Jubilant Foodworks Ltd
NSE:JUBLFOOD
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Jubilant Foodworks Ltd
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Ladies and gentlemen, good day, and welcome to the Jubilant FoodWorks Q1 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Siddharth Rangnekar from CDR India. Thank you, and over to you, sir.
Thank you, and welcome to Jubilant FoodWorks Quarter 1 FY '21 Earnings Conference Call for Analysts and Investors. Today, we are joined by senior members of the management team, including Mr. Shyam Bhartia, Chairman of Jubilant FoodWorks; Mr. Hari Bhartia, Co-Chairman of Jubilant FoodWorks; Mr. Pratik Pota, CEO of Jubilant FoodWorks; Mr. Prakash Bisht, CFO of Jubilant FoodWorks. We propose to commence with key thoughts from Mr. Bhartia. Thereafter, we will have Mr. Pratik Pota sharing updates on the progress that JFL has made operationally in response to COVID-19 and the strategic imperatives that lie ahead. After the opening remarks from the management, the forum will be opened for question and answers.A cautionary note. Some of the statements that may be made on today's call could be forward-looking in nature, and actual results could vary from these statements. A detailed statement in this regard is available in Jubilant FoodWorks' Q1 FY '21 results release and earnings presentation, both of which are available on the company's website under the Investor Relations section.I would now like to invite Mr. Bhartia to share his views with you. Thank you, and over to you, sir.
Good evening, everyone, and thank you for joining us today. I hope you are all safe and doing well. As we navigated COVID-19, our first priority remained ensuring the safety and well-being of our colleagues and our customers. The company is fortunate to have an incredible community of employees and partners who have helped us maintain business continuity in the wake of pandemic. This in turn helped us to serve our customers and our communities with a convenient, affordable and safe food and a great service experience.In India, with an intention to contain the COVID-19 spread, the government responded with 4 phases of lockdown, which was in effect from end of March till May 31, with various levels of stringency. It became increasingly clear that COVID-19 will not disappear immediately and the economy will need to be managed alongside persistent infection risks. Hence, the fourth phase of lockdown was followed by Unlock 1.0, wherein barring containment zones most of the business activities were allowed to resume their operations. We continue to see uncertainty in the operating environment as sales are impacted due to localized shutdowns. But we also see that the authorities are working towards opening up so that economic activities can resume in full force in the coming weeks. We have also seen gradual improvement in operating hours week-on-week, and also we are starting to see consumer confidence coming back.Let me now turn to quarter 1 performance. Owing to COVID-19, during the large part of quarter 1 FY '21, we were faced with acute supply as well as demand challenges. On the supply side, the lockdowns resulted in lost revenues on account of temporary store closures, also temporary closure of dine-in and takeaway formats, and of course, curtailed operational hours across major cities. On the demand side, there was consumer anxiety about making the contact with the outside world, which led to a reduction in delivery orders during the quarter.Reflecting on quarter's performance, I would like to comment on 2 key attributes that clearly made this quarter unique in the face of adverse operating environment for the company. Firstly, I must elaborate on our efforts to swiftly restore the operations. We were among the fastest to reopen our stores where we reopened 1,000-plus stores within 53 days of the announcement of the national lockdown despite significant ground level challenges.We were the first to introduce Zero Contract Delivery and to extend it later to Zero Contact Takeaway and Zero Contact Dine-In. Our strong supply chain infrastructure in commissaries and distribution centers across India helped us to respond faster to operational needs in terms of new requirements of sanitization and food safety. This gave us tremendous agility in responding to operational needs and reduce dependence on third parties. Our own digital platform helped in direct connect with our customers when most of the orders were coming through digital. We saw additional traffic on our platforms and increase in our app downloads. We saw business recover progressively through last quarter, and the months of July and August were especially very encouraging.Secondly, we made bold structural moves, made to change the short-term and prepare us better for the longer term. With an intent to mitigate the adverse impact of pandemic, we tried to variabilize as many cost elements and reduce discretionary expenses. We have decided to shutdown 105 unprofitable Domino's stores. These stores were part of margin improvement programs during the pre-COVID period. Most of these stores had dine-in focus and were located in malls, food courts and tech parks. Closure of these stores will lead to an improvement in our margins in the future. We will, however, be opening 100 new Domino's stores this year, and hence, our network will be of a similar size as last year's. We plan to make our store portfolio to become more profitable by the end of this year.We also introduced a delivery charge for the first time to recover the increased cost of doing business. Since delivery charges are now accepted norm in the industry, we expect these delivery charges to continue in the future as well. Recently, as you are aware, we forayed into FMCG segment with the launch of RTC range of products under the brand name ChefBoss. Given the increased interest in home cooking and experimentation, our entry into this exciting and fast-growing category could not have been better timed. These bold measures have not only helped us to mitigate the COVID impact last quarter but more importantly, have also positioned us better structurally for the future.Our performance in the international segment was encouraging, both in Sri Lanka and Bangladesh, doing well in navigating the COVID-19 crisis. The business recovery in both countries have been healthy, with Sri Lanka becoming profitable last quarter. We continue to see strong potential in both markets and plan to open 5 stores in each of the both countries.To summarize, our team displayed tremendous agility, flexibility and boldness in the way we responded to the crisis. We moved quickly to restore operations to adopt our business to new realities, even as we made structural changes that helped -- that will help us to emerge stronger from the crisis.Looking ahead, we are hopeful that the business will continue to improve gradually over the next few months. We expect near normalcy by the exit of quarter 4 FY '21. We remain excited about the medium- to long-term potential of our category and our business, and we have no doubt that we will emerge from this crisis better positioned to participate in the opportunities that lie ahead.Now I would request our CEO, Pratik Pota, to continue this discussion by sharing his perspectives.
