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 Q2 and H1 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to 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 2 and H1 FY '21 Earnings Conference Call for Investors and Analysts. We are joined today 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; and Mr. Prakash Bisht, CFO of Jubilant FoodWorks. We will commence with key thoughts from Mr. Bhartia. Thereafter, we will have Mr. Pota sharing updates on JFL's progress and the strategic perspectives on growth. After the opening remarks from the management, the forum will be opened for question and answers. A cautionary note. Some of the statements made on today's call could be forward-looking in nature, and the actual results could vary from these statements. A detailed statement in this regard is available in Jubilant FoodWorks' Quarter 2 and H1 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. Thank you for joining us on the call today. I hope everyone is staying safe and healthy. While visibility for the near-term demand has improved sequentially, we remain cautious on the broader economic impact of the global pandemic in the coming period. We, on our part, continue to navigate the COVID-19 pandemic situation and try to serve our customers, our communities with convenience, affordable, safe food and service experience. I'm pleased to report that the company's second quarter results delivered a continuation of and, in many respects, an acceleration of the key themes we outlined on our previous call. Firstly, our effort was to secure the quickest path to recovery. Despite tremendous headwinds from COVID-19, the company secured the quickest path to recovery by adapting the business to new realities. This was done while according highest priority to health and safety of our customers and employees. I'm glad to share that as of today, we have reopened almost 100% of our store network across the country. And as you have seen in October, we have recorded near 100% sales recovery compared to last year. Secondly, we have continued to leverage this opportunity to strengthen our operating model. During this crisis, we took significant steps to strengthen our business, increase our financial flexibility and optimize our cost structure.Notably, pursuant to our decision to close 105 unprofitable Domino's stores, we had effected their closure in H1 FY '21, that is almost 5 stores in Q1 and 100 stores in Q2. As you are aware, these stores were part of margin improvement program during the pre-COVID period. However, we remain on track to open more than 100 new Domino's stores in the most viable store format as our result -- our network will be of similar size as last year. We plan to make our stores portfolio to become more profitable by the end of this year. Thirdly, we have continued to leverage investment in our digital assets. Our continuous investment in our in-house tech platform has helped us to respond fast to our new requirements of business. The app downloads during quarter 2 at 6.3 million were the highest ever for the company. Online orders for delivery sales have risen to 99%, thereby reducing cost and improving efficiency. Fourthly, we have continued to innovate during this tough period. As you know, we launched the new drive-and-pick functionality, which will obviously allow our customers to avail takeaway orders conveniently from within the safety of their very vehicle and without stepping into the Domino's store. We have also launched a Pasta Pizza Party, which -- with the launch of pasta pizzas and our new range of pastas. Pratik will elaborate more on this. Largely, I must say, we continue our efforts on delivering superior performance. As a synergetic combination from revenue recovery and stringent cost control despite host of challenges, the company has delivered a superior performance, with improvement in earnings and substantial improvement in margins year-on-year. With the current business momentum, we are confident that the business will continue to improve to achieve near normalcy by the exit FY 2021. During the opening of COVID, we had contained our store opening plans. During the first -- during the quarter 2, we restarted our efforts and now have removed all stops, and you will see more store openings quarter-on-quarter in more new and optimized format for all of our brands. Considering all the requisite interventions affected by us in light of the changes in operating environment, I fully expect that when we emerge from the pandemic, we will be even more agile, responsive and efficient. We are continuing to invest significantly to further enhance our digital strength in maintaining a continuous dialogue with our consumers with relevant advertisement and promotional campaigns and in allied growth areas. Now I would request our CEO, Pratik Pota, to continue this discussion by sharing his perspectives.
Thank you, Mr. Bhartia. Good evening, and thank you for joining the Q2 earnings call today. In the face of continuing COVID-related headwinds, I'm happy to report that we showed true resilience and mettle to deliver a strong all-round performance during the quarter. We executed a clear strategy and playbook to navigate this challenging environment during the quarter. We implemented a new set of safety and COVID containment SOPs in our stores and commissaries, which has allowed us to offer continued and uninterrupted service to our customers safely and consistently. We reopened most of our stores across cities, with a few stores that were not opened being in corporate parks or in specific locations that have restrictions. We brought a strong focus on delivery and takeaway channels to mitigate the pressure on dine-in. In delivery, we removed the threshold of a minimum order value requirement that we believe will help grow orders and will allow us to tap into both a new set of emerging customers and also into new occasions. The takeaway channel continued to see strong momentum, and we made the user experience more smooth and intuitive. We also launched the new drive-and-pick functionality, which will allow our customers to avail of a takeaway order conveniently within the safety of their vehicle and which will simulate the drive-through experience. Dine-in remains muted as expected, though there was an encouraging recovery sequentially. Our continued focus on digital efforts during the quarter. Our sharp focus on performance marketing helped drive app downloads to a record number