IPO-bound Devyani International, the biggest franchisee of Yum! Brands in India, sees no competition for KFC in the country, given its unique chicken offering, the company’s Chairman Ravi Kant Jaipuria said.
The company, which runs 696 stores across 196 cities in India, including Yum! Brand-owned quick-service restaurants (QSRs) such as KFC and Pizza Hut, plans to raise about Rs 1,838 crore through the initial public offering next week.
“We offer fried chicken and 80 percent of our business is chicken only, whereas if you look at other QSRs in the segment, they are burger-based,” he added.
Jaipuria said adoption of the delivery model instead of the earlier focus on dine-in was working very well for Pizza Hut and there is huge scope for its expansion.
The company plans to use the funds raised through the IPO proceeds to pay most of its debt, while its expansion going ahead will be funded through internal accruals.
KFC: the crown jewel
Devyani International runs 284 KFC India stores across 107 cities in India and the brand contributes more than half of its revenues.
“KFC has been a star performer within DIL's portfolio on all fronts — store expansion, revenue growth as well as profitability. DIL's KFC store network has grown at 40 percent CAGR over the last three years (25 percent CAGR on an organic basis) and it now accounts for more than 50 percent of Yum's India KFC store network vs. less than 30 percent three years ago,” said a recent note by brokerage firm Jefferies India.
According to Jefferies, the format generated 57 percent of Devyani International’s revenue in FY21 and 73 percent of its brand contribution profit.
The company has the right to open KFC stores in states in South India and East India, along with some states in North India (Rajasthan, J&K, Himachal Pradesh) and a few cities in Delhi NCR and Uttar Pradesh, and Bengaluru.
Devyani International faces stiff competition from Jubilant FoodWorks which runs Domino’s in the pizza segment. 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 in India.
Sapphire Foods India and Burman Hospitality are other franchisees of Yum! Brands in India.
“Pizza Hut (incl. delivery) has strong competition in Domino's Pizza and will take a fair amount of investments on brand recall along with aggressive rollouts. Conversely, KFC enjoys a strong brand position and Jubilant FoodWorks' Popeyes will need to make similar investments and, hence, is not a serious threat, in our view,” said a note by Jefferies.
Both the companies have aggressive expansion plans for their brands Pizza Hut and Domino’s Pizza. Jubilant FoodWorks while reporting its first-quarter results for FY22 said that it plans to add 150-175 stores for Domino’s Pizza this year.
“DIL's Pizza Hut network has expanded at a mere 7 percent CAGR vs. 39 percent CAGR for KFC (25 percent organic). While 107 stores were opened on a gross basis over FY18-21, 54 stores have also been shut down resulting in a much lower net addition,” said Jefferies.
The two companies, however, have a different approach to the delivery business. Domino’s Pizza focusses on deliveries through its platform, which is the major contributor to its delivery business, while Pizza Hut relies on food aggregators, a model it plans to continue deploying.
“We are one of the largest business partners for Swiggy and Zomato,” said Jaipuria.
“Though we have our delivery infrastructure, the sales are relatively low as compared to the food aggregators,” he added.
According to Jaipuria, the model is working out for them because it is a variable and in a fixed model, the company would have to develop its delivery infrastructure. Also, he added, this speeds up the rollout to new cities and towns.
The coffee challenge
Devyani International runs 44 Costa Coffee stores across 17 cities in India. According to the company, its Costa Coffee outlets reported a revenue of Rs 90 crore in the pre-pandemic period FY19 and Rs 21 crore in FY21.
Jaipuria also said Costa Coffee has had some international management changes and Devyani International is under negotiation with the company.
“We are currently going through the legalities of the agreement,” he added.
Costa Coffee, analysts said, is the weak link in Devyani International’s portfolio.
“Devyani International has closed several stores in FY21 and store count has reduced by ~30 percent. While format profitability is modest with double-digit Ebitda margin in FY20 (pre-Ind AS 116), revenue growth has been sub-par,” said Jefferies.Costa Coffee contributed 5 percent of the company’s revenue in FY20 and 10 percent of brand contribution profit during the period.