Thank you, Mr. Bhartia. Good evening, everyone, and thank you for joining the call. Q1 FY '21 was undoubtedly one of the toughest quarters we've ever faced as a business. As a crisis, COVID-19 was unique, as it brought with it challenges both on the supply side and the demand side. There was also the unpredictability in the way the crisis unfolded and continues to do so even today, which requires us to be extremely vigilant, swift and flexible in the way we responded. Our execution strength, a strong brand that has earned consumer trust and credibility, a robust and resilient supply chain and agility of our own actions helped us in dealing with this crisis. However, above all, it was our teams and the people on the ground that rose splendidly to the challenge of the crisis. The store and the commissary teams braved difficult odds and adverse conditions to continue serving our customers and keeping the business running. This quarter truly belongs to them.We faced several challenges during the quarter. We entered Q1 FY '21 just after the nationwide lockdown has been imposed, resulting in the closure of all our stores for dine-in, takeaway and delivery. Thereafter, since delivery has been called out as an essential service, we began opening our delivery stores progressively from April. The national lockdown was followed by local restrictions and lockdowns, which also disrupted operations and led to store closures and revenue loss. In addition, curtailment of store operating hours till only 9:00 p.m. until June meant that the dinner day part was severely compromised. More than 250 stores had to remain shut on weekends, which also impacted peak periods adversely. We took a number of urgent steps to deal with the crisis and to ensure business continuity. We took all necessary and possible steps to firstly ensure the health and safety of our employees and their families. We reached out and maintained a continuous line of communication with them, reassuring them and keeping them motivated.We were the first to launch Zero Contract Delivery and subsequently Zero Contact Takeaway and Zero Contract Dine-In. We worked with the local authorities across the country to open our stores. We were amongst the fastest brand to restore operations with more than 1,000 stores reopening in Q1 FY '21 within about 50 days. We continued to drive brand visibility, and we actually increased our digital marketing spends during the quarter. We had a record number of 4.4 million app downloads in quarter 1. As a result, the contribution of our own assets to our delivery revenues also increased significantly during the quarter.In addition, recognizing the severity of the crisis, we also moved quickly to conserve cash and to cut costs. We revisited and revised payment terms with our business partners so as to manage cash flows in Q1. We moved quickly to cut nonessential costs, and we optimized our restaurant operating costs in areas such as energy, maintenance, fuel and so on. Early in the crisis, we reached out to all our landlord partners, helped them understand the on-ground situation and sought rent waivers or reduction. I'm happy to share that we achieved reasonable success on this front in quarter 1, with rent reductions amounting to INR 294 million having been secured in the quarter.We also used the crisis to effect some structural changes in our business. These are fundamental improvements that will strengthen us and hold us in good stead even post COVID. First, we variabilized our manpower. As we had shared in the last earnings call, we have moved to convert all our erstwhile full-timers and part-timers to flexi-timers who are rostered by the hour. This will provide us with the necessary flexibility to ensure that our labor deployment in stores mirror the demand curve more closely and thereby drive efficiency. Closure of unprofitable stores. As Mr. Bhartia said, there were a number of stores with the profitability outlook for the next 2 years looked uncertain and challenged. Some of these stores were also borderline unprofitable in FY '20. We have, therefore, decided to shut down 105 Domino's stores. Of these, more than half were in malls and in food courts with others being in tech parks or in the travel channel. Introduction of delivery charges. As you're aware, we had not been charging for delivery earlier at Domino's. However, given the growth in the home delivery segment across multiple categories, and customers' willingness to pay for it as also the increased cost of doing business during COVID, we decided to introduce a modest delivery charge from June. Delivery charge was introduced at INR 20 and moved then to INR 30, which is a steady state charge we intent to stay at. The delivery charge has been accepted by customers. And what was extremely reassuring was that our Net Promoter Score and the Value for Money Scores did not drop even after the introduction of the delivery charge.Extension into FMCG. With the launch of ChefBoss, we have entered the ready-to-cook packaged food segment. It is an emerging category, which will grow in the future with consumers seeking greater convenience and ease in their kitchens. We see the FMCG foray as an extension of our capabilities as well as an opportunity to serve our customers both through RTE and RTC solutions.I'll now talk about the numbers for Q1 FY '21. The operational revenue in Q1 FY '21 was at INR 3,803 million, a recovery of 40.5% of our total system sales last year and a 52.7% recovery of our operational stores. Within this, delivery recovered 66.7% of