The expansion of Zomato and Swiggy is affecting the quick service restaurant (QSR) industry, as more consumers are opting for delivery over dining in, according to a report by MoneyControl, citing an analysis by the foreign brokerage firm BNP Paribas. This shift is intensifying competition in the food delivery market, presenting challenges for QSR chains.
Zomato’s monthly active restaurant partners surged dramatically from 61,000 in FY19 to 276,000 in FY24, significantly broadening its market presence. The company’s 276,000 active restaurant partners far exceed the 5,500 stores of listed QSR brands in the first quarter of FY25.
This extensive expansion has provided consumers with more dining choices, leading to fragmented sales and further weakening the already struggling daily sales within the QSR sector, according to the report.
The number of restaurants active on Zomato increased to 51 times the total number of branded QSR stores in FY24, compared to 22 times in FY19.
The report suggested that with consumers having more options, sales are likely to become fragmented, exacerbating the already weak average daily sales in the QSR industry amid generally sluggish demand.
In contrast, Jubilant FoodWorks, which operates the Domino’s Pizza brand in India, has performed relatively better, partly due to initiatives such as free delivery. However, the increasing competition in the delivery segment is putting pressure on margins across the industry.
The aggregate revenue growth in recent quarters at 7-9 percent is lower compared to the 14 percent CAGR seen over FY19-24. The firm added that management attributed this slowdown to weaker consumption amid a challenging macroeconomic environment.
The industry’s revenue growth has largely been driven by the addition of new stores, but this has negatively affected profit margins. The report noted that market fragmentation caused by aggregators and increased competition has limited price increases.
QSR firms’ performance
In the first quarter of FY25, listed QSR firms reported an eight percent year-on-year increase in aggregate sales, aligning with the seven-to-nine percent growth observed in recent quarters. However, this growth lags behind the industry trend and coincides with a significant decline in revenue growth compared to the 15 percent year-on-year rise in store count. This has led to a substantial decline in Ebitda margins, with a 400-600 basis point erosion post-rent.
Despite aggregators’ efforts to improve profitability, QSR chains continue to face margin pressures. The brokerage firm adjusted Ebitda margins for Jubilant FoodWorks to increase from 12.6 percent in FY24 to 15.1 percent in FY26, contingent on further improvements in same-store sales growth (SSSG).
The report also indicated that the increasing scale of aggregators might continue to shift bargaining power in their favour, and with slowing store additions and ongoing pressure on SSSG, a sharp recovery in revenue growth and margins appears unlikely, potentially leading to further reductions in consensus estimates.
Jubilant FoodWorks performed slightly better than its peers, supported by positive SSSG due to initiatives such as free delivery. However, the company also experienced lower gross margin expansion. In recent quarters, QSR sales growth has lagged behind store additions, resulting in significant margin reductions.
Regarding capital expenditure and expansion, Jubilant FoodWorks plans to open 180 Domino’s stores and 20-25 Hong’s Kitchen outlets. Westlife Foodworld aims to establish 45-50 new stores in FY25, focusing on South India, smaller towns, and drive-throughs. Devyani International intends to open over 100 KFC stores and 50-60 Costa Coffee stores in FY25. Sapphire Foods India plans to maintain its target of adding three to four stores annually, while Restaurant Brands Asia aims to reach 510 stores by the end of FY25.
A turnaround in demand expected soon?
As the first quarter of FY25 was weak for the industry, companies remain optimistic about the medium- to long-term potential. Jubilant FoodWorks, Devyani International, Sapphire Foods India, and Restaurant Brands Asia expect an uptick during the festive season, despite subdued consumer discretionary spending.
Both food delivery and dine-in services face challenges due to weak demand, which persisted across categories in the first quarter of FY25, despite a high base. The report highlighted that Burger King was an exception, with a 16 percent year-on-year sales increase on a base of 25 percent.
However, QSR firms are hopeful of a gradual recovery in the coming quarters, buoyed by the upcoming festive season.
First Published: Aug 30 2024 | 5:56 PM IST
