Even as quick-service restaurants (QSR) rapidly expanded their store count after a strong recovery post Covid, the industry is currently witnessing sluggishness on the back of demand slowdown and a challenging macroeconomic environment. According to a report by BNP Paribas, the aggregate revenue growth of listed QSR companies was at 8 per cent YoY in Q1FY25, broadly in line with the 7-9 per cent seen in the last four quarters but well below the consensus expectations from the sector. It further maintained that the gross margins expanded as the cost of raw materials, such as milk, have moderated. However, EBITDA margins remained under pressure due to weakness in same store sales growth (SSSG).
Moving away from dine-in
For QSRs, the report added, dine-in sales are under pressure with lower footfalls and decline in average daily sales (ADS) YoY, and increasing competition from delivery. The trend is likely to continue with delivery business continuing to get fragmented as aggregators are connecting consumers with more restaurants and cuisines. Zomato has 276k restaurant partners vs only 5k total restaurants of branded QSRs and the rising scale of aggregators is expected to continue to tilt the bargaining power in their favour, stated the report.
Store additions slowed down as SSSG remains a challenge for most
Now if we talk about store additions, which saw a tremendous increase post Covid, but with sales growth of QSR industry being well below store additions, ultimately resulting in sharp cuts in margins, the pace of retail expansion too slowed down. However, it did differ across brands, for example, while for KFC, store additions remained healthy, Pizza Hut saw a sharp moderation.
The expansion drive also hit the brakes due to pressure on SSSG as consumers continued to show inclination towards delivery as compared to dine-in. “As seen in earlier quarters, sales growth was led by store additions, while SSSG/like-forlike (LFL) growth YoY remained negative for most companies with ADS declining YoY as well. SSSG/LFL growth was positive only for Burger King and Jubilant FoodWorks at 3 per cent each,” said BNP Paribas. In terms of performance, Jubilant FoodWorks did slightly better in comparison to its peers with positive SSSG helped by its initiatives such as free delivery, reducing minimum delivery order value size and dine-in focused value offerings. Store additions have moderated YoY but still remain strong at 15 per cent on-year. However, it saw a lower gross margin expansion vs peers.
“With slowing store additions and continued pressure on SSSG, a sharp recovery in revenue growth and margins seems unlikely to us, and this could result in further cuts in consensus estimates,” said BNP Paribas. The report maintained that the dine-in channel has remained under pressure since 2017 when aggregators started to build their food delivery businesses. While this further accelerated post Covid across categories, BNP Paribas added, it affected the pizza category the most. While most QSR brands are taking various initiatives and remain hopeful of a recovery, backed by the ongoing festive season, dine-in contributions continued to decline in Q1FY25 both YoY and QoQ.
Zomato, Swiggy continues to expand
Meanwhile, per the report, Zomato’s average monthly active restaurant partners increased from 61k in FY19 to 270k as of FY24. This implies that the scale of food delivery companies has expanded significantly over the past few years, which has helped improve customer reach, especially for smaller restaurants. Zomato’s active restaurant base of 276k is much higher than the 5.5k stores of listed QSR brands as of Q1FY25. “Restaurants active with Zomato have increased to 51x total branded QSR stores in FY24 vs 22x in FY19. We think with consumers now having more options, sales are likely to get fragmented. This is further denting the already weak average daily sales of the QSR industry, along with the general weakness in demand,” BNP Paribas concluded.
From: financialexpress
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