total system sales of last year. Takeaway recovered 43.1% of last year's total system sales, whereas dine-in recovered nearly 2.1% as it was shut for most of the quarter. EBITDA came in at INR 241 million at 6.3% of revenues. The profit after tax stood at negative INR 726 million. We opened 24 new Domino's stores in Q1 FY '21, and these were a spillover from the last quarter's count. The company continues to have a strong cash position and a strong balance sheet. The company had liquid funds equivalent to INR 6,401 million as on 30th June 2020 as compared to INR 6,914 million when we opened the quarter. The company, as you know, does not have any debt. Moving to International. We had an encouraging performance in the international business. In Sri Lanka, post the imposition of the lockdown on 20th March, we were the fastest to restore operations. We had an encouraging recovery of our business with delivery and takeaway both now ahead of pre-COVID levels. In addition, owing to disciplined cost management, we managed to break even and deliver a positive EBITDA in quarter 1. In Bangladesh, which is a much younger business, as you know, with a greater dependency on dine-in the pace of recovery was a little slower. However, we used this opportunity to drive our delivery and takeaway sales higher. Notably, we were the only brand in the country which did not witness a single day store shutdown. We opened 1 new store in Bangladesh in quarter 1, taking the total count to 4.Moving now to July and August. The phased recovery that we had seen in quarter 1 accelerated in July and August. And this was, of course, despite local level restrictions imposed by various states periodically. We recovered 69.8% of our total system sales in July and 84.6% in August. On a like-for-like basis, the sales recovery was 77.8% and 89.3% in July and August, respectively. Amongst channels, we returned to growth in delivery and takeaway channels in the month of August while dine-in remained soft.Going forward, while the COVID case load continues to increase, making predictions difficult to meet, based on the current evidence, we are hopeful of returning to full business recovery as we exit the financial year. Our plan is to open 100 new Domino's stores this year. We will also be scaling up Hong's Kitchen in Delhi, NCR this year with 15 new stores being planned. We expect the pace of new store openings on Domino's and on Hong's Kitchen to increase next year. We'll be opening 5 stores each in Bangladesh and Sri Lanka as well.Over the medium-term, we expect to see some significant structural changes in the categories and which will play to our strength. There will be a reduction in restaurant numbers as the pandemic extracts its business toll, it will lead to lower competitive intensity. Consumers will seek out and gravitate to brands that they trust and whose quality and hygiene standards are visibly better than others. There will also be an increased adoption of and move towards delivery, especially using digital ordering channels. These shifts along with the fundamental improvements we have made in our operating models will ensure that we come out of this crisis stronger and better placed to grow faster.With this, I would like to request the moderator to open the forum for questions, please. Thank you.
[Operator Instructions] The first question is from the line of Kunal Vora from BNP Paribas.
Sir, first question is on the rental. So the INR 29 crore reduction which you've seen, it looks like almost 1 month of rent. Is that a fair assumption that, like, you got like April waiver and -- are you seeing any permanent benefit in terms of lower rentals going forward?
So Kunal, the rent reduction that we got of INR 29 crores for the first quarter required us to engage with hundreds of our landlords and have an individual discussion pertaining to the store context. In many cases, where the stores were completely shut for April and/or for the month of May, we were able to get higher reduction. And in some cases, the stores that reopened, we were able to get lower reduction. The number, this happens to total up to 1 month or approximately 1 month of rent, but it required a lot of individual discussions across hundreds of landlords. Does this answer your question, Kunal?
Yes. I just wanted to get some sense on the permanent reduction. So like I get it that in the June quarter you would have got some concessions. But are you seeing any permanent reduction in rental, the long-term benefits in terms of lower costs?
The reductions that we secured Kunal and that you get in the P&L was specifically for quarter 1. We are engaged in an ongoing dialogue with landlords for reductions in the subsequent quarters as also for a permanent resetting off of rent. That task is a nontrivial one. It's a little bit more difficult because in many markets, in fact, in most markets, the commercial rent hasn't yet recalibrated. But we expect that to soften, and we expect that -- expect us to have some more success in resetting rents permanently. But it's an individual discussion, case by case discussion. The rent reduction that you see right now is secured only for quarter 1.
Sure. Second and last question, on the stores which you are shutting down, so like -- can you just talk about the total expenditure per store which you incur? And what will be the cost on equipment and what -- like that can be salvaged, like? And what could be the kind of write-off, which you might need to take because of the 100-store closure?
Pratik, may I take this?
Yes.
