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Westlife Development Ltd
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Ladies and gentlemen, good day, and welcome to the Westlife Foodworld Limited Q2 FY '23 Earnings Conference Call. [Operator Instructions]
We would like to remind you that certain statements made by the management in today's call may be forward-looking statements. These forward-looking statements reflect management's best judgment and analysis as of today. The actual results may differ materially from the current expectations based on a number of factors affecting the business. Please refer to the safe harbor disclosure in the earnings presentation.
I now hand the conference over to Mr. Chintan Jajal. Thank you, and over to you, sir.
Thanks, Rutuja. Welcome, everyone, and thank you for joining us on the Westlife Foodworld Earnings Conference Call for the second quarter ended 30th September 2022.
I am Chintan Jajal, Lead IR at Westlife. From the management team, I have with me Mr. Amit Jatia, Vice Chairman; Ms. Smita Jatia, Managing Director; Mr. Saurabh Kalra, Chief Operating Officer; and Mr. Akshay Jatia, Executive Director. We will kick off today's conversation with Smita sharing her thoughts on overall business progress and outlook. This will be followed by [indiscernible] operational financial and strategic highlights, post that we can open the forum for Q&A. We will be referring to the earnings presentation and financial releases, which are available on the stock exchange, as well as Investors page of our website.
With that, I now turn the call over to Smita. Thank you, and over to you, Smita.
Thank you, Chintan. Good afternoon, everybody. A hearty thank you to each one of you for participating in the call today. Hope you are doing well.
With the quarter 2 FY '23 results, I am happy to report that Westlife Development, now Westlife Foodworld is all set on the path to the next phase of growth. Despite external headwinds, we were able to produce strong and consistent results for 4 straight quarters. We have been continuously beating our standards, surpassing our goals, and have achieved the required competitive advantage by capitalizing on our strengths in cost leadership and operational efficiency. Our performance, clearly demonstrates that we have established a resilient business that has produced results and is positioned for the long haul.
Our coherent strategic approach has enabled us [indiscernible] excellent restaurants and create a strong and enduring brand. We are keeping a close eye on changing market trends and are committed to reviewing ourselves through disruption. We are bullish on our expansion plans and are on track to opening over 200 stores in the next 3 to 4 years. Our organizational agility and our strong focus on execution makes us well-positioned to deliver accelerated business results and create long-term value for all our stakeholders.
In closing, I would like to express my gratitude to all our employees and partners for their outstanding work in navigating this environment and offering our customers excellent value. As an organization, we commit to concentrating on our core values of operational excellence and productivity, enhancing our emerging digital advantages, and prioritizing the health and safety of all our customers and crew. From the entire Westlife family, I thank you for your support and for placing your trust and confidence in us.
I will now request that Akshay to share the operational highlights of the quarter gone by.
Thank you. Good day, everyone. I hope you had a great Diwali break with your loved ones.
I'm pleased to highlight that this is the fourth time in a row that we have outperformed [indiscernible] outstanding results across key parameters. Our strong performance in the second quarter, irrespective of macroeconomic and inflationary challenges was underpinned by steady growth across West and South markets. Our revenue at INR 5.72 billion grew by 49% year-on-year and 6% Q-on-Q in Q2 FY '23. This was backed by a strong 40% same-store sales growth. Even on a pre-COVID base of Q2 FY '20, we saw a healthy 44% rise in sales. Our average annualized sales per store continues to grow and reached a new high of INR 67.5 million in Q2. If we dissect the performance, we can see that our Meals strategy, our focus on omnichannel model and growth in emerging towns is playing out really well for us.
We sustained QSR traffic share gains in most of our markets by focusing on elevating [indiscernible] doubling down on our core equities of burgers and chicken. It was also heartening to see that we achieved broad-based growth across all store types with mall stores picking up the pace sequentially. Our systematic and well-thought-out approach to network expansion is helping new stores achieve required milestones much faster than the past. In fact, non-metro towns continue to post 1.6x growth versus metros on the pre-COVID base of Q2 FY '20.
Before talking about channel-wise performance, I would like to highlight a nomenclature change. We have transitioned from using dine-in and convenience to using on-premise and off-premise channels as it's easier to understand for a broader set of stakeholders. However, there has been no change in the underlying definition on numbers.
Moving on to Slide #6, we can see that the momentum has continued across channels with the on-premise business gaining strong traction and delivering healthy growth, while the off-premise business continue to rise steadily, creating a new high point for the business. Our on-premise business grew 96% year-on-year and 24% over the pre-COVID levels. The off-premise business increased by 12% year-on-year and 88% over the pre-COVID base. While our overall delivery channel achieved the highest-ever sales this quarter, our own McDelivery platform also continued to see increased consumer affinity and posted 1.7x growth versus 3POs, thereby increasing its share. Our cumulative app downloads surpassed 21 million or 2.1 crores this quarter.