of 6.3 million during the quarter. We also introduced a number of features on our app that help improve the user experience and drive convergence. We stepped up our marketing investments in quarter 2 with an aggressive presence on IPL through promotions, followed by the launch of the Pasta Pizza Party. We had strong visibility both on television and on digital, and we had a dominant share of voice on television during the quarter. We also maintained a tight focus on keeping costs under control. We made good progress on containing our fuel, energy and maintenance costs. We also did well to control our manpower costs in our stores. As a result, we were able to partly mitigate the impact of revenue deleverage on our financials. We also continue to invest in our future growth drivers. The Hong's Kitchen business showed an encouraging recovery, and we now have 5 stores of Hong's Kitchen operational across Delhi NCR. Our range of RTC products ChefBoss that we launched last quarter is now available on leading e-commerce platform. While it's early days yet, we are encouraged to see the consumer trials and good reviews on these market places. Coming to the Q2 results. Operational revenue was INR 8,055 million, an increase of 111.8% sequentially. Our overall system sales recovery for Domino's was 82.3% when compared to the same period last year. Within this, the Delivery and Takeaway channels did well and grew by 5.8% and 49.8%, respectively. The Dine-In channel continued to underperform and recovered 17.5% of system sales revenues compared to same time last year.Within this recovery, our larger metro towns of Mumbai, Delhi NCR and Bangalore showed a slower recovery as compared to other smaller towns. A total of 159 towns recovered their sales fully by September and showed a growth as compared to last year. EBITDA for quarter 2 came in at INR 2,147 million at 26.7% of revenues, an improvement of 290 basis points year-on-year. The margin improvement was on the back of soft dairy prices, along with several specific cost optimization initiatives that we've undertaken during the quarter. Profit after tax of INR 769 million, increased by 1.3% versus last year. PAT margins at 9.5%, grew up by 180 basis points year-on-year. The company's cash position for the second -- during the quarter, total cash and cash equivalents, bank deposits and investments increased from INR 6,401 million by end of quarter 1 to INR 8,278 million as we ended quarter 2. We opened 10 Domino's stores this quarter and entered 2 new towns. Our new store count for the year so far, therefore, stands at 34 for Domino's. We also opened 1 new store each for Hong's Kitchen and Dunkin' Donuts. As committed during the last earnings call, we are on track for opening more than 100 stores during the -- 100 Domino's stores during this year. In the international part of our business, we saw sustained recovery in both Sri Lanka and Bangladesh, led by online delivery sales. Moving from the last quarter, with a more recent optimal performance, we saw a strong recovery continue in the month despite, you recall, lapping a strong month from last year, which has both Dussehra and Diwali as part of the base. We had an overall revenue recovery of 96.2% with the channel wise recovery being similar to the preceding year's trend. In summary, I would like to say that we are pleased with the performance last quarter in the face of continued operational challenges in a difficult demand environment. Notwithstanding the changing and uncertain nature of the COVID pandemic, we believe that the worst is well behind us and feel extremely confident about the future. I would like to end by calling out the tremendous work done by all of our employees across the country. Their determination, resolve, their persistence and untiring efforts in the face of difficult circumstances has been truly humbling, and it has helped us serve our customers unceasingly and to recover faster. We owe our employees and our team members and their families a huge debt of gratitude. With that, I'll hand you over back to the moderator for a Q&A session. Thank you.
[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.
Congrats on the margin expansion. My first question is on the fusion product. So you've come out with the Pasta Pizza. So earlier, you had tried another fusion product, Burger Pizza, which did not exactly go as per expectation. So my question is what was the learning from there in terms of pricing, product formulation, branding, which you'll do differently and that's why you have launched this? So what is the confidence level this time versus Burger Pizza?
Abneesh, thank you. Thank you for the question. Actually, it's an interesting question that you asked. Select to contrast, Pasta Pizza and Burger Pizza. They are fairly different. I think the key difference is that the Pasta Pizza product as a format is a pizza itself. It's a pasta on a pizza. There is no format innovation. The pizza is similar to any other pizza that we are known for. It is the introduction of pasta as a topping that makes it unique. The learnings from the Burger Pizza, indeed from all our innovations, is something that we always take on board, and we incorporate them in our launch planning, and I think the critical ones are ensuring that we do a lot of consumer inciting around the proposition, make sure we test the product, make sure we have operational readiness trials done. Those learnings are ongoing learnings. And we indeed tick those boxes before we launch Pasta Pizza despite the challenges linked to having the launch happen in the middle of a pandemic. And I think the early response on Pasta Pizza that we have seen in terms of trial, in terms of repeats, in terms of customer feedback and NPS Scores, the feedback on social media, all of these have been extremely encouraging.
Great. My second question is on the store closures. So such a sharp closures -- quick closure of stores, especially when things are coming back so quickly. In terms of cost also, if you see cost dynamics are also structurally lower versus what it was pre-COVID. And gross margin almost 250, 300 bps expansion. My question is what was the hurry to close 100 stores? And second, now most of the new stores, will it be adjacent to the existing store? I'm asking this also because you have exited 6 cities in Domino's. So that is something shouldn't you do after the new store is opened through the exit a city after that's done. So if you could address that part?