Kunal, this is Prakash Bisht. So the closure of the stores, Kunal, would not have any significant impact on our P&L or on our cash spend. Let me explain you this. When we close a store, we are able to salvage at least 50% of the equipment that is available there. And if this 50% equipment we were to buy new normally that cost double the cost. So in terms of money, we would spend the same money. In terms of P&L, why it does not affect is that on one hand you have this 50% asset which will get -- which will not be used and will have to be charged off. But at the same time, in the Ind AS, you have also an asset, which is ROU, right-of-use asset, and also a lease liability, which is pertaining to these stores, that will also get reversed. And when it is reversed, it results in an income. So that income will set off this expense. So P&L will not be affected. Third point is that these are old stores. They are not new stores. So they are appearing in our books only at WDV. And as you might be aware, typically, our store expenditure remained in the range of INR 85 lakh to INR 1 crore per store. But these are old stores, so the value of this WDV is much, much lesser, but it would not have any significant impact on profitability. Does that answer?
Yes, that's it from my side.
The next question is from Aditya Soman from Goldman Sachs.
A couple of questions from me. So firstly, just on the store closures, given that you mentioned these are older stores, will the sales contribution be higher? I understand these are probably not profitable. But from a sales contribution, I'm assuming that sort of shutting 100 of them and opening new stores, it would still take time for the new stores to sort of reach the old store same-store sales levels. Would that be a fair assumption? Or would that be wrong?
Aditya, that would have been a fair assumption to make ordinarily. But in the wake of the COVID-19 situation and the revenue recovery that we were anticipating in these stores, the difference would not have been sizable. Because these stores, as we mentioned earlier also in our opening remarks, were predominantly dine-in focused with more than 2/3 of revenue coming from dine-in, either fully from dine-in only or more than 2/3. And given the expected pace of recovery of dine-in, we see -- the numbers of these stores were not looking promising. If we look at opening 100 new stores, these stores will be optimized for delivery and carryout. We'll open them in locations where we see an upside potentially in these channels, these growing channels. So I would not expect that to be a big dispersion between the erstwhile impact of the dine-in stores that we're closing and the new stores.
Fair enough. Very clear. And the second question is on the stores that have not fully opened right or operational. So you indicated that only 83% of stores are operational. But from a customer perspective, are there a large number of customers that, let's say, cannot order delivery? I'm assuming that their stores are shut, they will still get -- customers could still get service from neighboring stores.
That's true, Aditya. What we've done is we've recut some of these store delivery areas to service larger areas and service, therefore, large set of customers. So unless there is a store which is in a containment zone from which delivery is difficult to make -- I mean, it's not possible to make, other than that, most customers looking for delivery would get access to it, would have access to it.
[Operator Instructions] The next question is from Prasad Deshmukh from Bank of America.
So Pratik, 2 questions. One, in terms of the industry overall, are we -- are you seeing that many restaurants are not renewing their licenses? And do you have any estimate as to by the end of this financial year as to how many -- how much of the industry capacity in out-of-home food service would have shut down?
Prasad, that's a good question. We -- I think there are 2 things that we see very clearly that the impact of the crisis on a lot of restaurant players has been fairly brutal and it's impacted their viability. So we expect a significant number of restaurants to close down. Some have already done so. Some would -- you see that will play out over the next 2 or 3 months. A few restaurants also are looking for the festive season and to see how that performs before they take a call on shutting or not. I think our estimate of a shrinkage in restaurant inventory is between 20% to 30%. We expect that kind of shrinkage in the restaurant industry to happen. It would be more in the casual dine and deferring by cities. Again, there'll be a much more greater impact on dine-in focused stores. But that's the kind of number we see playing out. It may not all happen now. In fact, all has happened now, but it will happen, we believe, in the next 2 or 3 months.
Sure. And second question is if tomorrow the situation arises that delivery -- maybe delivery grows significantly from here and dine-in remains where it is, what kind of changes would you be doing -- would you have to do in your restaurant infrastructure? I mean, is there any possibility of aggressively scaling up cloud kitchen in this context and -- cloud kitchen kind of a restaurant in this context and then maybe permanently shut down more number of stores?
No, Prasad, we'll obviously keep watching this space very closely and then take a call on our store configuration depending on how it plays out. However, I think the important thing to note is that the 100 stores that I spoke about we'll be opening, apart from a few stores that are going to be opening in new towns, which will be full-service stores, most of the other stores that we plan to open will be stores optimized for delivery and for takeaway. They will be less than 1,000 square feet in size, typically about 700 square feet in size, located close to the market they serve. However, located in front-facing, customer-facing area so that we get walk-in customers as well. And in our experience, we have seen that a delivery carryout store is actually a more effective store than only a cloud kitchen. The cloud kitchen then depends solely on delivery. The takeaway, which is going to be an increasingly important channel for us as dine-in remains under pressure, I think the delivery carryout format is going to be more effective and give us a better return on capital for us than a pure cloud kitchen.
