Same-store sales growth in restaurants hit hard as downturn affects discretionary spending
Top restaurants chains are seeing a dip in the sales growth from their existing operations as they are unable to attract enough new customers or get existing patrons to visit more frequently, courtesy the present macroeconomic environment which is affecting disposable income and discretionary spending.
While the firms are partly making up for the same by opening more outlets, analysts see it as a relatively costly way to add revenues which affects profit margins given the expenses to set up a new unit.
Keshav Mishra, partner at Baring Private Equity Partners India, which has recently started investing in domestic consumption theme, said, “The overall sentiment in the market is gloomy and discretionary spending is decreasing across sectors. Fine dining might experience a stronger cut in sales growth because customers will be shifting preferences from fine and casual dining to QSRs.”
But for now, the impact is being felt by restaurant operators across formats. Key brands with a national spread like Domino’s Pizza, Mainland China, McDonald’s, Subway and KFC have seen a significant decline in the addition of new customers with industry experts observing that same-store growth of restaurants has gone down by at least 30 per cent in the last six months.
This marks a sharp departure from double-digit same-store growth last year and as a result, restaurants are now experiencing low single-digit growth in sales from existing outlets.
Take the case of Jubilant FoodWorks, which run Domino's and Dunkin' Donuts QSR chains in the country. For the company, its same-store sales grew just over 6 per cent in April-June quarter of 2013, sharply lower than the 22.3 per cent growth in the year-ago quarter.
Same with QSR chain Subway. “Last calendar year, we experienced same-store growth of 15-18 per cent, which has now come down to 8-10 per cent,” said Chetan Arora, country head, Subway, on the sidelines of Indian Restaurant Congress, organised recently by Franchise India.
Arora mentioned that each store takes almost two-and-a-half to three years to break even and one must have patience to increase same-store growth.
Brands like McDonald’s and KFC are also seeing low single-digit same-store growth. Hardcastle Restaurants Pvt Ltd (HRPL), which is now a subsidiary of public listed company Westlife Development, experienced a mere 0.5 per cent same store growth for the last quarter.
Even Yum! Brands, Inc, which runs KFC, Pizza Hut and Taco chains in India, experienced same-store sales growth of 2 per cent for the quarter ended June 15, 2013. This was 7 per cent in the corresponding period the previous year. This doubled its operating loss from India to $4 million against $2 million in Q2 2012.
The firm is, however, bullish on India and said in its latest quarterly statement that it expects record new-unit openings for Yum! Restaurants International and in India this year. Yum! Restaurants International is the overseas arm of Yum! Brands, which manages its QSR chains outside of its home market besides China and India, which are separate entities.
SAIF Partners-backed Speciality Restaurants Pvt Ltd—which runs a chain of fine dining restaurants with brands like Mainland China, Oh! Calcutta, Machaan, Sigree, Flame & Grill, Haka, KIBBEH, Kix and Shack, and a confectionery brand under Sweet Bengal—is also adopting different techniques for maintaining same-store sales growth.
“We are concentrating on the existing number of outlets and want to maintain same-store sales growth rather than aggressively expanding at this point. We have been able to maintain positive sales growth for last two years by various efforts,” said Anjan Chatterjee, founder and owner, Speciality Restaurants.
He mentioned that the company will be expanding in tier II and tier III cities. To maintain footfalls and same-store growth, the firm was avoiding increasing prices and only recently raised prices by 5-8 per cent after six-eight months, mentioned Chatterjee. Ankur Bisen, vice president, Technopak Advisors, said, “It cannot be an ‘either-or’ situation for restaurant owners to expand or focus on existing restaurants. They have to focus on both—i.e, existing restaurants and expansion to survive in the highly competitive fine dining and QSR segment.”
AD Singh, founder of Olive Bar and Kitchen said, “To maintain same-stores sales, we are coming up with reasonable pricing and concentrating less on expansion. We want to make the most of existing outlets and hence want to offer products at reasonable prices to customers.”
A recent report by Franchise India said that the restaurant industry has been growing at CAGR of 17 per cent and food service market is expected to grow from Rs 75,000 crore to Rs 1,37,000 crore in 2015.
(Edited by Joby Puthuparampil Johnson)
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Baring Private Equity Partners India Ltd. is a private equity firm with $1 billion assets under management. It provides capital for buyouts and financial restructuring to companies operating in India. The firm seeks to invest in information technology, life sciences, banking, financial services, insurance, energy, infrastructure and consumer goods sectors. The firm invests between $15 to $100 million. The company was incorporated in 2004 and is based in Guernsey, Channel Islands.
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