In a surprise move, Pratik Pota, CEO of Jubilant FoodWorks, resigned last week to pursue “quasi-entrepreneurial opportunities”. The development has led to a rerating of the stock by a few brokerages citing “uncertain times” for the company as it hunts for a new CEO.
Morgan Stanley downgraded the stock from ‘overweight’ to ‘underweight’, while JPMorgan has downgraded it from ‘overweight’ to ‘neutral’. Jubilant FoodWorks’ stock also took a tumble on the bourses and fell as much as 14 percent following the announcement.
The move has taken the Street by surprise, especially since the Jubilant FoodWorks board had approved Pota’s reappointment as CEO last June for another three years. Some analysts see the departure as an adverse development.
“This certainly is a negative development, as he has been instrumental in turning the business around post joining in 2017,” Edelweiss said in a note.
The company has initiated the process of identifying his successor, it said in a filing to the stock exchanges.
The turnaround architect
Pota has been credited with significantly improving the performance of the company after he took over the reins in 2017. Pota, who succeeded Ajay Kaul, had joined Jubilant FoodWorks at a time when the company was going through a rough patch.
“Jubilant FoodWorks went through a tough phase over FY13-17. Rapid store expansions led to cannibalisation and deteriorated profitability metrics. Aggressive product price hikes along with deterioration in product quality impacted the franchise. These factors along with acute cost pressure resulted in margin contraction from 19 percent in FY12 to 10 percent by FY17,” said a note by Jefferies.
Pota took several initiatives that improved the growth and performance of the business. He introduced concepts such as ‘everyday affordability’ at Domino’s Pizza, under which the company offered 20-40 percent discounts to consumers most days of the week instead of earlier promotional offers such as ‘buy-one-get-one on Wednesdays’, which boosted store throughput. Jeffries terms this initiative as a “game changer”.
Pota also invested in product upgrades with new crusts, liberal amounts of cheese, other toppings, imported sauces and visibly-pleasing packaging. He relaunched pizzas with these superior offerings at the same price points across the country, and closed down over 100 underperforming stores of Dunkin’ Donuts between FY17 and FY20.
This resulted in a sharp recovery. Better store economics had a trickle-down effect on profitability and Ebitda (earnings before interest, tax, depreciation and amortisation) margins expanded from 10 percent in FY17 to 17 percent by FY19. Ebitda hence more than doubled in two years, said a note by Jeffries.
According to Motilal Oswal Securities, since April 2017 the Jubilant FoodWorks stock has returned a 40.1 percent compound annual growth rate versus 12.3 percent and 10 percent for the Nifty50 and Nifty India Consumption indices, respectively
The ‘wait’ for the successor
Pota is also credited with spearheading the company’s ‘technological transformation’, which helped it compete with food aggregators like Zomato and Swiggy. He oversaw the launch of several innovations such as late-night delivery, delivery on trains and expansion in newer cuisines/brands, while also stepping into newer formats like cloud kitchens and kitchen-in-kitchens. Delivery in recent years has emerged as a major strength of the company even as most quick service restaurants and restaurant chains have struggled with the onslaught of food aggregators.
The company has also rapidly expanded to smaller towns and is way ahead of its competitor Pizza Hut in terms of store count. Pizza Hut currently has 500 stores in India, of which 317 are run by Devyani International; Jubilant FoodWorks, on the other hand, already has 1,335 outlets of Domino’s Pizza in India.
Pota’s departure, however, leaves a question mark on the future of all these initiatives.
“As a business, JFL’s franchise strength remains intact and it has scaled up enough to weather this. However, in the interim, before a new CEO is appointed, uncertainty on execution may prevail, given Dominos’ ongoing rapid expansion, and the multiple initiatives that are still in their nascent stages,” said Edelweiss in its note.
Pizza Hut franchisees Devyani International and Sapphire Foods also are expanding stores aggressively.
According to Manoj Menon, head of research and consumer analyst at ICICI Securities, for Domino’s, the bigger challenge in the next two financial years is the rejuvenation of Pizza Hut (relative market share issue for Domino’s), which has likely led it to implement a fortressing strategy (opening more stores in large cities and towns).
“At a time when there is an entrepreneurial wave, finding high-quality talent is the likely challenge which Jubilant FoodWorks will face, in our view,” said Menon.
Now, a lot weighs on the appointment of the next CEO and how he leads the company to the next leg of growth.
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