Further on Slide 7, I feel the key highlight is that we have delivered strong profitability despite inflationary headwinds. We were proactive with our pricing decisions instead of being reactive to external market conditions. Our pricing strategy along with our supply chain initiatives and improving product mix led to a 118 basis point sequential increase in gross margin to [ 65.5% ] [indiscernible] again, further flowed down to restaurant operating margin or ROM, which stood at 22.7% in the quarter as against 21.6% last quarter and 17.4% in the base quarter.
We recorded [indiscernible] operating profits of INR 988 million in Q2. Operating EBITDA [indiscernible] 17.3%, up by over 500 basis points versus last year. On a sequential basis, operating EBITDA margin was up by about 15 basis points backed by enhanced operating leverage, partially offset by higher staff costs. We generated a solid INR 680 million in cash profit after tax in Q2. I would also like to highlight that we took a 2% blended price hike in October, while the prices of key commodities like oil witnessed softening, milk and wheat saw continued pressure. Having said that, overall inflation in our raw material basket has been relatively moderating.
Sales through digital channels such as our mobile app, self-ordering kiosks and delivery accounted for more than 55% of total system sales. This signifies that we have now greater business predictability owing to our omnichannel approach. This strong multi-channel and multi-day-part strategy also allows us to serve our customers whenever and however they needed, no matter where they are. We have added 6 new restaurants and entered 4 new cities during the quarter. With this, we now have a total of 337 restaurants, 274 McCafes, 68 Drive-Thrus and 138 EOTF restaurants across 52 cities. We remain confident of adding 35 to 40 new stores in FY '23.
All in all, our menu innovation and omnichannel strategy has helped us deliver over INR 63 million of average sales per store and nearly 17% of operating EBITDA margin in the trailing 12 months ended September 2022. We maintained a strong balance sheet and liquidity position. Our operating performance will continue to generate healthy free cash and fuel our growth in the future. We have also been working hard to further strengthen our brand trust and business through menu innovations, business initiatives such as the Real Food, Real Good campaign and McDonald's in Every Celebration among other things. We have launched some brand films for the festive season under the umbrella campaign of Meals make Families.
Finally, at Westlife, we go to great lengths to ensure that ours is an inclusive organization and a great place to work. In keeping with our vision, I am thrilled to announce that we were named recently one of the top 50 India's Best Places to Work for Women. This year also marked the Sixth anniversary of Ronald McDonald House Charities in India. This program aims to keep families together in tough times. Since its founding, we have touched the lives of 35,000 families through RMHC India. We will continue to build on this initiative over the next few years.
With that, I now hand over the call to the moderator and open the forum for your questions.
The first question is from the line of Abneesh Roy from Nuvama Institutional Equities.
My first question is on your gross margins going ahead. Already it is higher than pre-COVID. Of course, wheat and milk prices have been highly inflationary. So wanted to understand in terms of sourcing of say, wheat, are you already well-placed, so the current prices doesn't really impact you too much? Milk, of course, is quite inflationary and there, it's not possible to have too much of long-term contracts. So any price hike you'd need to sustain the current gross margins?
Thanks, Abneesh. I'll have Saurabh, our Chief Operations Officer, to answer the question.
Yes. Hi Abneesh, I think Amit has made it abundantly clear in the last few years, commodity cycles happened, we don't see that impacting our gross margin on a month-to-month, year-to-year basis. Like you said, milk has been under pressure, and we've already taken a 2% hike in October in order to manage all the inflationary pressures, which were coming, but we do not see any further impact coming because of any of these commodity. One or two commodities, because we sell so many things go up and down, but we are able to easily manage it. I do not see us -- a gross margin coming into any immediate pressure from where we see it.
Sure. I had one question on your delivery business. So another QSR said that they saw their highest share from their own app. So they have been consistently seeing a movement from aggregators to customers ordering from their own app. In your case, are you seeing similar or you are not focusing too much on this?
So I think Akshay, in his commentary, already spoke about our own app delivering better than the 3PO players, which is this -- the likes of Zomato and Swiggy. However, we would not like to believe -- while we will continue to strengthen our own app towards the largest base, we do see that there is a play in terms of our strategic partnership with the 3PO, so that we don't leave business on the table. So we remain engaged even with the 3PO players to continue working on increasing the delivery size on the 3PO players, plus also on our own app, continue to work on the value proposition and continue increasing the base of users on our app vis-a-vis 3POs.