Sure, Abneesh. So I think the important point is to go back to what we discussed on the call last time, which is that these 100 stores or 105 in total were stores where we saw no line of sight to profitability despite a lower cost structure, both in terms of food cost and high gross margins and in terms of lower operating costs, including lower rents. The reason for that fundamental was most of these stores were largely dine-in oriented stores of stores in locations where we did not see traffic come back. When it was abundantly clear that there was no line of sight to profitability, then it made sense to exit from these stores quickly. I think it's important to also, in the same breath, say that our commitment is to open at least 1 store for each one that we shut down. And therefore, to attempt to end this year with the same network size as we had when we entered this year. And as Mr. Bhartia said in his opening remarks that we are removing all possible barriers to store expansion. I think the important thing is to open stores that are efficient, that are optimized to serve under the new demand pattern and to serve customers across all channels, delivery, carryout and indeed dine-in, optimized for dine-in. Coming back to your question about where the new stores being, yes, we've exited 6 towns, but we intend to come back in these towns, we also intend to open many more in new towns in the balance of the year. The new stores that we open will in some cases be in the same micro markets, where we were present earlier and where we shut the stores down. But in some cases, it will be in markets more optimized for the new channel demand, the demand pattern that we have seen by channel to sort of take advantage of the growth of delivery and takeaway. So I think to summarize the key things, these stores were not going to be profitable in the next couple of years based on our modeling, and therefore, it made sense to shut them down ASAP, number one. Number two, we will be opening at least one store for every store that we shut down. Number three, these stores to be put both in towns that we are present there and also in new towns. So we are a growth brand and a growth business. And based on the revenue recovery that we have seen last quarter and in October and the way our cost structures have been controlled, we feel extremely confident about the future. And our agenda is to open more stores, not to shut more stores.
That's helpful. Just...
I'm so sorry to interrupt. May I please request you to rejoin question queue for your follow-up. [Operator Instructions] The next question is from the line of Percy Panthaki from IIFL.
My first question is on your gross margins. So in the last several years, your gross margins have gravitated towards that 75% kind of mark and last 2 quarters have been higher than that. So would you say that the 78% kind of gross margin is the new normal going ahead?
I think it's important to understand the reasons why our gross margins have expanded in this quarter compared to like you rightly said, the historical trend line, which was a little lower.I think there are 3 or 4 drivers of the gross margin expansion. The first one is a fairly soft commodity cost environment in dairy. Unlike last year, when we saw huge pressure on dairy prices, milk and cheese prices last quarter, and indeed the year so far, has been a lot softer, and that obviously helps us grow gross margins to an extent, number one. Number two, I think compared to same time last year, if you remember the period of a year ago, there was intense competition, and I think there was a lot of discounting on aggregator platforms. I think this year, the discounting has been lower. And indeed, our own discounts, therefore, have been calibrated accordingly. And in fact, lower discount also helped us expand the gross margin. The third thing and very important work that the team has done even controlling wastage through a lot more of -- a lot better forecasting, a lot more vigil in the stores and therefore, that's made us more efficient in the stores. And the fourth reason, of course, is delivery charges. The fact that we introduced delivery charges toward the end of last quarter and quarter 2 was the first full quarter when we got delivery charges play out. So these are the 4 reasons that helped our gross margins expand. And as you can -- if you go down the list, I think it's very clear that some of these are sustainable and some of these will correct as the price cycle plays out.
Sir, let me answer the same question in another way. This delivery charge that you have taken or rather introduced, would you consider that as part of your normal annual price increases or is that over and above that?
I think it's important to look at this from a consumer lens. I think the fact -- I'll say 2 things. Charging for delivery is part of the operating protocol for the entire delivery ecosystem, whether it is food, whether it is grocery, whether it is any other service. It was the only outlier, the only exception to this rule, which we have now corrected and we've introduced delivery charges, which are towards recovering partly the cost of delivery and providing the convenience at the customers doorstep. So that's the first point. The second point is that we recognized and we know that ensuring that we are in the right space in terms of value for money is critical. We are in the QSR space. Our strategy is to expand and grow the market and grow the category amongst a set of very, very value conscious consumers. So between the delivery charge introduction and anything else that we may do, we have to make sure that we keep value for money as an equation front and center. And we do nothing that damages that equillibrium.
On your store opening trajectory, could you give us some idea how many stores you would target to open in FY '22?
That's a little early right now. I think as we are right now focused on FY '21, the number we talked about for this year, as you know, is over 100 stores. But it would be fair to say that the momentum would accelerate for next year as we exit this year.
Right, sir. And one last question, if I might squeeze in.
I'm so sorry to interrupt. May I please request you to rejoin the queue. The next question is from the line of Latika Chopra from JPMorgan.
My first question was on revenue trends and the comments that came through that you plan to achieve normalcy by exit FY '21. Now this quarter, though, you would have a base impact from festive and the base -- the October month I'm talking about. But at the same time, we had IPL which was not there in the base. So how should we read the growth trends? And what do you imply by normalcy by exit FY '21? Do we expect the company to recover back to normalized SSG growth levels? Or we are talking about absolute sales being same as last year levels?
Latika, thank you for the question. I just want to make sure I heard you correctly, because there was a bit of an echo when you -- in the first part of the question. Your question was about how should we read October given that we had IPL this year. Was that the first part of your question?
Yes, there was IPL this year and then the base had Diwali, right? So just in that context.