Yes. And Pratik, I'll also add here. This is Hari Bhartia. The -- more and more, it is important to bring transparency. So when we build the store, it's an open kitchen, people -- when they walk in even for carryout, they can see the kitchen. They can see how the food is being prepared. They can see the sanitization and hygiene standards. So I think visibility from a brand perspective and confidence perspective is very important also. So I think as the store formats will shrink, but we will -- we continue to give a lot of importance to carry out and visibility.
The next question is from Manoj Menon from ICICI Securities.
That was a brilliant execution which we could see in the last 5 months. A couple of questions, actually. One, just curious to understand the conversations which you would have had internally before you decided to implement the delivery fee. Because historically, when I look at it, whether the pizza price what I pay for a medium-size in Bombay versus, let's say, Manhattan, I mean there -- I think there will be enough understanding or observations that pizza is an expensive product in India from a consumer lens. So how do you -- I understand that at this point in time, consumers are probably prioritizing -- consumer is not necessarily prioritizing price and value. So FY '21 or even FY '22 is fine. So but then it will be important, one, because, let's say, for example, as an analyst in April, not even in my wildest dreams this is something which was feasible. So good luck on that. So just to understand the affordability angle on pizza, there is a gross margin what we have currently? That's the first question. The second question to you and Mr. Bhartia, actually on the general thought process on M&A opportunities which may be available in the market today and that also to say in the context that Jubilant FoodWorks is probably the only restaurant stroke sort of similar company which actually has got a good balance sheet and more importantly, you've got a currency of the stock as well. Just trying to understand these 2 things.
Thank you, Manoj. Let me respond to the first question on delivery charges. I think as you rightly alluded, there was a lot of internal deliberation last quarter when we decided to introduce the delivery charge. I think if I wind the clock back a little, we had begun charging for delivery for extreme use cases even earlier last year. So we had begun charging for late night delivery, for deliveries after 11:00 p.m. across the country in the second half of last year. We've also begun charging on aggregators for orders below INR 300 without undermining order value threshold. So we had tried and experimented these delivery charges and our experience has been reasonably positive. When COVID struck us, our first response actually was to just get business continuity restored. As you appreciate, getting business back, putting in all the SOPs for hygiene, for sanitization required us to embrace much higher cost structure, the cost of sanitization, cost of PPEs, et cetera. And the cost was significant. And we began asking the question that can we absorb this or would customers be willing to pay this cost? We also saw the larger delivery ecosystem, where all delivery service providers, whether it's food service aggregators or whether it is any other e-commerce player began charging for delivery, and we also saw customers' willingness to pay for this. Customers began to appreciate the value of having food or a grocery item or any other item delivered to their doorstep hygienically and safely. And all the consumer work that we did in the last 3 or 4 months told us that the consumer was ready to accept this. And only after that discussion and that debate did we introduced this. However, I want to put -- I want to make one point abundantly clear, and I think we needed to bear as well we are absolutely clear that we are a value for money-focused brand, and we will remain that way. There's nothing that we will do that will compromise our value credentials. So for example, even after increasing the cost of delivery charges, our Value for Money Scores have actually improved. And customers have realized the value that we are providing, number one. Number two, contextually, it's important to know, and I'm sure you will recognize this, that even after the delivery charge, we remain much more cost-effective for the customer than getting orders on aggregator because there's a delivery charge, there's a distance fee, there's a surcharge and then there are packaging charges. Compared to any other service provider this will remain the cheapest. So look, we have value for money front and center in our process, we'll do nothing that will compromise it. You can be sure of that. Mr. Bhartia, do you want to respond to the question on the M&A.
Yes. I'll comment on that. So this is Hari Bhartia. Firstly, on the -- just to add to what Pratik said on delivery charge, I think customers have started attaching some value to the whole delivery and convenience part. And thanks to the aggregators, as Pratik pointed out, people have realized that for a service like this, where we are guaranteeing a delivery time beyond what everybody else does, that there is a value to this. And it also helps us feel differentiating for a person who comes and picks up the pizza from the store. So I think to that extent, he gets an advantage. So I think customers have -- and as Pratik said, there was a lot of work done before we introduced this charge. Now coming to M&A, I'll tell you, we are quite conservative when we look at...
Mr. Bhartia, I'm sorry to interrupt, but there's a lot of disturbance on your line.
I don't know. I'm muted everywhere except this line. So can I -- let me continue and see how it works. Maybe others -- if there are -- if others can mute it. I'm muted here. So on the M&A, I just wanted to add that we are a bit conservative. Firstly, in the last 25 years, we have always seen a very large opportunity for Domino's itself. Even today, we see a possibility of growth to 3,000 stores and a single-minded focus to make this very efficient and continue to scale this business. And I'm sure, as the economy grows, the potential of number of stores will grow. The format, everything will grow. In the meanwhile, we also took up 2 -- we have taken up Chinese as a brand, which we see as a huge potential. We are experimenting with an Indian brand where we see the potential to take it up. But saying all this, A, to stay focused on what we are doing and scale that up because we see potential very large. Sri Lanka and Bangladesh together offers a big opportunity, almost to a level of, if I say, combined between 300 to 400 stores in the next many years. But to your point, we look at opportunities. We see where we can add value, where we have strength in terms of either digital. As you know, we have a unique supply chain system, which can help reduce the cost in a new brand. We do continue to look at opportunities. And if we find something which -- where we can add value and help them scale up and which is not competitive to our existing play, we will look at it.