Sure. And last question is on your other marketing initiatives. So on this drive-thru in terms of 120 seconds service guarantee, what is the thought process on this? And is this very different versus, say, any other QSR in terms of a promise? And in other global markets, is this a big differentiator to the customer?
So number one, I don't think too many competition -- competitive players have the #1 omni-player as far as drive-thru is concerned, we already have around 60 plus drive-thrus operating across. And one of the use cases, which we see people using drive-thru for is when they are in a hurry. And when you look at it from that standpoint, then obviously, speed of service -- the fastest speed of service is a key unlock to that use case occasion. And for us, we are very, very happy that versus pre-COVID, we have changed the momentum of drive-thru dramatically. While we don't give the breakups on the investor call, but we've dramatically increased -- exponentially increased our drive-thru volume, and we are committed to opening more drive-thru as a percentage of portfolio when you see our new store openings, and then we are very happy about the place we are in as far as drive-thru is concerned.
The next question is from the line of Avi Mehta from Macquarie.
I had three questions. First was on the store addition. We have done first half only about 10, 11 stores, and we've like set the guidance for '23, I mean the 35, 40. I just wanted to understand, was -- is there a delay that happened, which is why first half is so skewed in the second half? And what is it that gives us some confidence? And that could be my first part, just trying to understand this better.
Sure. Avi, it's a great question, and I'm seeing this trend across the Board, across markets typically with -- because the cycle is a capital cycle and at least, the McDonald's stores are 3,000 square foot, we're doing a lot more drive-thrus, so acquisition of land, our contracts are 25 years. So the cycle is long, but typically, it all ends up in the last 2 quarters. And therefore, we still maintain very strongly that we will be able to deliver the 35 to 40 that we've talked about, with the pipeline is in place, the ground breaks are happening, and therefore, the opening will come through as well.
And what would be the CapEx number? Would you have any number in mind when you say for the full year, how much should we pencil in, if you could help us with that?
The CapEx?
Yes.
It will be in the range of INR 2 billion to INR 2.2 billion.
Okay. Perfect. That's helpful. The second bit was essentially just taking this further with new stores now accelerating in the second half, I mean, I remember in the last call also you said that the annualized per-store sales should be more at the INR 60 million, INR 65 million range. And first half has been INR 67 million. So is that -- you will still maintain that INR 60 million, INR 65 million because the impact should start coming in, in the second half because you're going to have more new stores? Is that the right understanding? [indiscernible] to margins?
No, we are confident of maintaining the INR 67 million mark that we've talked about. One is new stores are opening much better. Number two, we have a huge underpenetrated market. And in fact, many times, when we are entering smaller cities, we sometimes do better than that as well. So for example, when we opened the airport, the average was much greater. We have a couple of more stores coming at the airport as well, drive-thrus normally open better. So it's all factored, and we are quite confident of maintaining the INR 6.7 million -- INR 67 million average unit volume.
Perfect. So I mean, if I were to paraphrase it, it's more like the new stores are also doing better, and your new launches that you did whether it's chicken, that traction also continues, which means the existing stores is also kind of doing at a much better pace than what we had imagined in the first quarter, correct?
Correct. Absolutely.
Last bit, Amit, just you had announced 2% price hike. I mean I recollect the last time, I know that time was very different, but you were one of the few ones to use your supply chain strength to take price cuts, you were actually one of the few ones that -- you went against the market, and you saw good market share gains. This, I'm talking about the 2010 period. I just wanted to kind of get your sense because you've taken a 2% price hike, which means, clearly the situation is not that weak, but I would love to hear your comments on how would you contrast these efforts?
I'll explain to you. To my mind, pricings are very much an art, and I feel we've handled it very well when I look at our 25-year history. Firstly, we still maintain that -- we stay within the 3% to 5% price hikes. But I've also learned the hard way not to fall back on price increases, especially when there is an opportunity to take it and inflation in the minds of the consumer is still there and other peers have taken much greater price hikes because you may not be able to take it later. So first and foremost, in 2008, '09, '10, when we doubled our same-store sales, we stopped taking price increases, and we paid for that dearly in 2013, '14 and so on when we were forced to take a 10%, 12% price increase, which was a rare situation. Also in the last two years, we did not take any price increase at all, and we didn't want to fall back on that.
So therefore, first thing, our 3 pillars of improving growth margins continue, which is control on raw cost, product mix and menu price increases. So the same pillars continue quite strongly, which is why in the industry, I'm proud to say that we're probably going to be the rare one that has improved gross margins even in this quarter. Number two, you've seen the top line has not been impacted. I mean 40% same-store sales growth in the quarter and 49% top line growth in totality. So while maintaining our sales, we've been able to get a margin growth. We feel that's not a bad situation, but moving forward, it goes back to the 3% to 5% a year. So I hope that answers your question. The important thing is we are not changing our strategy or are thinking around how we need to move forward.