Right, right. Latika, thank you for the question. I think the way we are seeing this is that IPL certainly had an upside similar to our delivery sales for us and for the entire category. There was also Diwali base sitting in last year's numbers. If we spread the numbers and do the math, we still believe that coming close to 100% recovery in October, I think it's very, very good momentum. And remember, the overhang of COVID continues. That's not gone away. And one of our channels has been underperforming for obvious reasons. That got a little better in October, is not on the numbers, but still well below what it should be pulling at. So all 3 put together, I think October performance is very, very encouraging. I think the way to see this if you look at the trend line month-on-month. See, channel-by-channel, look at the numbers for each channel and see how both at system level and the same-store level, like-for-like level, how the numbers have moved up. So all the numbers that we modeled internally tell us that this is very, very encouraging. And this is ahead of what we've seen in the category in general. Coming to the second part of your question. Yes, I think the way we are seeing normalcy is that we would see actual growth happen year-on-year and the COVID overhang to sort of become almost a non-issue. That we believe would happen towards quarter 4 -- towards the exit of this year.
All right. Okay. And as the markets open up, I just wanted to get a sense on how are you seeing the momentum on new customer adds, frequency of consumption from existing consumers as more food options become available? Any color on some of these underlying trends? How are they behaving?
Latika, there are 2 or 3 points to keep in mind here. I think the first large point that -- and the contextual point that you all know is that in India, the category frequency and the category penetration remains low. Structurally, we've always been a Dine-In-driven market, and even consumption is actually low within that, even lower. Number three, we've been a highly fragmented market with a multiplicity of choice and very often driven by discounts and deals. I think a lot of these variables are changing. The market is becoming a lot more organized. I think there is a greater acceptance of food coming home, and there's going to be a shrinkage of marginal brands with questionable antecedence and questionable credentials. So all of these trends, if you add them up together, it will be 3 or 4 things. A, it will mean a growth in the organized sector, faster growth. It will mean a growth and a faster growth of credible trusted brands. It will mean a faster growth in the delivery channel. It will mean faster growth on the back of online and technology. Now all of these trends will do 2 things: A, is to grow the category, of course; B, we will play to us and for the brand. So even as the market opens up, even as consumers now have no choice, we believe structurally the way that the market will shift, will be playing to our strengths. Did I answer your question?
Yes. But I was just trying to understand...
I'm so sorry to interrupt. The next question is from the line of Chirag Shah from CLSA.
The highest ever app downloads that you have seen of 6.3 million is very, very impressive. So of course, the lockdown is one of the incentive for the consumer to download the app. But beyond that, what are the efforts and promotion that the company has done to give an incentive for the consumer to download? And at what stage do we start the data analytics once the app is downloaded? And is the download -- does the download mean that the consumer would have tried his first order on the app?
So Chirag, thank you. I agree, we were very encouraged to see the sharp increase in app downloads. And we were gratified because that was very clearly a conscious strategy on our part. What drove this? I think 2 or 3 things. The first one is a very clear focus on performance marketing, which helped drive our consumers to download the app with a specific call to action and the increase of our spends on performance marketing by almost 80% versus same time last year. That was a very clear strategy to drive app downloads, number one. Number two, our app through the last quarter and the last 5 months, has always been advantaged vis-à-vis other ordering platforms in terms of promotions and in terms of experience. So in quarter 2, specifically, during IPL, we had a 50% of BackToCricket offer, which was ran exclusively on our own assets, our own apps. So that was an incentive for customers to come in and download an app and order from our app. The Pasta Pizza launch was previewed first on our app for a fortnight before opening up to other platforms. So those are 2 reasons. Third reason, we believe, is the fact that for Domino's users, the most intuitive and the most seamless experience actually comes from consumer app because once you order on our app, your choices we remember, you can customize your pizzas. So the time to transact, the time to complete the order is the shortest on our app. And customers began to see that and we saw that happen, and that's what actually drove our app downloads. Our data tracking to your point begins immediately. Once the app is downloaded, we prompt and encourage customers to place their first order. Once they place their first order, we, of course, get the feedback and customer satisfaction scores and then we prompt repurchase as well. So there's a very clear customer engagement strategy which follows an app download. And our CRM strategy plays a -- therefore, a very -- in complementing our app downward strategy.
Understand. And my second question is on the store closure. Have we reorganized the delivery to then service larger areas wherever you have closed stores or it doesn't make sense considering the increase in delivery cost that it entails?
No, Chirag. I think it's a good question. But just to go back to my earlier response to Abneesh, I think a lot of the stores that we closed were actually dine-in stores. Obviously, in that case, this question is not relevant. But in cases where we had delivery stores closed as well, what we did do is reorganize the deliver area to make sure that those customers were serviced from a proximate store in the neighborhood, wherever we could do that without compromising the customer experience.
The next question is from the line of Vivek Maheshwari from Jefferies. Mr. Vivek Maheshwari, you may please go ahead with your question. As there is no response from the current participant, we take the next question from the line of Avi Mehta from Macquarie.
I hope there's no issue with the line.
Yes, the line is on.
Hello? Can you hear me?
Yes, please go ahead, sir.
Yes, sorry, I'm really sorry, there was some issue at my end. Sir, 2 questions. One, continuing on the store closure right now. You have maintained that you would look to at least maintain the store count. Would this in a way, look, how would you change the portfolio now? Would it be -- A, would it be a change? Or would it be, in what form, location by -- if you could kind of share your thoughts on that, please?
