Jubilant Foodworks plans to open 4 new commissaries in FY14

Jubilant Foodworks, the operator of Domino's Pizza and Dunkin' Donuts pizza delivery chains in India, plans to spend Rs 75 crore to set up four new commissaries in the current financial year, Ajay Kaul, CEO, said on Friday.

It will set up new commissaries near Nagpur, Hyderabad and Guwahati and move into a new bigger commissary in Delhi, he told CNBC-TV18.

It is also stepping up on training its employees and spending on advertising and marketing amid a slowdown in same-store sales.

Jubilant Foodworks reported lower-than-expected fourth quarter earnings on Thursday. Same-store sales growth declined 7.7 percent, its lowest in 16 quarters according to analysts.

The company has also only guided for 10 percent same-store sales growth for this year at Domino's, much lower than the 16.2 percent growth in FY13.

Margins are expected to be around 16.5 percent this year, compared with 16.7 percent in Jan-March.

Kaul said consumers were downtrading and conserving cash amid the overall economic slowdown. However, he feels that the blip driven by the macro-economic factors is temporary and hopes the company will get back to double digit same-store sales growth once the economy recovers.

While the company may be facing same-store sales pressures, it is speeding up its expansion, especially of Domino's Pizza outlets. Last year it opened 111 stores and Kaul says the company is confident of opening 125 outlets year after year going ahead.

It will also open at least 18 Dunkin' Donuts restaurants this year. It currently has 10 outlets, most of them in Delhi, except one in Chandigarh.

Below is the edited transcript of Kaul's interview to CNBC-TV18. 

Q: There was quite a bit of disappointment with that same-store sales growth guidance that you guys put out. I know in our last interaction you were pretty candid about the fact that same-store sales growth is slipping. Could you just walk us through whether this is a conservative estimate that you have put out and what exactly has led to this much of a decline?

A: We have been saying this for sometime. A company which has been getting around 30 percent of same-store growth, for them to come out with these kind of numbers may probably sound a bit disappointing. But it is all economy. There is nothing more than that.

If one was to compare us with comparables within our own industry, which is one of the other big players in the quick-service restaurant industry, about 7.7 percent will still look very good. Are we happy about it? Not at all.

The larger story which I want to dwell on is the growth story. The growth potential in India is something which we are always upbeat about and we are putting all our money behind that. I want to dwell on three things. Firstly, we had said we will open 110 stores in the year. We had started at 90 and taken it up to 110, we actually did 111 stores. Our forecast for next year is 125 stores atleast and that is Domino’s alone.

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Even going forward, we believe we can do atleast 125 store year-after-year. So, that is our belief and trust behind the growth story. There is a temporary blip which is driven primarily by macroeconomic factors. The optimist in us tells us that it is not going to be for long that we will deliver single digit same-store growth numbers.

We do believe we will get into double digit hopefully in the next few months and economy is going to help it primarily and nothing else. Talking about next year we think we will do at least 10 percent same-store growth. We think we will deliver at least 16.5 percent return on EBITDA as an indicator of profit and 125 Domino’s stores and 18 Dunkin’ Donuts stores in the course of next year.

Q: The kind of guidance you guys are putting out in terms of same-store sales growth which is as low as 10 percent versus a guidance of opening a 125 stores is difficult to marry. 50 percent of those incremental stores is from the top 10 cities for you guys where you have talked about cannibalisation problems as well. How do you marry this disconnect between how low your same-store sales guidance is versus how aggressive you guys are being in terms of fresh store openings and that is in the top 10 cities. Are you being overly pessimistic?

A: There is no disconnect there. While there is a small linkage between opening new stores in existing cities and it tends to cannibalise a little bit, but that has been something as the part and parcel of the industry. It was there last year. It was there even in the years where we have done 37 percent same-store growth and 30 percent same-store growth.

It has a very small impact and nonetheless, there is that impact. I think the larger picture emerges from the economic factors. Consumers have started down trading. They have started conserving cash. While we are an absolutely impulse purchase, high discretionary spend, low-ticket kind of an item, on the complete year, we did around 16 percent same-store growth which is still pretty good.

The government is probably trying to throw some economic stimuli at the consumers which is going to trigger demand and which is going to kind of bring the consumerism back. However, we do believe it may take sometime and that is why I would say 10 percent is a number we are kind of confident about.

It is not with pessimism, but we are also a company which believes in delivering more than what we promise. If one looks at last year, while 7.7 percent on one side is the same-store growth for last quarter, but during the course of the way, we spent nearly Rs 50 crore in upgrading our factories, our commissaries.

In Mumbai, we moved to a new facility and we spent around Rs 25-26 crore. In Calcutta we invested in a new commissary which cost us around Rs 12-15 crore and we opened up brand new commissary in Chandigarh. That is an experiment we did for around Rs 10-12 crore and inspired by that, during the course of the following year which is the year we are sitting in right now, we plan to invest around Rs 70-75 crore in building four more commissaries, around Nagpur, Hyderabad, Guwahati and in Delhi which was commissioned around three-four years back.

We want to move to a state-of-art three times the size facility. All this is happening because we are looking at the future. We are not getting bogged down by one quarter or half a quarter where our same-store growth maybe 7.7 percent. The larger picture is that our country, India offers us to add atleast 125 stores year-after-year and keeping that in mind, we are investing so much of cash into creating infrastructure.

Additionally, last year, our marketing spends only went up, because our philosophy is that when it hits a bit of a downturn or the times are not too conducive, that is the time to put money behind your own people as well as your brand. That is why, last year our marketing spends went up.