If I may just probe you further, Amit, is it fair to say that you still remain the cheaper option because others have taken price hike? Is that what you're alluding to?
No. See, it's about -- see, for example, it's value for money. You don't look at the gourmet burgers.
Yes. Value for money, correct. Is that the fair way to look at that value for money -- sorry, go on.
No. I was just saying, see, gourmet burgers, for example, even at INR 200, reflect value and people are buying that, so rupee margin on that is quite strong. Similarly, McCafe has come back quite strongly and that is improving our margin is pretty much what happened in the past.
And I'll let Akshay and Saurabh add a couple of thoughts they have.
See, Avi, we don't look at it as the cheapest option, right, because we're not playing a price game. We're playing a value-for-money game, where value for money means many things, and we've discussed this before around. It means pricing, it means experience, it means quality of product. And in that equation, yes, definitely, we are showing differentiation, and we are showing very good customer response. So pricing is a strategy, and we've used it the way that it is supposed to be. Hence, it's been well received by our [indiscernible]. On top of that, even if you take our gourmet burgers, right, like the example we were talking about, even at, say, an average price of INR 280, INR 320, people are seeing it as extreme value because it's not only well priced for them in a relative basket, it's quality, it's filling and it's an occasion with their families. So that's how we look at it and that's how we're looking at managing both volume as well as margins.
Perfect, Akshay. So cumulatively, we would have taken what price hike? That's the last question from my head.
It's about [indiscernible].
The next question is from the line of Kapil Jagasia from Edelweiss Broking.
First of all, congratulations on a great set of numbers. My first question is, just wanted to understand this 1.7x growth of McDelivery in this era of strong performance of dimension. So what was the growth number of McDelivery in previous 2 quarters? And any promotional campaign, which has worked for you or any other promotions done for this delivery channel?
Okay. I'll have Saurabh answer this question.
Yes. So obviously, from a pre-COVID standpoint, we are seeing 1.7x growth in sales on our McDelivery channel in terms of percentage. If you look at it, we do multiple things, for example, we launched KitKat McFlurry, and that helps us both in dine-in and delivery business all together. So it's not that our menu strategy is only playing out in dine-in or delivery.
How we look at it, like I said earlier also, we look at it in two parts. Delivery business is an important business in which one lever is to work with the third-party operators like Swiggy and Zomato, and continued strategic partnership with them to maximize sales. The second is from our own app standpoint, look at what our loyalist want and [indiscernible] user interface and user experience continuously, and we've done a lot of work around that, and we see that giving us good results in terms of our app growing dramatically more than the growth we saw on 3PO operators, and therefore, the percentage which our own app contributes has also become significantly high.
Okay. So just like McCafes, would delivery also be available in 80% of our store network? What would be the number here?
Yes, absolutely. It's almost 300 stores have delivered. Yes. And 90%.
Okay. 90%, okay. And just one bookkeeping question from my side. These employee spends are up by 25% sequentially, any one-offs here?
No, basically, you have to look at -- it's not employee cost, it's all G&A. Sorry, you want to -- Datta, you want to take this?
So basically, there are no one-offs in here. It's basically the merit increase, which has come in the current quarter.
Yes. So, just to add to that, obviously, during COVID and the last 2 years, there has been a lot of pressure on keeping staff costs in check. Obviously, the merit cycle has come up, and we wanted to appropriately reward and manage that cycle. So it's in line with what we expected and there are no one-offs. It was part of our whole high-performance culture.
Yes. So very shortly, you will also see the Investor Presentation, when we do an Investor Day, in that, we are already planning ourselves up for the next 5 years of our new vision, and therefore, we are adding new skills in the system, we are making sure we know whom do we want to keep in this journey. And hence there is a marginal increase in employee cost, but absolutely, in line with what we had planned.
The next question is from the line of Percy Panthaki from IIFL.
In response to a previous question on CapEx, just to get my numbers right, did you mention that it would be about INR 220 crores of CapEx this year?
Between INR 200 crores to INR 220 crores is what I said.
Okay. And would it be possible to give some color on the breakup of this as in how much of it would be for setting up new stores, how much for renovation, how much for any other IT projects, et cetera, et cetera?
No, we don't share breakup on CapEx.
But it's funded -- I mean it's used for like you said new stores, reinvestments and other CapEx.