Thank you, Avi. I think as we said on the call last time, and given the changing nature of the channel demand -- channel-wise demand, the stores that we opened this year will be a little different from the stores that we had in the past. And especially the stores that we've closed is a couple of ways. I think the first is that they'll be a lot more optimized for delivery and carryout. They will not be done independent alone, will be smaller stores, more compact, typically of a 700, 800 square feet size that will allow us to deliver to neighborhood very, very quickly, and allow us to also give a good easy takeaway experience. Given the size and given their objective, they will be located close to neighborhood in High Street, in residential areas, typically, they're not being in malls for larger parts and they're certainly not in the food court. So in that sense, for the larger part, our stores -- the new stores will be a little different from the ones that we are closing. The only exception that we would make is when we enter a new town where we believe that there will still be a demand for Dine-In, the store might be a little larger and with slightly more dine-in covered to allow the experience to be had by consumers in that new town. But even then, the store would be between 1,200 to 1,300 square feet. It will not be much more than that. So, yes, to summarize, smaller, more efficient stores, optimized for delivery carryout in existing towns with some space for dine-in in new markets.
Okay, sir. And sir, second, just a bookkeeping bit on the discounting. How has that trend kind of behaved? Have you seen an increase in the festive period? And -- or does it continue to be below historical levels? That's all from my side.
So Avi, if I do the trend line on discounting, sequentially, of course, there has been an increase because in quarter 1, I think everyone was looking to just drive -- continue with your business other than discounting. So there has been that increase sequentially. But on a year-on-year basis, there has been a softening of the discounts, both for us and for the category in general. Going forward, unless there is some irrational behavior which comes again, we believe that the worst of aggregator-led discounting is behind us, and we see a lot more rational discounting regime continue in the quarters to come. Also, I think it's important to recognize that consumers have become a little less discount and deal seeking and a little bit more value and quality seeking. That has also helped moderate that discounting behavior.
The next question is from the line of Vivek Maheshwari from Jefferies.
Am I audible now?
Yes, Vivek. We can hear you.
Apologies for the last time. So 2 questions. Firstly, I know it's an apple to mango comparison, but, let's say, as things have started picking up, we have seen a pullback in packaged foods. Now Jubilant or Domino's for that matter is at a very interesting juncture. So one side is the delivery and the takeaways and the other side is dine-in. As things pick up, customers get more experimentative, in that context, how do you think about -- is there a possibility that you have had a huge advantage in the last few months of being the most trusted brand as consumers start, let's say, looking out for option, is there a possibility that some part of the benefit goes away and gets to the competition, do you think that is something which is possible?
So Vivek, I think, I sort of go back to my answer that I gave earlier, and the things are as follows. I think our category still in India is small and nascent and has ample room to grow both in terms of penetration and in terms of frequency. We have seen, in the last 6 months, adoption of delivery as a channel, as a service increase across multiple categories, including in food. What has been very encouraging in our case, in our category has been the adoption of delivery in the smaller towns. So delivery growth has been much stronger in smaller towns compared to the larger towns. Such behavior change, Vivek, we know is a one-way street, now that behavior changes, it is endured. We also know that dine-in has a role to play. The occasion that dine-in caters to, the moment and the occasion and the celebration the dine-in caters to of providing an experience that occasion will remain relevant for time to come. It got a little muted right now because of COVID. But once that goes down or goes away, dine-in will come right back. To all of this, consumers will navigate increasingly so by hygiene, safety, trust quality, whether it's dine-in, whether it's takeaway, whether it's delivery, will also navigate by quality of service and quality of products. All of these are our strengths. So as the market opens up, as, I think, more choices get available, I think the market will grow, number one. Number two, the contours of the market growth and the change will play to our strength. So it doesn't deters at all. And in all our modeling, we are not seeing that play out. We're not worried about a competitive headwind coming our way.
Got it. Sure. And on the other expenses bit, how should we think about this line item because on a Y-o-Y basis, there is -- I mean, Q-o-Q may not help much. But the Y-o-Y comparisons, when I look at, it is still quite below. Of course, part of this will be variable. But what is the -- if I look at from a second half perspective, how should I think about whether in terms of percentage of revenues or on an absolute basis? How do you think about that line item?
Prakashji, do you want to take this question on? Prakashji, are you on the call?
I'm sorry. I was on mute, Pratik. So I'm taking it. So Vivek, so you have seen anyway in the first quarter. And particularly in this quarter, you have seen that we have maintained and we have controlled the fixed cost. Of course, this line item has partly variable cost and partly fixed cost. So far, we have maintained this cost line item. So to the extent it is variable, of course, it will go up. But I think the right way to see it is in terms of percentage to sales. So, so far, we have been able to manage the percentage of sale. We do not foresee too much change happening there. Of course, in the first 2 quarters, we had rent concessions which has gone -- the savings of the rent concessions have gone into this line item. In the next 2 quarters, whether we will be able to maintain the same pace of concession, that's a thing that we will discover in the next 2 quarters. Barring that, we believe that this is not going to go too much higher or lower in terms of percentage to sale. I think that is the right way to see it.
Okay. From the second quarter level?
Yes. So to some extent, maybe to the extent of range you must see and the rest of the things, you should see that we will try to cover the expenses in line with this because to the extent of variable will move with the variable, fixed costs we have controlled so far. We'll continue to control them so far. Rent concessions, we'll see how the Q3 and Q4 spell out.
