Burgers Pip Pizzas As Inflation-Wary Indians Switch To Cheaper Options

Indians are preferring burgers over pizzas as inflation prompts households to cut back on discretionary spending.

The fourth quarter earnings of the country's quick service restaurant chains suggest softening demand as companies continued to pass on higher costs of key ingredients, like cheese, to protect margins. Still, the operators of McDonald's and Burger King—offering affordable burgers and fries to fried chicken—fared better then Domino's and Pizza Hut franchises on same-store sales.

In FY23, prices of cheese, flour and chicken rose 40%, 28% and 20%, respectively. While flour and chicken costs are easing, cheese prices remain elevated.

"After Diwali last year, we have seen a sudden dip in discretionary spending and therefore the same-store-sales have been impacted," Sanjay Purohit, group chief executive officer of Sapphire Foods—the operator of Pizza Hut and KFC outlets—told BQ Prime.

The quarterly numbers also reinforce downtrading witnessed for the past several quarters. The companies have launched low-priced variants, partly impacting their revenue growth.

"The Flavour Fun has led to some cannibalisation," Ravi Jaipuria, non-executive chairman at Devyani International—the operator of Pizza Hut—said, referring to the new range, priced under Rs 100, launched in July last year to drive volume growth.

"In pizza, a lot of local competition has started coming back," according to Jaipuria. The category has been very price sensitive, which is why the company has consciously not taken a price hike—unlike in KFC, where it raised prices by up to 3.5% during the quarter, he said.

Inflation and downtrading are not the only reasons though. Consumer preference is changing too.

"People are spending more money on higher quality, artisanal products," Rohit Kapoor, chief executive officer—food marketplace at Swiggy, recently told BQ Prime to highlight the shift towards items that don't taste mass-produced.

Brik Oven and Pizza Bakery from Bengaluru, 1441 Pizzeria from Mumbai and Tossin Pizza from NCR saw growth within a month of being onboarded onto Swiggy's gourmet vertical, he said.

Better Margin For Non-Pizza Chains

All the five QSR companies have missed the consensus estimates on margin, with the pizza chains faring the worst.

Westlife Foodworld Ltd., the operator of McDonald's restaurants in West and South India, reported an operating margin at 15.9% in the fourth quarter versus 13.8% a year earlier, aided by its chicken portfolio.

While cheese and milk remain inflationary, the management doesn't expect major price hikes in FY24. Instead, it had guided for a 2-3% hike, indicating a 100-basis points Ebitda margin expansion to 18%. Over the last 12 months, Westlife has increased prices cumulatively by 7%.

Restaurant Brands Asia—the operator of Burger King India—reported Ebitda margin at 11.6%, up 33 basis points. The margin impacted because of high milk inflation in the March quarter.

The remaining three—Devyani International, Sapphire Foods and Jubilant Foodworks—saw their fourth quarter margin contract.

Yet, companies have largely retained their aggressive store expansion plans, as they remain confident that the trend is transient. They also maintained their capex guidance for FY24.

Westlife Foodworld, for instance, has a capex plan of Rs 150-220 crore this fiscal, of which 60-80% would contribute towards building new restaurants.

Jubilant's capex is likely to be in the range of Rs 700-800 crore in FY24.

The management of Jubilant expects IPL and school vacations to drive demand in the first quarter ending June, even as the overall discretionary spending remains uncertain.

However, Sapphire Foods' Purohit expects the demand pressure to continue for the next few quarters.

While Jaipuria of Devyani International expects consumer sentiment to improve in the second half of the year, led by easing inflation, he cautioned that elevated dairy prices may drag profitability.

The company said it has seen a marginal improvement in demand over the last 45 days. It maintains its same-store-sales growth guidance of 5-6% for KFC and 7-8% for Pizza Hut in the medium to long term.

Restaurant Brands Asia is aggressively promoting its Rs 99 meal to improve the dine-in share of the business. The company lowered India gross margin target from 68% to 67%, factoring in the value launches.

Meanwhile, analysts from several brokerage houses flagged risks. They expect margins to stay under pressure because of persistent cheese inflation, uncertain demand environment, impact of focus on low-priced products and higher depreciation because of store additions. The competition from food aggregators is also a key risk, they said.