Okay. Also just wanted to understand your margin journey. You have already reached about 13.5% on a pre-Ind AS basis. What's your medium-term target here? And what would be the main contributors to the expansion going ahead?
So basically, we had laid out our Vision 2022 in 2016 when our EBITDA margin was 6% or 7%, and we have boldly talked about 13% to 15% and here we are. So I'm quite pleased that we've actually delivered pretty much on all parameters, while aspirationally we have always maintained mid-teens, but we have an Investor Day coming up, and we will give more color on Vision 2027 in that particular Investor Day, which is not too far away.
The next question is from the line of Devanshu Bansal from Emkay Global.
Yes, sir. Congratulations on a strong execution on the SSG front. Sir, historically, there is a 5% to 10% increase in revenue per store from Q2 to Q3 and incrementally, we have taken a 2% price hike as well. So can we expect these historical trends to continue this year Q3 as well?
Absolutely, because our pricing strategy so far has worked for all these years. We have pretty much a very good balance between art and science of pricing. So we are quite smart about how to do it and so far, our results indicate that has worked quite well for us.
Got it. And sir, for H1, our CapEx is closer to about INR 1.3 billion and we have opened about 11 stores versus annual target of 35 to 40, so since you've mentioned that you'll be incurring INR 2 billion to INR 2.2 billion, so is it significant part of this CapEx under CWIP?
So Devanshu, what do you see in the cash flow is that payout of CapEx, not the actual CapEx, okay? So -- or buyback period, so it will give you the advances to capital vendors and everything. Hence the cash flow will not give you the correct picture of how much CapEx has actually happened. What Amit said still holds good but CapEx when you save, it's what we like capitalize at the year-end, okay? It has nothing to do with the cash outflow and inflow.
Got it. Understood. And lastly, so you explained the reason for higher employee cost, does the same explanation apply to higher head office costs as well for this quarter?
Yes. Absolutely. The same thing and you've got to look at things like employee costs and because what happens is as the -- there is Diwali, you start sort of hiring part-time workers, you train them, so you've got to look at it over a period of 6 months to 1 year. So if you look at corporate G&A, which we are proud to say as the only company that actually spells it out because we really care about controlling it. It's about 5% of sales, which is very much in line with global trends.
The next question is from the line of Chirag Lodaya from Valuequest.
Yes. Thank you for the opportunity and congratulations on great set of numbers. Sir, my first question was on McCafe, so if you can just throw light, how McCafe is doing now?
McCafe has come back because that's pretty much an in-store strategy from our point of view and so McCafe was just building out when this COVID thing happened. Personally, I believe the opportunity on McCafe is at least double or triple of where we are at as McDonald's and coffee continue to build in the consumers' mind. But with in-store growing at 96%, McCafe thankfully has kept in line with that and has [Technical Difficulty]
Okay. So it would be now above pre-COVID, right?
Yes, yes, yes. Almost.
Right. And sir, in terms of gross margin, so we have improved our gross margins, but we are still below our historical levels. So with McCafe also doing well, is it fair to assume that going ahead, we'll improve gross margin as well?
So that's a constant endeavor. I do believe that we are at a very healthy number. I've maintained this for the last 5 years but yet, we do get 100, 200 bps here and there movement, but is there a dramatic focus to grow gross margin? No, it is to maintain and grow it small -- in small bits. The bigger objective for us is to grow our topline. So currently, if we have INR 6.7 crores average unit volume, the idea is aspirationally to grow that quite nicely, and we will share details of that in our Investor Day. So I think that's the bigger focus, not that gross margin improvement is not, but we are in very good territory for our type of business, okay? Within QSR, by the way, there are different sectors that have different sort of baselines around gross margin, employee costs and things like that. For our industry, that is the burger sector, we are in a pretty strong position on gross margins.
Got it. And then just lastly, what kind of inflation we are seeing in CapEx per store?
CapEx per store is pretty much in range with what we are talking about, there had been pressure because there is an important component, the dollar has depreciated but simultaneously, as I have maintained this forever that we recognize that rupee keep depreciating, we know that. So if you know something and you don't act on it then what's the point of having sort of people involved? So we simultaneously take cost out. So typically, it had been in the past between INR 2.5 crores to INR 3.5 crores because as we've added business models, like McCafe has now become a standard, experience of the future has become a standard. So again, we want to give more color on the cost structure to build a restaurant in our Investor Day, where we will share what it's going to look like for the future.
Got it. And in terms of store paybacks, how it is trending, sir? Now, as you mentioned new stores are doing much better.