We launched our new positioning which was 'Yeh Hai Rishton Ka Time'. The consumers are already resonating with it. It is a different story that they have decided to kind of conserve a bit of cash and they are not spending as much, but it is a temporary blip. We have increased our training budgets to almost double because we believe this is the time when one has to tell his/her employees that times maybe a bit tough, but we believe in them. We are a people business, we have 21,000-22,000 employees all over the country. We are looking at the future of the growth.

Q: That puts more pressure on your margins does it now because do you have increasing staff cost, you have increasing rentals and inflation is breathing down the necks of most companies like yourselves - what steps are you taking to address these cost pressures and how long before you can get back to those 18-19 percent margins that you use to see before?

A: There is a small price one has to pay when one is in such a humongous growth phase. If one looks at last three years, we have had 87 stores, 111 in last year and we see atleast 125 in the next year and it will continue like that. So, when one is in a growth phase, one has to make some investments in business.

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I did talk about investment in factories, around Rs 50 crore last year, Rs 75 crore this year and such investments will continue. Investment in creating bench strength, leadership pipelines, that is a small price one will have to pay in the short run. I will urge our investors, our shareholders to realise that when they look at Jubilant Foodworks, they are looking at a company which is riding the growth potential of this country and they should look at it from long-term perspective. We are making a rock solid organisation for future.

Q: Can you just throw some more light on what the exact rollout expenses are for Dunkin' Donuts and how much time before which that starts to contribute to the business?

A: Dunkin' Donuts contributed to small single digit in terms of sales. Its impact on EBITDA was around 70-80 basis points. We have aggressive plans for both Dunkin' Donuts and Dominos. However, Dunkin' Donuts would always play a small brother’s role and Dominos as a result will play the big brother role, because by the time Dunkin' Donuts reaches 100 stores in three to four years time, Dominos would probably be sitting at 1000 stores to put things in perspective.

It’s impact on the overall performance and the profit and loss will also be small but having said that, we are mercilessly focusing on it. The first ten stores that we have opened in Delhi NCR and the one in Chandigarh has given us very encouraging results. We plan to open atleast 18 stores this year. In that, we also plan to enter atleast one more metro and we are on course to open around 80 to 100 stores in four to five years time.

For Dunkin’, we are leveraging the Dominos infrastructure beautifully. From our existing factories of Dominos we will create Dunkin factories, so there is leveraging of infrastructure cost. As people are concerned, we have a huge bench strength, call it talent pool sitting in Dominos which we are constantly using for Dunkin' Donuts. We are hoping that in the next couple of years, two three years even, Dunkin' Donuts’ business on standalone basis should start showing profits and after that, the ride is going to be that much smoother.

Q: You know that Q4 is traditionally the weakest reporting number for you guys in terms of your same-store sales growth. I am trying to understand if this 10 percent guidance that you are setting out is a base for you or your indication of your weakest possible numbers through the course of FY14 or is that going to be average kind of growth that you expect to see?

A: There has been no year in our history where the drop in same-store growth has been such. Even in the year where we got 37 percent same-store growth or 30 percent same store growth, which was year before last, the dispersion was probably in between 33-34 percent at the maximum and maybe around 25-27 percent on the minimum.

This has been one year where we started at around 25 percent in one quarter and it has ended at 7.7 percent. So, there has been a huge dispersion. While we could see that at the consumer level, we could see the signals in terms of drop in frequency – I would not say that the growth in frequency was not as much in terms of penetration or new customer acquisition. I believe the growth was not as much but we never realised that the drop would be so much. These are 90 percent driven by macro economic indicators. One can look around and see how our immediate competition is doing and their numbers are also in public domain. A lot of them are in sub-zero range during the same time periods. That is giving us a bit of a concern of how dispersion be so much.

We also go back to Lehman Brothers time. In that year also, we had around six to seven percent same-store growth, but the moment we came out of that in the very first quarter after that, we clocked something like 22 percent same store growth.

The optimist in us is telling us that a little stimulation by the government, by the economy, for a 300-350 purchase outlay consumers are not going to hold back or hang on for that long. They are going to swing back according to us and the day is not far. We are hoping that the numbers will climb back into double digits.

While we may be sounding a bit conservative, the significant drop has also taken us back by surprise because one has never seen this before, so we don’t know how long this will continue. We hope to turn the tide sooner than later, but we don’t know. That is why we are banking more on our future growth which is build 125 Dominos stores, building atleast 18 more Dunkin' Donuts stores, put money behind product launches, advertising. It also includes us putting money behind our factories, creating infrastructure for future, putting money behind people.

Q: For most businesses, growth in volumes tends to overlay any other concerns whether it is margins or anything else. Over the course of the new few years for you guys, what would you say is the biggest challenge- is it to bring volume growth back or do you think the pressure is more towards the lower end in terms of maintaining profitability and ensuring that margins are not damaged any more?

A: Clearly, if one looks at penetration, if one looks at per capita consumption of pizza and so on and so forth, there is so much work to do in terms of bringing more and more people in to this group of people who understand what quick service restaurants (QSR)  are, what is pizza and so on and we look at the country as a whole here. So, the first challenge is to get more and more people to taste, eat, consume and understand what QSR and pizzas are, then increase their frequency. We are not as much bogged down about margins. Margins we have to protect. We are a public limited company and all our shareholders are accountable for. We will never let them down but clearly for the next four-five years, growth is where we are focusing on whether it is terms of new stores, entering new cities, bringing in new brands or in terms of same store growth which temporarily may seem not too optimistic but we are pretty much optimist that we will back into the numbers. We have been delivering in the past and the margins will come. The margins are something which will follow. As soon as the same-store growth climbs a little bit, but growth is what we are focusing on which in turn means orders, more consumers, more penetration, more frequency and so on.