If I can add to that, I think in the other expenses line, there were 3 drivers of productivity as Prakashji said. One was rent, clearly. The other one was productivity in specific cost lines in our stores. That was energy, fuel, housekeeping, et cetera. And there was obviously the saving on account of some lower G&A, travel, et cetera, because of again, obvious reasons. We will also offset the hit in this line, was also on account of 2 things. One is that, of course, expenses linked to COVID and the incremental cost of sanitization, et cetera, which hit us. That's one hit. Along with that, our increased marketing spend. This was an IPL quarter, and therefore, we had to increase our marketing spends as well. So those are the pluses and the minuses. Some of these will sustain over time, the costs or advantages, some will get mitigated. So that's the way we are seeing this play out. As COVID costs go away, as marketing expenses normalize, rents also will go away. So some of that will get neutralized.
The next question is from the line of Resham Jain from DSP Investment.
So just 2 questions. So first is the loyalty feature which we have added on to the app. If you can just share your thoughts around that? And any global experience if you can share related to loyalty feature? How it can help the overall performance going forward.
So Resham, loyalty is something that we are still piloting, in a pilot stage right now, in a couple of markets. So it's early days to talk about our own experience with loyalty. That's still relatively recent. And also there is a little bit of noise because of COVID. If I pull back and address your larger questions about loyalty and what role it could play, I think we believe that loyalty has an important role to play in driving frequency, driving stickiness and driving occasions. And that's something that we intend to, therefore, explore and push in the time to come. We are fortunate that we have access to the global learning from Domino's, the Domino’s ecosystem, both in the U.S., in Australia and other parts of the world. And you can be sure that we keep benchmarking them and learning from them and assimilating and incorporating the best of what they have done and their learning into our program design. So that work is going on. But it's early days to report an update on loyalty yet.
Okay. And sir, my second question is on Hong's Kitchen and Dunkin' Donuts. After the downsizing of Dunkin' and with now 5 stores of Hong's Kitchen, where are we in the journey in terms of -- are we confident enough now with whatever different formats and or the products which we have launched over there to take it to the next level? Or do you think that it is still couple of years before ramping it up significantly?
I think, Resham, Dunkin' has seen a slower recovery than Domino's, which, I think, is natural and to be expected, and that's the way we modeled it, given its larger dependence on dine-in and given its format of the product and of the portfolio. That said, and we've called it out last time as well, we believe that the future of Dunkin' lies in having smaller stores, more compact stores, in some places kiosk-like stores, which have beverages, which have donuts and which have simple food. And whenever we opened such stores, we've been encouraged by the results we are seeing there. If I take away the COVID wave, we believe that Dunkin' has a path to scale with a model like that. But of course, it will be tested at scale once COVID becomes less of a factor.
Okay. And Hong's Kitchen, sir?
On Hong's Kitchen, Resham, our -- and I called out in my opening demands as well, very encouraging recovery post COVID of the business. We have now got 5 stores in Delhi NCR. We intend to go to 15 stores as we exit this year. We were encouraged by the response to our value range that we launched earlier this year. We are encouraged to see customer feedback, both on the product, on the packaging and our service. And we believe that the space that we are trying to explore and sort of blow up, which is that of Chinese QSR, affordable great tasting Chinese food served across channels, I think it is backed by a credible brand. I think that space, we believe we can exploit and leverage and build the brand in. So I think good early results, very encouraged and we intend to scaling up in Delhi NCR in the balance of the year.
The next question is from the line of Aditya Soman from Goldman Sachs.
Congrats on some good sequential improvement. However, I mean, were the overall sales still underwhelming given that, I mean, if you look at in a global context where Domino's is seeing high-teens sort of growth. We've seen even on the delivery side about mid-teens in October. And this is taking into consideration that we had close to a 10% sort of effective price increase because of the delivery fee and the app growth has been about 73% year-on-year. So would that mean that for a downloaded app, the number of orders has effectively halved?
So Aditya, I wouldn't call the revenue performance underwhelming, and I would not do a like-for-like comparison between India and other markets without incorporating and looking at the other factors as well, in terms of the COVID case load, in terms of working hours in which stores are allowed to operate or not, in terms of contribution of various channels between delivery, dine-in, takeaway across various markets. I think the way to look at this is to say that despite the continued headwinds on COVID, in Q2, as we all know, even as the lockdown was revoked and unlock happened, the COVID cases continued to increase and the fear factor around that continued to increase. So there was continued customer fear, anxiety, reluctance. In the face of that, we have come back to nearly the same revenue as last year in the month of October despite having a significant channel mix towards dine-in in the way. And again, all that we have seen gives us conviction that this momentum will sustain and we will start building back revenues working around the dine-in handicap through delivery and take-aways. So I would say -- and of course, a big driver of that has been our digital assets, has been our digital strategy, has been our digital app download number, has been our focus on continued marketing.We're the only brand that maintains agents and marketing presence, brand presence across both the quarters, nonstop first with setting focus solely on safety and then, of course, more on safety plus food and then on promotions and innovations. So systematically, we have built back the growth drivers, and that led us to come back to almost the same revenues as last year.