It's trending very well because if you look at our return on invested capital, it's doing very well over 30%, that clearly reflects how the paybacks are looking at. The good news is that [Technical Difficulty] are opening very well and therefore, the payback cycles are only getting better.
Right, right. But in terms of years, can you help us understand?
In terms of years, it's normally 4 to 5 years.
[Operator Instructions] The next question is from the line of Pratik Poddar from Nippon India Mutual Fund.
Yes. I just wanted to check the 2% price hike, is it across on-premise, off-premise and across categories, which means value plus premium?
Yes, Saurabh will take that.
When we say 2% price hike, obviously, we don't take price hike equally across all our products. It's a weighted average, which is 2%. Some of it could be higher and some of the things might not have price increase. Obviously, that's the breakup, which we don't share, but weighted average, we have taken a 2% price increase across channels and geographies.
And you can confirm this is across channels or again, it's weighted average?
Across channels and geographies.
The next question is from the line of Shirish Pardeshi from Centrum Broking.
Amit and team, hearty congratulations for walking the talk you have delivered. I'm quite impressed with the numbers, but just 2 clarifications. I'm sorry for the sake of repeating, I joined a little late. So what is the current inflation, which we have seen in Q2? And maybe towards the end of quarter or early October, have you seen that from the previous quarter inflation standpoint? We are seeing the inflation is cutting down?
No. So I covered that in our commentary and yes, obviously, we'll take you through that again. We have seen a relative moderation in inflation, while some key commodities like oil witnessed softening, you've seen pressure in other commodities like milk and wheat. What we can say is that, number 1, you've seen volume growth. Number 2, you've also seen margin growth. So despite taking price, we've been able to manage both volume because it's been done scientifically and margin because we've played with multiple levers, there's pricing, there's cost initiatives, as well as product mix. And as a result, you've seen us deliver very high SSSG, as well as our highest-ever operating profits. So that [Technical Difficulty] inflation.
So I personally can -- I don't believe in looking at it quarter-on-quarter. As Akshay said, some things go up, some things go down and we cannot react to it. The question is that you factor in something and then you work towards taking cost out of the system regularly and you stay ahead of the curve. So that is how we manage it quarter-on-quarter. If you look at our history over 15 years and look at India's inflation and map that, yes, I think 10, 15 years is a great timeframe for us to be confident that year-on-year, we've been able to manage that quite well, but it's hard to comment quarter-on-quarter.
No, no, I agree your point, Amit. What I was trying to extract, say for example, the inflation in the food is running 7% to 8%. So if you're -- assume that if the similar inflation is there, you have been able to just pass on 2%, so it gives the arithmetical calculation that 6% you would have absorbed or would have tried to do the internal cost synergies and engineering. So I just wanted to understand what are the…
Shirish, I mean, my point is that math does not work like that. Because you are reading a reported number around food and that's not how it translates down at work and business, okay? One, we work directly with farmers and what is reported, I don't know what basket they are talking about, plus our contracts are long-term contracts, and they don't change month-on-month and quarter-on-quarter, plus we have price contracts, we cover, we hedge. So I'm not able to give you any color around this 7% versus what ours is and so on, so forth.
Important thing is please look at our trends, we will manage it. I cannot promise you, quarter-on-quarter, you will see management, but you will see over a period of time, yes, we will continue to sort of manage inflation and hopefully, keep our gross margin ahead of the curve.
Okay. Okay. My last question is on the digital demand. Obviously, you will not share, but I'm still making an attempt. What level of interest or maybe if you can share the digital demand is towards for value segment, the premium segment or it is completely at the mass segment which is driving? So...
It's across the board. See, we are an omnichannel business now. We very proudly stated that 55% of our business is coming from digital channel. When we say 55% [Technical Difficulty] then it can't be skewed in any direction. It's got to be a pretty holistic mix. I mean if you look at our experience of the future stores, if you look at all the work we've done around digitally, delivery, [Technical Difficulty] talked about user interface, making the ability to order more easier. All that is continuously growing the digital base. So it's across the Board.
The next question is from the line of Vishal Punmiya from Nirmal Bang Institutional Equities.
Yes. Congratulations on a very strong set of numbers and festive greetings to the team. My question was on the desserts portfolio. Now if we look at the current portfolio, obviously, it's a good mix of frozen desserts as well as to some extent, muffins and cakes even within the McCafe portfolio. What is the potential for this business? Or what is the potential for this category for us, and can it become a part of the meal that we offer? So from that context, just wanted to understand the potential of desserts portfolio.