Okay. Okay. Understood. Understood. My -- the only context, which I'll just quickly highlight, on my second question, on the M&A opportunity, was point number one. As an analyst, I've been advising investors on one aspect saying that look Jubilant is probably the only company with -- in at least in my understanding, listed or unlisted, which actually got a good balance sheet and a lot of the other companies -- a lot of the other companies would probably need a growth capital infusion, which technically means that there might be distress and otherwise opportunities. And top down, for example, when I look at the ChefBoss launch recently or the Chinese -- or the comment 6 months back about looking at some of the global opportunities, it's very clear that top down, Jubilant FoodWorks as an organization might be willing to look at opportunities for growth outside of Domino's. And India, possibly, there may be a burger opportunity, there maybe even, I don’t know, X, Y, Z opportunity. That was my background of asking that question because the timing was more important. Maybe I would not have asked this question 1 year back.
No, no. Your point is right, and we will -- we are looking at it. But we have to be careful. We are just not jumping at it. And if we feel that we can add value and create a sustainably large business, we will look at it.
The next question is from the line of Dhaval Shah from Girik Capital.
Sir, my question is on the operating hours of the stores during the Q1. On an average, they would be operating what 50%, 60% of their regular time? What is your understanding?
Dhaval, that would be a function of, A, which pizza you're talking about and which geography and which town and which store, in particular. We saw the operating hours improve from Q1 into July and August. And in July and August, the operating hours curtailment was confined to a fewer stores. But until early July, we actually had all stores shutting at 9:00 p.m. So it's a function of, again, like I said which store, which geography, also which channel. I mean some channels were allowed to operate for longer hours, but dine-in was shut a lot earlier. The interesting thing is that wherever we have seen operating hours unconstrained, recovery there has been much, much stronger. So this average that you see of 85% is a combination, as you can imagine, of stores which were constrained in terms of operating hours and operating days of the week and so that were unconstrained. And a large number of stores that were unconstrained actually have returned to full normalcy and pre-COVID phase levels.
Yes. So just was trying to figure out the employee cost since the entire staff has moved to the variable part. So if the stores start operating to near-normal hours, what sort of number should we keep in mind on the employee side? So it should be -- I mean, will it be upwards of INR 250 crore?
So Dhaval hard to put a number to it. It will be a function of various different things. But I think the important point is if you look back at the quarter 1 results that you were seeing, our move to variabilization actually happened through the quarter, mid-quarter, actually. So you weren't seeing that benefit being captured in quarter 1. Also the fact that through quarter 1 and through, I guess, even July and August to some extent, the demand conditions and local restrictions were fairly unpredictable. And therefore, we had to keep our staff in the store to service orders as and when they came. But potentially, if I look ahead, that is exactly the idea that if we are -- once we are able to get a more certain and more definitive demand environment, how do we make sure that the supply deployment of manpower mirrors and matches what we expect the demand curve to be like.
True. Fair point, sir. And sir, what sort of trajectory do you see in terms of the GP? We have expanded by a couple of basis points?
Prakash, you want to take that answer?
Yes. Mr. Dhaval, as you have pointed out, the GP margins have been better this quarter. And primarily, the raw material cost has been good. We expect the commodity trends to be benign during -- throughout the year. So we expect that we will have the benefit of the low prices in the coming quarters as well.
The next question is from Amit Sachdeva from HSBC.
Just very, very quickly wanted to ask the logic of FMCG venture. Basically, obviously, you have a restaurant business, so there's clearly the expertise there. But this is about brand and distribution is very different and it's also perhaps a different battle. So it may like a short-term need where people want to work at home, but building a business of this scale and if you could share some vision? And how do you see this? Should we really take it seriously? All I mean to say is that. Or it is something that is an experiment and you probably want to see how it goes?
