Jubilant Food says it won't hike rates for at least a year

Despite a dismal performance in the first quarter of FY17 where its same store sales growth went into negative territory for the first time in the past seven quarters, Jubilant FoodWorks is confident of an improved show and a positive same-store sales growth in the second quarter.Jubilant FoodWorks, which operates Domino's Pizza and Dunkin' Donuts chains in India, attributed a 31.09 percent fall in standalone net profit at Rs 18.99 crore for the first quarter ended June 30 to weak consumer sentiment. The company had posted a net profit of Rs 27.56 crore in the same period of previous fiscal. Total income from operations went up by 6.69 percent to Rs 608.91 crore during the quarter under review as against Rs 570.68 crore in the year-ago period, Jubilant FoodWorks (JFL) said in a filing to the BSE. The company's same store sales growth declined to -3.2 percent, for the first time in past seven quarters.Drawing parallels between the food aggregator industry in Asian and Western markets such as US, Jubilant's Chief Executive Ajay Kaul told CNBC-TV18 that the food delivery market in India too will grow going ahead. Asserting that online sales for Jubilant have been better than those from the dine-in segment, Kaul said that the increasing number of food aggregators and delivery apps will help sales of Domino's Pizza.Jubilant FoodWorks added about 36 stores in FY17 so far and plans to add about 130-140 Domino's Pizza outlets in the year. Kaul said that while delivery sales have been better than dine-in numbers, store additions are part of the company's strategy. Already, sales in July and August have seen a significant improvement over Q1, he said.Kaul was also betting on the benefits of the Seventh Pay Commission and a good monsoon to drive the country's consumption. He, however, said that the market lacks an appetite for price hikes and the company won't raise prices for at least a year.Below is the verbatim transcript of Ajay Kaul's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: I heard you on the conference call where you did mention that the demand environment remains very challenging. But the question that begs asking now is the kind of pressure that you guys are facing or quick service restaurants are facing from food aggregators who do not only have to not pay rentals but they are giving a lot of discounts, etc. What kind of threat do you face from food aggregators and do you think it could get worse over the next 3-6 months?A: You have to look at this space from two aspects. How the food aggregators are playing a role in some of the developed economies and what kind of disruption have they done there across the world and second is at what stage is delivery as a concept in India and how will it evolve from here and thereby the interplay between the two. On all these counts -- I will address both of them -- we only see that all these activities only going to make the delivery as a segment grow significantly.If I look at USA as the mother of all markets, the aggregators have only played a role to grow the market, the delivery piece, more and more consumers despite historically in the US having been used to food getting delivered at home, the market is still growing and Domino’s in the US is a beneficiary of that.We believe the same trajectory is going to get followed even in India as much as it has got followed in a lot of Asian countries. If you look at specifically India now, the various players who are there, they are themselves in a state of flux. Some of them do well today, some of them have folded up, but one thing for sure is going to happen, they are going to make more and more people, us and their efforts included to grow the delivery piece and which, to my mind, was till now a task that was only left to us to grow the deliver market and now, there are more players who are doing category development work.Personally if you ask me, as an organisation, we are very happy that all these names that you just mentioned are going to collectively make the market grow. You will be surprised that even in a quarter where for the first time in 7-8 quarters, we have registered a negative same store growth and that is a blip and I will explain that in a moment -- our delivery is still doing better than dine-in. In the previous seven quarters where we were giving a positive overall growth, our deliver was again doing far better than our overall growth, which means delivery was still growing despite all the competition. So, are we losing our sleep because of these aggregators? Not at all. In fact we are in discussion with them, we talk to them, we collectively work out how we can jointly grow. They come to us and they also discuss their strategies with us sometimes.Anuj: I just want to intervene here because the point that you are making is in conflict with the point that you made in the conference call yesterday and your strategy. Your volumes are negative, your same store sales growth is negative and at the same time, you are saying that delivery is doing well but you are opening up new stores very aggressively. In fact, now you might be reaching a stage where to meet your guidance you might be opening some 10-15 stores a month and you are adding rental cost at a time when dine-in is not doing well. So, why are you doing that?A: I do not think there is any conflict in what I am saying. We are in this business of developing and growing our company over the next 5-10 years. In the short run, maybe there is a blip here or there, although it is not reflective in our numbers because if you look at last seven quarters -- let me explain this quarter. Our new product launch which normally happens in the first week of April, it happened only towards the end of April. So, in April, we got a bit of a hit. On a cosmetic comparison basis, June, this year had Ramadan 20 days, which was not there last year and as a result, June also did not look too good. So overall our landing has been at minus three.I am making this statement in front you today that since then, which means July and August have been significant improvements over our performance of Q1 and we will definitely have a landing in the positive zone as far as Q2 is concerned. We normally do not make forward looking statements and I am not going to give you a number, but we will be in the positive territory.Now, delivery in the short run, despite all this pressure and despite ups and downs, upheavals which some of these aggregators are seeing, is still growing. Our numbers are also doing better than our overall numbers. In the medium-term to long term, we are very confident that delivery as a segment is probably going to be doubled, tripled its size in the next 2-3 years. And we will be beneficiaries of that also.Yes, having said all that, the numbers in this quarter have not looked good. Consumer sentiment -- we have not seen any statistically significant improvements or changes.However, let me finish by making three statements. One, all the good things, we believe, that Modi’s government has done in the last 2-2.5 years, the economists as much as some of your economists are saying that high-time that some of them started delivering results