Sure. So I am quite pleased that if you look back and look at our [Technical Difficulty] in 2016 and 2018, we kind of broke out the different categories in which there is opportunity for the McDonald's brand to grow and our beverages was a lot talked about because of McCafe. So McCafe is not just about coffee, similarly, desserts is something that we do quite well in. Most recently, our McFlurry with KitKat, it's an amazing association with a very strong brand. And when the 2 come together, results just take off. So McFlurry is a big hero and it's worked beautifully for McDonald's in many market. Also, we have a dessert kiosks strategy. We don't talk about it because if we tell everything, then we have nothing left for the future on a lighter note. But we do believe that desserts in McDonald's can grow.
To my mind, I mean, from what I recollect, it's a $500 million and $600 million category for QSR and I think we are reasonably well in trend. But we have a long way to grow in desserts. It's not been a crazily focused area for us, but like I said, strategy is about where to prioritize. So you have to go after the biggest bang for the buck and as we've shown you in our presentation, [Technical Difficulty] it's about meals and we've gone about it with chicken and with our Gourmet Burgers and [Technical Difficulty] on the quiet, we're working on desserts. So more on that as what I call Horizon 2, Horizon 3 for the future but it is something that has got opportunity.
Okay. So basically, after looking at some of those Asian market portfolios -- other Asian market portfolios, I could see that there is a decent opportunity in the pie portfolio, the apple pies, the pineapple pies. So is there a potential of adding that kind of product in our India business?
Okay. We had -- we started with apple and pineapple pies and they are fried products. So I think, leave it to us, we get a -- we have a really good understanding of how to build the dessert portfolio and that is work in progress for us and it will continue to grow like what we did with KitKat, we feel is a low hanging fruit [Technical Difficulty] with the new product at least at this stage.
Sure, sure. Sweet pie, like you're saying is a category creation job. We already have a lot of -- lot on the menu, which we can prioritize before we go to apple and pineapple pies from where we stand. And then like Amit has already mentioned, menu, I think you've got to trust us that with the resources we want to put our money where the mouth is. And given that the long-term -- or medium-term to long-term strategy for now is to shift our focus towards meals and dessert will have a part to play in meals like you saw in the KitKat McFlurry promotion, we will continue that.
[Operator Instructions] The next question is from the line of [ Sanchit Aggarwal ] from [ Kredent Info Edge ].
Congratulations on your results. My question is in line with the fried chicken. I remember that when you introduced fried chicken and done very well in South India and herein also introduced in West India, I think somewhere in 5 to 10 stores. So can you share how -- what has been the response in West India in the 5 to 10 stores that we had brought the product in?
Yes, Saurabh can take that.
Yes. So for us, fried chicken was a very, very big imperative in South because our standing as a brand in terms of relevance was relatively on the weaker side and with fried chicken, we have been able to change that completely our average unit volume in South look as good as what we look in West. In West, we already are a very strong brand and for us, when we make that choice, obviously, there is CapEx involved as far as launching spicy chicken is concerned. Therefore, we prioritize the Gourmet Burger collection on top as far as winning the meal occasion is concerned. And in that also, we have got very exciting chicken products and we are experimenting in 5 restaurants.
Unless and until we see that fried chicken will be really a big driver for customers to come into McDonald's, on an incremental basis, I think it's not worth our while to add complication to operations in the West. But we are evaluating in the -- in 5 stores where we are experimenting what's the role of fried chicken, what's the role of wings, do we need to have a fried product without bone, so on and so forth. So it's all work in progress as far as menu is concerned. We are very excited the way our fried chicken has played out in South and we continue to remain optimistic of the role of fried chicken in South. On West, we are still experimenting.
The next question is from the line of [ Dhiraj Mistry ] from Antique Stock Broking.
Yes. Congratulations on the good number. So just to continue with the previous question, so in how many stores in West, our fried chicken would be available?
It's basically just in test market, 5, 7 restaurants. That's it.
In South also?
No, no, no. In South, it's across the Board. In West, it's a test, so I don't think West is worth conversation right now. In South, it is across all our restaurants.
Yes. So follow-up question on that, like, if I compare the mature store in fried chicken, although we are very new in fried chicken, how is the traction in the first store or mature store for the fried chicken? So earlier, you have guided that there could be incremental sales of INR 50 lakhs per store from the fried chicken. How's the development over there?
So just to give you firstly that McDonald's is a very strong chicken brand in the whole world, and probably, sells more chicken than anybody else in the world within the QSR category. So we are leaders in the top 10 countries in chicken. So first thing is it's not new, it's been part of our strategy from a brick-by-brick point of view and a couple of years ago, we felt is the right time to launch it. In South India, the traction for fried chicken continues to be very strong. The number that I talked about, we are getting ahead. Aspirationally, we are looking at over INR 1 crore per restaurant per year in South India and we are moving in that direction. We will give more color on that when we are ready, but [Technical Difficulty] it's trending very well.
