the awareness, what kind of budget we are looking at? And how long will it continue?
See, overall, from a brand perspective, we spend about 6% of the top line on the brand marketing and the local store promotions. Whenever we launch new products or whenever we take some initiatives, we do spend some additional money. The Yum also puts in the additional money from their side and therefore -- but on an overall basis, we try and balance it out. So while, for example, in the near-term quarters, we will see that the additional monies are being spent on Pizza Hut on the menu refresh. So that whole assessment is currently on. We can come back to you once we [ visualize ] the overall plan.
The next question is from the line of Tejash Shah from Spark Capital.
Manish, you touched upon the sluggishness in pizza category from the customer behavior dimension. Just wanted to know, would you attribute a bit of higher sluggishness in this category versus others because of very high intensity of organized retail competition that we have seen.
So I don't think I talked about the sluggishness in the category. What I said was that pizza is the largest category for QSR in the country. It is still growing on an overall category basis. It's just that there's a very aggressive expansion which is happening from the other brands. And therefore, from the availability perspective, the consumers have much wider choice available today. And therefore, there is some bit of rebalancing, which is happening.
At the same time, if you see, and I'm not saying that this is going to happen in India. Globally, burger is the biggest category as far as QSR is concerned. Whereas in India, it has always been pizza because it got started very differently. So obviously, there will be some rebalancing, which will happen in this category because there are other sources available and there are other brands also which are expanding very rapidly. But otherwise, there's nothing wrong with the pizza category as such.
Very clear. Second and last question pertains to Costa. When we see -- so just wanted to understand the interplay between ADS gross margin and margin here. So when I see that last quarter, we were at INR 36,000 ADS with 78% gross margin and we reported 20% EBITDA. This quarter, we had lesser ADS, lesser gross margin, but our EBITDA was higher. So just wanted to understand how the interplay works out? And considering that we have such good dynamic here, why are we not expanding this format much more rapidly than what we are doing at the current pace?
So see, one, is, obviously, the gross margin line behaves very differently to the EBITDA because that is all about input materials. And the gross margin is a little lower because as I said, there has been some price increases during the quarter on milk. And plus, we've seen some price increase on the coffee beans also. So that is what has impacted the gross margins on the Costa Coffee side.
As far as the brand contribution is concerned, because as we've undertaken a rapid expansion, and therefore, typically, let's say, once the store is in the maturity phase, the rent-to-revenue ratio for this business is high, and that kind of gets stabilized as the ADS starts to build up for the new stores. So that's the reason why you're saying that -- why you are seeing that the brand contribution is behaving a little bit differently because there have been some old store openings where the ADS has started to stabilize. And therefore, rent-to-revenue ratio is getting better.
Sure. And on rapid expansion?
Sorry.
Sorry, sorry, go ahead.
Please go ahead. No issues.
On rapid expansion because when we are seeing brands like Third Wave Coffee and they are like expanding very rapidly. So just wanted to know what is our kind of -- do we want to accelerate the pace here or we are comfortable with what we have guided for now?
So we are talking about Costa expansion at about say 60 to 70 stores every year. We are comfortable with that pace. And therefore, that kind of gives us a great opportunity to build this brand. So that is how we are looking at it. To be honest, I'm not privy to the Third Wave Coffee plans, and therefore, I will not be able to compare Costa to that.
The next question is from the line of Devanshu Bansal from Emkay Global.
Manish, I just wanted to better understand the demand situation. So I wanted to check whether footfalls are being challenged, build sizes now due to tighter wallets or are there challenges on both the fronts. So could you break the SSG for Pizza Hut and KFC into [ build fest ] and build size?
So Pizza Hut, if you look at Devanshu, I mean, as we said, that the fun flavor range was launched last year in the month of July, and that impacted the APC, which is the ticket size, but the transactions have continued to build, and that is what is kind of helping and going to be helping the brand in the long term. Similarly on KFC side also with the value layer, with the snackers range with the KFC rolls, KFC lunch menu. We are building the transactions. And therefore, there is a small impact on the APC.
So volume trends, both are positive and whatever negative SSG is due to the build size that is the [indiscernible]?
Correct, absolutely. And because our priority is to get -- I mean, more and more footfalls into the store. Our priority is to build the transaction. And therefore, wherever there are some menu gaps and product gaps. And we've managed to find the right product. We are going to be launching that.
Great, sir. And for Q1 and coming Q2 quarter, can we expect the ADS seasonality that was there last year to continue this year as well?
So no forward-looking statements, Devanshu.
No. So just to put in that range, last year was a, I would say, a common seasonality? Or were there any one-offs that you would like to highlight?
I mean, apart from the seasonality and all, there was a huge amount of inflation also which you were seeing. And therefore, obviously, that was getting impacted -- that was impacting the consumer demand also. So let's see this year, also the other peculiarity that we are seeing, you must have heard about this Sawan seasonality. And Sawan typically is a period where a part of the nonvegetarian population they turn vegetarian. And this year, we believe it's an extended Sawan period. Too early to say, but that could impact the numbers to some extent.
Got it. And last question from my end. Both KFC, Pizza Hut, the magnitude of increase is different in terms of sequential ADS, but for Costa Coffee, it's a dip. So can you explain as in why that happened?
So Costa Coffee, as I talked about Devanshu earlier, is mainly on account of the new store openings because new stores typically tend to open at a lower ADS and then they mature over a period of time. But if you look at, let's say, even for the current quarter, the SSSG for Costa Coffee is sitting at almost about 9% to 9.5%.
