India’s quick-service restaurants (QSR) are seeing structural shifts going beyond weak consumer spending, after food delivery platforms opened the door for unorganized players to compete against branded chains, said Kunal Vora, Head of India Equity Research at BNP Paribas.
In an exclusive conversation on the weekly podcast, The Wealth Formula, Vora said, “What we have seen in last 2-3 years is the growth rate for QSR sector has come off and margins also have come off,” said Vora. Explaining the change, he said that food delivery has become very large compared to what it used to be 4–5 years back, taking away some of the growth from the QSR segment. “It (food delivery) enables the smaller chains or unorganized restaurants. They start getting access to the customer. From a customer perspective, he has got more options.”
This increase in competitive intensity has eroded the pricing power of QSR brands. “The ability to take price hikes and to maintain or improve margins goes away,” Vora said. “You can have growth, or you can have margins. Both making a strong comeback is something which we don't see.”
While consumer discretionary remains a structurally attractive segment, urban consumption trends have weighed on the near-term performance. “Urban consumption has been weak,” said Vora. “We do believe that consumer discretionary is more of a secular and longer-term outlook.” he said, adding that investors need to be careful about which segments to pick within the broad category, as each has its own dynamics.
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“Unlike in the case of jewellery where we are seeing a movement from unorganized to organized, in case of QSR, what we are seeing is the unorganized becoming more powerful now because they are getting the reach to the consumer which they were earlier not getting.”
Vora also mentioned that the food delivery companies themselves are evolving. “What has changed in the last couple of years also is that the food delivery companies have become more margin focused now. That seems to be helping (QSR players).”
“In the last two quarters what we have seen is as the food delivery companies have looked to expand their own margins, so there is some scope for the QSR companies to make a comeback,” said Vora, adding that this comes at the cost of margins for the QSR companies.
Besides, there are still demand pressures, impacting QSRs. “Income levels are not really increasing at a dramatic pace... especially at the mass end because of the very high inflation.”
BNP Paribas does not have coverage on food delivery company Eternal. It has a Sell rating on Jubiliant Foodworks, which owns Domino’s Pizza, and does not have coverage on Westlife, which owns Mc Donald’s.
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