Okay. That's helpful. And sir, 2 questions. Going forward, our effective tax rate would be the corporate tax rate?
25%.
Okay. And sir, lastly, can you comment on the royalty payment where you were in talk with the parent company any development on that?
So we have clarity until 2026 and when there is more clarity, we will definitely come back. And we are very confident that in the last 25 years of our history with McDonald's, I think we've always focused on growing the market. So we are very confident that, that will not be a barrier in our growth.
Thank you. The next question is from the line of Manjeet Buaria from Solidarity Investment Managers.
I just wanted the data point on what was the range we've stayed in FY '22 and H1 FY '23, the cash outflow for rent?
Cash outflow for rent. I mean it is declared, it is there in our annual report. We'll have to pick that up and come back to you since you want the cash outflow. We'll pick that up and come back to you.
Right. Or sir, if you could just give me the rent on an accounting basis? I just want to adjust for the Ind AS 116, so I just wanted to know what the actual rent has been for FY '22 and H1 FY '23.
We have given the reconciliation in our Investor deck, it's there. If you go to page -- one second, it is there in the Investor deck that was sent out earlier today.
I'll check on it.
There's a reconciliation, which gives you the rent depreciation and all of that.
I'll check on it.
Any case, if it's not clear, you can just write to us offline and we can come back with whatever appropriate.
The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher Private Limited.
Yes. Congrats Amit and Akshay on a great set of numbers. I have a couple of questions. So my first question is that if we look at the on-premise, off-premise sales, also we have -- although we have grown very well in terms of on-premise sales...
Sorry to interrupt you, Mr. Aggarwal. May we request you to speak a bit louder?
Yes. So what I'm saying is that we have grown on-premise sales by 88% whereas off-premise sales have grown by 12%. But if we compare the 2Q numbers with the 2Q '20 numbers, the on-premise sales are still lower by 9% and as we understand that the more on-premise sales happen, the more will be the operating leverage. So do you believe that in the coming quarters also on-premise will grow faster and will it provide more operating leverage in the coming quarters as well?
I mean I first want to correct your thinking. In my opinion, there is not much difference between operating leverage of delivery business and the on-premise business as far as we are -- I've maintained this by the way forever and in all my previous calls, when delivery was not that well-known as well. To my mind, forever business comes from if our sales are growing faster, then, of course, the leverage will come and that's that. We don't see much of a difference standing on on-premise and off-premise.
And Amnish, I think what we have written over here is that our on-premise business has grown around 24% over the pre-COVID level. So I'm not sure about the number that you're referring to, where that FY '20 has witnessed strong growth across channels and hence, our overall sales growth versus FY '20 is around 44%.
Okay. So it means that the incremental operating leverage will not be very high whether the sales are from off-premise or on-premise?
Correct. But if you see, our growth is 44% and if you obviously compare margin, there is significant operating leverage that we see in chicken.
Okay. Fine. And my next question is on the sales mix, like we have been focusing a lot on premiumization and the trend is really gaining momentum, we have even launched the Gourmet Burgers, so do you have any data with us to share that what could be the sales proportion of burgers, which are, say, above INR 80 or INR 100 as a part of the total sales?
So Amnish, we don't break that out, but as we mentioned, we've seen very strong traction in meals and a lot of it has come through our meals strategy, which is anchored by our Gourmet Burgers and even our current campaign that's running in October, November, December centers around our McCheese platform, which revolves around our Gourmet Burger. So we are seeing strong growth across the burger category led by meals as well as premium burgers.
[Operator Instructions] The next question is from the line of Manjeet Buaria from Solidarity Investment Managers.
For the follow-up, I just took a look at the reconciliation on the deck on the rental expense, which you mentioned. So roughly, my understanding from -- this is around INR 22 crores-odd was rental expense for this quarter, which translates to, give or take, around 4% of sales. I just wanted to understand, Amit, structurally, how do we think about this rent expense line item? Steady state, where does it settle down as percentage of sales for our company?
So we look at this more on a yearly basis. We look at the business more from what is the right strategy to tackle rent rather than in an Ind AS point of view. So we continue to do 20, 25 year deals and so on, so forth. I think typically, rent is between 7% to 8% of the P&L, and I think that's a great number as we've seen globally as well. So that is how we think about it.
Got it. So, steady state, 7% to 8% should be the rental expense, which is a good number to be at…
Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.
Thank you very much everybody for participating. We really appreciate it. Have a lovely day and talk to you all very soon.
Thank you. On behalf of Westlife Foodworld Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.