Even, Manish, on a sequential basis, that plays out, I was asking more from a sequential basis?
Yes, because, I mean, we are opening the stores rapidly. So it does impact on a sequential basis also.
The next question is from the line of Shirish Pardeshi from Centrum Broking.
Yes. Manish and team, I have one fundamental question. If I look at the journey over the last 15 months for Pizza Hut, we have done the pricing adjustment. We have introduced value layer. And in last quarter, we have introduced 10 new pizzas and about 3 quarters before we have fun flavor.
So maybe if you or Rahul can address this. Is the competition is one angle we are seeing and you have alluded saying that there is a value layer which is picking up. But fundamentally, what is the consumer behavior telling us? And that's why I wanted to pick brains from Rahul, if he can give us what exactly is happening in pizza. Because there is a dichotomy and when we look at the last 2, 3 quarters, the burger guys are doing better. So is there a permanent reset, which is happening from the consumer point? And as you said that there is more options, which has opened after COVID.
See, the reset is happening -- again, as I said, there's nothing wrong with the pizza market. The reset is happening because, for example, there are additional choices, there are additional brands which are available to the consumer, right? And therefore, in that scenario, we need to kind of continue to do the right things. I mean, after we restructured the Pizza Hut brand post-COVID time, our objective was how do we kind of fill the ADS of the brand. For building the ADS, it was very important that we have a strong value layer so that we are able to because Pizza Hut, as you know, has always been considered as a premium brand. And we need to kind of balance that piece out by giving the value layer.
The value layer, the timing was a little unfortunate because by the time we introduced, we were in for high inflation scenario. And therefore, there was this down trading, which kind of happened very rapidly. And that's where we kind of decided to refresh the premium side of the range and we've done that. In any case, it was due and therefore, this kind of pushed us into making a faster decision and we introduce that. Now we are going to be -- so we balance the portfolio now. We are going to be building the awareness around that whole piece and that's how the Pizza Hut journey has been. I mean from a loss-making brand, Pizza Hut is a positive brand today. The consumer demand is there. The stores are -- the store expansion is happening. The consumer awareness is there. The consumer choice is there. So therefore, I mean we are confident about this brand.
Manish, just one follow-up here. I mean, hypothetically, if you would have not done these actions, what would have happened to SSG?
So -- I mean, in hindsight, because there have been so many variables. It will be difficult to just kind of remove one hypothesis and build on the other because, I mean, the markets are different. The competition is different. We've done multiple things within the brand. So it will not be right for me to kind of just remove one variable and hypothesize it.
Okay. My second question on KFC. I'm looking at Slide 17. We've been able to manage the gross margin. But when I look at the brand contribution margin, which has declined on a Y-o-Y basis, 130 basis points I do understand there's a chicken inflation sitting in there, and you have taken about 3% price increase. But what should we rule going forward? Is this decline will get resolved and we look at the margin expansion or there are some more inflation element sitting in this quarter and that will also have the impact in the next quarter.
What is the base you are taking for your comparison?
On Slide 17, I'm making the comparison. So last year, Quarter 1, we had a gross margin was 69% in KFC, which has proved to 69.7%. So understandably, there is a price element which is there. But when I look at the brand contribution margin, which is 22.4% has now become 21.1%.
So there is a very strong element of leverage in these businesses, as you know. So if you look at last year same quarter, the ADS number was INR 127,000, right? That INR 127,000 had come down to INR 106,000 in the previous quarter, and therefore, there was a significant dip as far as the brand contribution is concerned. And now with, let's say, the ADS numbers going back to INR 117,000 we've managed to recover on the brand contribution piece also. So therefore, I mean that is the other thing you need to kind of keep that in mind that there is a strong leverage which is there.
And apart from that, there is an element of, as I said, we discussed about the employee expenses and the minimum wage revision in some of the states where Karnataka kind of stands out and KFC has a very strong presence in Bangalore. So that has also impacted. So we need to kind of bear these things in mind. But as we kind of continue to build the brand, the ADS improves, we are very positive that we will be able to get the brand contribution back to where they were for KFC.
I got that. That's helpful. Just one little more follow-up on KFC. When you say and when we want to reconstruct the SSG, which as a company, which has been flat or marginally negative. But since we have more dominant and we are seeing the benefit in the networks we are going. So is this SSG in semi-metros or Tier 1 towns is better than metros or this phenomena is pulling down the SSG more in the metros?
We've seen the consumer behaviors are pretty uniform, whether it is metro or nonmetro or a small town or a large town because remember that SSG is also dependent and linked to the kind of store expansion strategy that we are following. So if you look at, for example, in the current quarter, we've not grown the number of cities coverage, that has remained the same. So therefore, that kind of tends to impact the SSSG a little bit. If let's say, I go to a completely new town and I don't open any additional store in my existing cities, that will not impact the SSSG numbers. So therefore, there are some other variables also.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for closing comments.
Thank you, Chairman and all the investors, analysts who have been on the call. We do hope that we've managed to respond to your questions satisfactorily. Should you need any further clarifications or would like to know more about our company, please feel free to contact the Investor Relations team. Thank you once again for all your time today and joining us on the call and participating in our growth journey. Many, many thanks.
Thank you. On behalf of the Devyani International, this concludes this conference. Thank you all for joining. You may now disconnect your lines.