irrespective of two other facts, the Seventh Pay Commission fallout and also cascading effect of monsoons, which is clichéd and beaten to death by now, we certainly believe are going to have a positive impact even on food service on the fast-moving consumer goods (FMCG) sector in general and so on.So, come October-November onwards, we are highly optimistic. While you may argue that we have been optimistic in the past also, but this time around, there are clearly some additional indicators like the Seventh Pay Commission and monsoon are going to have an impact and the numbers should improve from there on. Can I put my finger on any number? The answer to that is no. We are a conservative company, we do not give coordinative guidance.Latha: Coming to the numbers. If I looked from your initial public offering (IPO) onwards, your margins are at the lowest since you declared IPO. Your food earnings per share (EPS) trend is falling with every year -- FY13 Rs 20, FY14 Rs 18.10, FY15 Rs 16.90, FY16 Rs 15.90. So where is the troughing out? Is this a troughing out year?A: Answer in two parts to that question. There has to be a way of isolating Dunkin Donuts impact which may be reflective on the Jubilant Foodworks’ (JFL) performance because when you go back to our IPO days and even a couple of years thereafter, it was only Domino’s. However, thereafter, Dunkin has been playing its role.In this quarter close to 250 basis points impact has come because of Dunkin Donuts. So, you need to isolate that and look at Domino’s performance. It may not look as bad as you are suggesting. However, yes, we agree that this has been probably one of our worst quarters in terms of overall earnings before interest, taxes, depreciation and amortisation (EBITDA) margin dilution and so on.Having said that, we believe two things -- one yes, cosmetically minus three is bad, but we are going to spring from here and as I said, in this quarter which is about the finish in another month’s time, we are already seeing significant improvements and we should definitely land up in the positive territory. The moment your same store sales growth is in the positive territory, you start managing your margins better. With all this six sigma, all the other productivity, efficiency drives that we have, for our arguments sake, on labour which is one of our large costs, we have been able to reduce at least two employees per store compared to exactly a year back by way of some man power productivity models that we have deployed. If you look at the way we have been negotiating with our food suppliers, our raw material costs is constantly coming down. So, there are ways which we deploy to keep margins intact. The moment the same store growth starts hitting, whatever 6-7 percent, then we are in a good territory and if it is more than that then, those are the days we want to look forward to. I think those days probably are not too far. There is a bit of optimism in what I am saying here, but it is also led by certain external factors like the Seventh Pay Commission and so on.Sonia: Is this a new normal that we have to live with? Low single digit growth by the company because not only you, but all your competitors whether it is KFC, whether it is Pizza Hut, whether it is Dunkin Donuts are all seeing a fall in growth, which indicates that there is a change in consumer preference perhaps because of the growing health consciousness as well. So, is this a new normal single digit growth that we would have to live with for the next couple of quarters?A: I would not agree at all. The last statement, which you made with respect to health, while there is a very small niche of customers and it is more something which you hear rather than it gets practiced, because the frequencies of consumption, if you look at pizza, you look at burgers, it is still so insignificant and small, in fact, consumers, in research after research tell us that do not talk of all these things and we are having things in reasonable proportion so, why even talk about that. So we believe health, while a consideration, is too top-ended and too niche. That is not one of our concerns.However, the larger question which you asked is that is it a new norm? I do not think so. I think, as much as FMCG in general and if you sub-segmentise that and come to categories which are more discretionary in nature which includes ours, is going through a rough phase. Last two three year have been the worst and it is not just us, it is a lot of categories even going beyond food. We believe that with all the flips, whatever the government has done in 2-2.5 years, that is going to show some impact, Seventh Pay Commission, maybe we are relying on that too much but it will have its impact and a good monsoon will all take the numbers forward into good territories. Can we see 10 percent kind of same store growths also in future, at some stage, for sure we will be in that territory.Anuj: That is a long-term call and that is something we will discuss when we have time for that. For now, we have one question. In hindsight, was Dunkin Donuts a mistake because it is eating into your EBITDA margins, prices are high and discounts are high? So, might as well bring down prices.A: Not at all. Again there are two-three questions in one. As far as pricing is concerned, we do realise that if you look at a packet of three years and I am speaking on behalf of the industry here. There were far too high price hikes especially in the high food inflation zone, which goes nearly 1-2 years back. However, if you look at last price hike which we did, which was on very scientific, very price elasticity driven and so on was in December. We do not foresee taking a price hike for another five months. So, we will go without a price increase for almost a year if not more. So, that is our stance on price increases. The market does not have appetite to take too many price increases. We will have to manage our margins by doing whatever all efficiency, productivity gains internally.Dunkin Donuts is far from a bad decision. In fact first point, look around and tell me which food brand, which has come into India in the last 10 years is making loads of money and this is not a true story for India, it is even outside. Food from outside may look a great business and indeed it is. Domino’s has proven that, but it takes a bit of time and in 3-4 years, you cannot reach such conclusions.On Dunkin per se, the iterations, whether it is the pricing, people, products, menu mix, store design, store types, store locations and a few others, we have iterated and we have kind of now gravitating towards what we believe is the right size store with the right kind of people, with the right kind of menu and everything and pricing and so on.It is unfortunate guys that last 23 years have also been the worst for the industry. Look at some of the other formidable brands like -- without naming them -- the American giants, they have closed 50-80 shops in the last 1-1.5 years. Give me a break. We are here trying to bring in a brand, which is only 3-4 years old, it needs a little bit of more sales and all stores will then start making money. I do agree from full profitability, it is still a few years away, but it takes its time.