So this is Hari Bhartia. Firstly, we did this seriously. It's a small start, I agree, but it is something that we believe we have already a lot of expertise in this in terms of ingredients, in terms of flavors. As you have seen, we have entered the area of cooking sauces based gravies right now, mainly just to start with in the ready-to-cook. Ready-to-cook market is quite large, could be INR 5,000 crores to INR 6,000 crores. And -- but this part of the market is growing very fast. Because for convenience, where the life at home is busy for anybody who's cooking, and it's not only COVID situation, but it's the way lifestyle at work at home is evolving, that convenience is becoming very important. So in terms of buying ingredients and then preparing food to making it convenient for a housewife or somebody who wants to cook at home, to make it easier to put together in a manner that they can also be creative and add their creative aspect in a very short period of 15, 20 minutes. And this is a kind of thing which is -- which has been evolving, whether it is pre-COVID or at post-COVID level, we will see that this kind of market will grow. And we do believe that we have built some deep knowledge in this area because of the different cuisines that we work in. We have good supply chain capability to produce this at an effective cost. And as you have seen, we have launched it digitally right now through e-commerce mainly, and we want to take it to modern trade next year and expand the range of products also. So we expect this to be a large and a serious business in the future. But we are also taking these steps by getting more consumer response of the products that we have made. I think we have looked at pricing very carefully to make it affordable and also, of course, high quality. So that's where I would say the whole thought process is.
Sure. So I think it's a slow build and basically going from small channel in e-commerce to maybe modern trade and then introduce. So I got it. I got it. That's very helpful.
So I would say we also need -- we will also expand the range of products while we go forward. So, of course, take it to all channels and expand range.
Yes. Got it. Got it. No, that's very helpful, Mr. Bhartia. Just a small one, if I may ask Pratik about the variabilization of staff costs, which is obviously a great idea and you probably would like to retain some part of it as the situation evolves as well. But I would assume the delivery staff was already on the variablized structure, if I'm correct, right? Largely, it has been achieved over time last year as well, quite a lot of it. And is it the -- for our cost base for the fixed staff that works in the stores or -- to what extent is incremental? What I want to know is that, what was already there, what is new structure is coming? Does it mean that cost has now gone up because if somebody is going to variable structure from fixed structure, is it wages are higher now adopting this structure? What does it mean for -- if you look at this cost as a percentage of revenue of some sort?
Amit, when we visit this -- come back to the first part of your question, I think this move from full-timers to flexi-timers covers both our in-store -- inside the store employee and also our delivery staff. Our delivery manpower earlier was a combination of full-timer, part-timer and pay per delivery. And therefore, this move to flexi-timers where we roster and ask people to come by the hour covers them as well. Now as we move from a fixed cost to a variable cost and by hour, what happens is that while there may be a marginal increase in the per hour cost, the efficiency that we extract by ensuring that we indent and roster people only when they are needed versus carrying surplus capacity when they are not needed, I think that cost more or less comes even. In fact, there's an advantage to that, which is why we get efficiency at the operating level. Did I answer the question, Amit?
The next question is from the line of Abneesh Roy from Edelweiss.
Sir, you mentioned that Domino's stores new are being optimized for delivery and takeaway. My question was on Hong's Biryani and the Indian offering, also are you doing something to take care of this?
Abneesh, no, absolutely. I think our new stores for Hong's or indeed for the Indian brand will be optimized for delivery and carryout for 2 reasons. One is, of course, the faster growth that we expect in these 2 channels. But also the point that Mr. Bhartia made earlier, about the importance of having a customer touch point that he or she can come and experience the brand, see the quality, see the open kitchen. So for both those reasons, even for the new brands when we expand in the Delhi, NCR region, we will be looking at delivery carryout stores, very efficient, very optimized for delivery and takeaway.
And could you share some more insights on how the performance of Hong's and the Indian offering is? I understand the Indian offering on the delivery and takeaway are not that suited versus a pizza. So are you also talking about expansion in the Indian offering in the next 6 months?
So first, coming to your question, Abneesh, on Hong, I think Hong's we are very pleased to see a very strong recovery in performance through the quarter and especially in July and August. What we -- apart from the fact that there was reassurance of a credible brand with an open kitchen, delivering quality products at good prices, what also helped us was that during the last quarter we introduced a new value for money range priced at INR 99. We call it the incredible range. And that really helped us drive our order count. So our recovery has been very robust, and that has given us the confidence to, therefore, expand and scale up in Delhi, NCR. On Biryani, the Biryanis of India, we had only 1 store during the quarter, which was in a mall, and its operation was intermittent. Therefore, it's hard to sort of, therefore, eke out and say what the recovery was. But whenever we had operations going and whatever -- to whatever extent we did, the feedback was very reassuring. But we will be looking at scaling up Indian gradually over time.
The next question is from Avi Mehta from IIFL.
Sir, I had a question on the cost savings program. You -- could you have a target in mind in terms of the rupees crore saving that you are planning to achieve in FY '21?
Prakash, do you want to take that question on? Prakash yearly has a target.
No, Avi. Yes, Avi, of course, we have a target, but I think it's a future, forward-looking statement, so we can't really share this target.
Sir, I mean, just trying to get a sense on how much to expect. And more importantly, how much can sustain? If you can give us any guidance on that, that would -- that is what I was looking for.
No. I think it's difficult to put a number around it. But be rest assured that company is totally focused on cost and we would make every effort to optimize the cost.
Sir, my second...
If I could just add...
Sorry, go ahead, sir.
Go ahead.
No, no. Go on, sir.