No, absolutely. I mean, I understand your perspective, Pratik. I was just coming in at it from a different angle, just looking at delivery sales alone, so the channel mix does not distort it. Even then, the sales have been somewhat lower. And about the second question, I mean, where you've got sort of your total app downloads has gone up to, say, 44 million from 25 million. But we are not seeing the same level of increase in total orders, and we've also seen a price increase. So would that mean that the number of orders per consumer who has downloaded the app gone down significantly?
Actually, on the contrary, Aditya, the contribution of our orders on our own assets and the order growth on our own assets has been highest ever, has been very, very encouraging. So I would not call that out. I think, if anything, the fact that we have driven our apps singularly and driven the app download and driven customers to come to our app through promotional probe, through messaging propositions that has what has helped us drive order growth and delivery. So if you double check on the given numbers, we don't share the data publicly, the reality is that our app has shown a very, very healthy increase in orders.
Fair enough. And just a couple of bookkeeping questions. I mean one is on CapEx per new store. And second is, what would be the impact on SSG of the store closures, especially where you've closed in, say the delivery stores?
Prakashji, can you take the question on, please, on CapEx?
Yes. So we have said that we are going to open 100-plus stores. So overall CapEx for the year, we see in the range of INR 200 crores. And with regard to the SSG on the closed stores, because most of the time these stores were any way closed during the year also, they were not operating, so as such, we do not see given -- and most of the stores, as Pratik had explained, they were dine-in stores, they were in malls and they were in food courts. So their SSG impact is very difficult to explain because the dine-in segment itself is subdued at this point of time. So that even if they were opened, that would have been very, very minimal.
Fair enough. Did you say INR 200 crores, sorry, I lost you for a second.
In the range of INR 200 crores because -- of course, we are opening 100 stores and we are opening stores for other brands, and there will be, of course, some maintenance CapEx and other spend.
No, but earlier with larger stores, our store CapEx was about I mean, INR 1 crore to INR 1.1 crores right? So why is the CapEx almost 2x now?
No, Aditya, so it's 100 stores, plus, of course, there are stores for other brands, plus, there is -- of course, there will be other reimaging and maintenance CapEx. The number that I'm giving you is a rough cut.
The next question is from the line of Kishan Gupta from CD Equisearch.
Sir, basically, I want to understand like what sort of sales cannibalization happens when you people open new stores in places where you have no small presence like Bombay, Pune, New Delhi, Bangalore and Chennai?
So Kishan, what we have seen consistently when we have fortressed our markets and opened stores in the neighborhood of existing stores is that our service levels improved significantly, we deliver to our customers much faster. And that, in turn, helps improve customer satisfaction and this in turn drives reorders and repeats much faster. So our existing stores, the mother stores, sees a temporary drop in revenue, but then it comes back to the original revenue levels quickly within a year's time but with a much better customer experience, and therefore, much -- typically a higher frequency over time. And the new stores ends up servicing both some of the old areas better but also creates typically new market we did cater to. So the 1 plus 1 is better than 2, typically. That's how the fortressing strategy works.
So basically, as you talked about this, so what do you think is the store potential for cities like Bombay where you have already almost over 100 stores?
So Kishan, whether it is Bombay or whether it is any other market across the country, we are excited by the opportunity that lies ahead. We believe that there is tremendous opportunity and tremendous sales worth to add stores. Both in markets like the one you described and also in markets which are smaller, where we have 1 store, where we can add 1 more, where we have 2, so we can add maybe 1 or 2 more. And of course, in 300, 400, 500 towns, we don't have a store right now. So I think what excites us, we look at Domino's in India and indeed in Sri Lanka and Bangladesh as well, is a sheer run way we have to add more stores. And hence, our strategy of really ensuring that we remove all bottlenecks and all the barriers to store expansion.
But if I see your store count, it is more concentrated in these cities. So 50% or more than 50% of our stores would be in these 6 cities basically?
That's right. And as we go forward, not only are we fortressing these markets but we'll also be entering a large number of new markets as well. So if I look at the store opening strategy, we'll make sure that we strengthen our presence and fortress our presence in markets like Mumbai, markets like Bangalore, Delhi NCR, et cetera. We'll ensure we become -- we have more stores and more distribution and access points in smaller towns, in the Tier 2, Tier 3 towns, where we may have 1 or 2 or 3 stores. And then we also have a strategy of entering towns where we have no stores right now. So while you're right, historically, our bias has been more towards the larger markets, increasingly you'll find us to be a store network that is present deeply in large markets like Bombay, like Mumbai, but also present across a large number of markets distributed as well.
And what type of integration exists?
I'm so sorry to interrupt. May I please request you to rejoin the queue. We take the last question from the line of Manoj Menon from ICICI Securities.
Just a couple of questions on cost, actually. One, given that now the delivery charges are pretty much part of the template, the gross margin band from around 74%, 76%, does it now move to structurally a higher number? It could be 76%, 78% or 77%, 79%? Just from a band point of view for the medium term?
I think, it's difficult to put some numbers. Pratik explained it in the earlier part of the call that the improvement in gross margin is a product of at least the favorable commodity prices. We see less pressure on discounting, the delivery charges and the efficiencies that we have brought in. Of course, out of these 4, commodity prices are not in our hand. Discount to a limited extent, it's in our hands, but though Pratik already mentioned that we believe that the aggressive discounting that we saw in the previous periods may not come back. So to the extent of commodity prices can always go back. Rest of the things are more structural.
Okay. Just to clear -- sorry Prakashji, you're saying something, sorry.
I'm saying that rest of the -- out of these 4 components, 2 components are sustainable, 2 components are not in our control. They will move with the environment.
Understood. Understood. Just quickly on the same -- when I move beyond per the gross margins -- or including gross margins actually or the COGS, could you just comment about some of the work which you have done, some of the good work which actually could result in permanent cost savings? I'm not looking for a quantification, I'm looking for a directional understanding.
Pratik, would you want to answer it or shall I continue?
Please go ahead, Prakashji. I will come back once you finish.
So Manoj, this was mostly discussed in the earlier part of the call also. But we have worked on various kinds of productivity during this period. So obviously, one of them was rent which is, obviously disclosed in the results also, so you know the number. But the other -- there are lot many other productivities that we have driven and which is reflecting in the numbers that despite many of the fixed costs in these line items, we did not allow it to affect the leverage of our -- no deleverage is reflected. So that could happen primarily because we worked on our store operating costs. We have worked meticulously on controlling the store operating cost. We have also worked around bringing the efficiencies in terms of the wastages, we have controlled, we have also controlled miscellaneous line items within the other G&A. There also, we have gone structurally, and we have tried to control. So the results that you are seeing is a combination of the productivity and some of the impacts which are rent, which is mostly during this period. So some of them are going to be sustainable because whatever structural changes we have made in terms of productivity, in our store operating cost, they will sustain. Some of them to the extent of rent concessions and all will depend with the environment. And some of them, these costs are variable. So they will change with the volume. So that's how it's going to play out.
If I can add to that, Manoj, to what Prakashji has said, I think a few things that I want to underline. The first one is much more efficient deployment of manpower in our stores. And further to what we discussed on the last call that we changed the manpower deployment model to a variable mall model, that led to a structural improvement in our manpower productivity, and that we believe will endure. The second piece of good work which was done was in reducing the energy cost in our stores. And again, we called it out a couple of quarters ago that we now got energy management systems across all our stores, and the data we generate from the stores is used very effectively and very, very surgically almost to identify stores that are underperforming on actual consumption. And therefore, intervene there. So our energy costs came down substantially during the quarter. We believe this is something that hopefully we will endure as well. The third area that we had some very good work done is on store level wastage. In quarter 1, all of us, I think the entire industry was caught on the wrong foot post lockdown, where we had some -- we had wastages happened, unplanned, unforeseen wastages happened. But structurally, I think the work that the team did between operations, finance, supply chain, to improve the forecasting accuracy, to improve the dividend in the stores in terms of ensuring that we were dosing as per standard recipes and compliant with that, all of that led to a significant improvement and reduction in store level food wastage. The fourth area, again, where we saw improvement was in the cost of delivery and the vehicle operating costs. We used this COVID period to also intervene with a lot of reporting and technology interventions in the stores and we could scrutinize the consumption, buying assets by stores much more closely. And using that data you're able to intervene and control the fuel cost as well in our stores. So these are structural interventions. I could go on, but these are 4 or 5 big things that we did, which we believe we're not coincidental because they were driven by the team, and most of these we believe would endure in the future as well.
Completely understood. Just one last thing, which I may, and this is quite straightforward, actually. Just before COVID or maybe reasonably prior to COVID actually, there was a thought to reimagine about 100-odd stores every year to -- for a different touch and feel, and I do remember visiting one of those stores in Bangalore, maybe a year back or so. Is that in the back burner currently? What's the thought process? Because it may be a great opportunity to do a lot of this work when really no dine-ins are actually happening.
So Manoj, I think for obvious reasons, store level reimaging also took a bit of a backseat during the first 4, 5 months of this year. But it is absolutely part of our strategy to reimage the old stores and bring them up to the required standard. And one reason why the CapEx number is also higher, which I was referring to an earlier discussion on this call, is that we intend to reimage existing stores as well. So it's absolutely part of our strategy, and we continue with it in balance part of the year.
Understood. 100 would remain, right, broadly speaking?
That's right.
And the new stores if at all would be...
For obvious reasons, the trend line directionally that's the intention.
And the newer stores would be reimagined, if I am right.
That's right. The stores that we are opening now are in the new design, what we call the Ace design. And we've got tremendous feedback for the new design. And that's now part of our design template, not just in India, but across Bangladesh and Sri Lanka as well.
Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.
Thank you, everyone for joining the call today. I do hope we've been able to answer and address all the questions that you've asked to your satisfaction. Despite the ongoing challenges, the strength and resilience of our business model has led to an encouraging recovery of our business, both in quantum and an in space. We are excited about the opportunities that lie ahead and are confident that we have the right strategy in place to tap into them in this emerging new world. I wish you and your families a very Happy Diwali.And one request, please don't forget to order your favorite Domino's pizzas while you enjoy the festival with your near and dear ones. Should you need any more clarifications, feel free to reach out to us. Thank you, and Happy Diwali once again.
Thank you. On behalf of Jubilant FoodWorks, that concludes this conference. Thank you all for joining. You may now disconnect your lines.