No, no, just to add what Prakashji said, I think there were 2 parts to our cost optimization exercise in the last quarter. The first one was an urgent and immediate response to the lockdown and the business impact, which we move to do. So we cut cost, very specifically restaurant operating cost, energy cost, maintenance cost, manpower cost. Yes, so there was a lot of urgent action taken to cut our costs for the immediate quarter 1. However, we also put in place a lot of workstream which would help optimize cost for the longer-term as well. And the intention, obviously, is that once this pandemic abates and once we emerge from this, we will come out stronger with a more efficient, more optimized operating model. That's exactly the intention.
Okay, sir. Okay. And sir, my second bit, again, just on the -- I'm still not able to understand why do you -- gross margin should logically expand further from the current levels in first quarter because you obviously had a delivery charge, which you would not recoup for the entire quarter. What is the flaw in that understanding? Am I going wrong? Shouldn't margins logically move up only as we go forward? And so anything just you can throw light.
So just to add to what Prakashji has said earlier about gross margin expansion. One of the drivers of gross margin expansion sequentially and versus last year was the fact that owing to a much reduced competitive intensity and owing to the fact that the restaurant supply had gone down significantly and owing to the fact that consumers and customers were choosing to order not driven by discounts, but driven by credible and trusted brands that rely on, yet pull back on discounting in quarter 1. And that also was a significant contributor to the gross margin expansion. As stores have reopened, as other brands have come back, as a semblance of normalcy has returned and you saw that in our numbers on delivery, we've got the discount back. And therefore, there will be that headwind on gross margin on account of discounts rationalizing, which will be competitive as Prakashji said through food inflation remaining benign.
And the delivery charge, sir, shouldn't that logically add to the merchants as well? Because that has been implemented in June, so would that not be the case? I mean, unless -- the delivery charge is something that is present for the entire quarter?
No, it was not there for the whole quarter. So yes, it was -- it started from the June. So you will see the full effect in the coming quarters.
So you will see some expansion because of that, right, sir? That's a fair bit to kind of take it.
We take the last question from the line of Ritesh Gupta from AMBIT Capital.
Hello? Am I audible?
Yes, Ritesh. Please go ahead.
Yes. Sir, just on the store expansion bit, could you accelerate from a long-term point of view because, let's say, the delivery and the takeaway format gets viable, so should the 100, 150-store expansion guidance from '22 onwards, should it accelerate as opportunities become better and rentals probably get more rationalized?
So Ritesh, first of all, I think for this year, our 100-store plan that we talked about, of which we've covered 24 so far, has to be seen in the context of the COVID-related practical constraints on the ground and the need for us to execute within those constraints. So that itself, I believe, is an aggressive number. However, going forward, is there room for us to change gears and expand faster? I think the answer is yes, absolutely so. And then Mr. Bhartia also called out in his remarks saying that he sees a much larger potential for Domino's as a brand in the future. So yes, next year, and hard to predict right now, but depending on how the COVID situation plays out, we could see potentially an expansion and acceleration in store expansion.
Sure. And sir, just to clarify from the previous participant's question also. I mean, historically, your gross margin range has been around 40 -- 74% to 75% and that's been pretty consistent. Should we now see a relatively better long-term gross margin trajectory given the delivery charges have emerged and that has become much more acceptable to the consumer? Should we see a band change in the gross margin itself from a 2-, 3-year view or from a 4-, 5-year view?
No. So Ritesh, I would not move to the conclusion quite yet. I think this quarter and what we are seeing even now is a very soft commodity cost environment wherein costs are at historic lows. Quite unlike what we saw in the past. Some of the margin expansion has been driven by that. The last quarter margin expansion was also driven by discount rationalization that I spoke about earlier. So as those -- as that plays back and winds back and the inflation normalizes, there will be the pushes and pulls between that and the delivery charge. Now where that leads us, I can't be sure, but I think it's premature to conclude that there's not been an expansion in gross margins for perpetuity.
We will take that as the last question. I would now like to hand the conference back to the management team for closing comments.
Thank you, everyone, for joining us on the call today. We hope that we were able to address all your queries. To conclude, we believe that notwithstanding the unpredictable and the high-impact nature of the crisis that hit us, we've done a good job of dealing with it in the immediate short-term last quarter. We moved swiftly to drive business continuity and get most of our store network operational. Most of our targeted stores are now operational. Our powerful brand, strength in delivery and a strong set of digital assets and programs have helped us drive our sales recovery. Delivery and takeaway sales are back to or higher than last year's levels in most parts of the country. We've also used the crisis to make some fundamental improvements in our operating model through variabilization of store manpowers, culling up unprofitable stores and the introduction of a delivery charge. We have complete conviction that we will emerge from this crisis stronger. Should you need any more clarifications or have any more questions, please feel free to reach out to us. Thank you. Have a good day, and stay safe.
Thank you very much. On behalf of Jubilant FoodWorks Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.