Rising preference for delivery boosts Swiggy, Zomato: Dents Domino's, KFC, Burger King store sales

his shift is leading to increased competition in the food delivery market, creating challenges for QSR chains according to foreign brokerage firm BNP Paribas.

Zomato and Swiggy’s growth is hurting quick service restaurant (QSR) sales as consumers opt for delivery services over dine-in experiences. This shift is leading to increased competition in the food delivery market, creating challenges for QSR chains according to foreign brokerage firm BNP Paribas.

Zomato's monthly active restaurant partners surged from 61,000 in FY19 to 2,76,000 in FY24, significantly expanding their reach. Zomato’s 2,76,000 active restaurant base is higher than 5,500 stores of listed QSR brands in the first quarter of FY25. This vast expansion means consumers have more dining options, leading to fragmented sales and further weakening the already struggling QSR industry's daily sales.

“Restaurants active with Zomato have increased to 51x total branded QSR stores in FY24 vs 22x in FY19. We think with consumers now having more options, sales are likely to get fragmented,” the research firm said in its report. This is further denting the already weak average daily sales of the QSR industry, along with the general weakness in demand.

In comparison, Jubilant FoodWorks, which operates Dominos Pizza brand in India has done relatively better with initiatives like free delivery, but heightened competition in the delivery segment is putting pressure on margins across the industry.

Sameer Khetarpal, Chief Executive Officer and Managing Director of Jubilant FoodWorks in the post first quarter FY 25 results investor call said delivering food is less profitable compared to when customers pick up their orders from the store, even if the order size is the same. This shift in the mix of order types improves overall margins, which is reflected in the year-over-year reduction in EBITDA, but it also contributes to positive same-store sales growth.

Aggregate revenue growth in the recent quarters at 7-9 percent is lower compared to a 14 percent CAGR over FY19-24, as per the BNP report. Managements have attributed this to consumption slowdown as the macroeconomic environment has remained challenging, it added.

Store addition for revenue growth is hitting margins

While revenue growth in the industry has been driven by adding new stores, this has negatively impacted profit margins. Over the past two years, while more stores were added, average revenue per store has remained flat or has declined, putting pressure on adjusted EBITDA margins. This is due to market fragmentation from aggregators and increased competition, limiting price increases.

In the first quarter of FY25, listed QSR firms reported an eight percent year-on-year increase in aggregate sales, which is consistent with the seven percent to nine percent growth observed in recent quarters.

However, this growth is below the industry trend and has been accompanied by a significant decline in revenue growth compared to the 15 percent year on year rise in store count. This discrepancy has led to a notable decline in EBITDA margins, with a 400-600 basis point erosion post-rent.

Even though aggregators are trying to improve their profitability, QSR chains continue to face margin pressure. “For Jubilant FoodWorks, we expect adjusted EBITDA margins to increase from 12.6 percent in FY24 to 15.1 percent in FY26, which will require further improvements in same-store sales growth (SSSG),” BNP Paribas reported.

The report also added that the rising scale of aggregators could continue to tilt the bargaining power in their favour, “With slowing store additions and continued pressure on SSSG (Same-Store Sales Growth), a sharp recovery in revenue growth and margins seems unlikely to us, and this could result in further cuts in consensus estimates.”

Jubilant's performance was slightly better than peers with positive SSSG helped by its initiatives
such as free delivery. However, it also saw a lower gross margin expansion. In the recent
quarters, QSR sales growth been well below store additions, which resulted in sharp cuts in margins.

With respect to capex and expansion, Jubilant FoodWorks expects to open 180 Domino’s stores and around 20-25 Hong’s stores. Westlife Foodworld targets 45-50 new stores in FY25, with stronger focus on South India, smaller towns and drive-throughs. Devyani International plans to open 100+ KFC stores and 50-60 Costa Coffee stores in FY25. Sapphire Foods India plans to stick to the three to four stores a year guidance. Restaurant Brands Asia expects to reach 510 stores by the end of FY25.

This shift of consumers moving away from dine-in is leading to sales growth being led by delivery, while dine-in sales are under pressure. BNP Paribas Exane infers that this trend is likely to continue.

As seen in earlier quarters, sales growth was led by store additions, while SSSG or like-for-like (LFL) growth year on year remained negative for most companies with ADS (average daily sales) declining year on year as well. SSSG/LFL growth was positive only for Burger King and Jubilant at three percent each.

“With slowing store additions and continued pressure on SSSG, a sharp recovery in revenue growth and margins seems unlikely to us, and this could result in further cuts in consensus estimates,” the report stated.

Demand Outlook

As the first quarter of FY25 was weak for the industry, companies are hopeful about the medium to long-term industry potential. Jubilant FoodWorks, Devyani International, Sapphire Foods India, Restaurant Brands Asia expect cheer in the festive season despite subdued consumer discretionary spends.

Demand remains the common challenge for food delivery and dine-in. Weak demand trend has continued in the first quarter of FY25 across categories despite a high base. “Burger King has been an exception as its sales grew 16 percent year on year on a base of 25 percent,” the report said.
QSR firms, however, remain hopeful of a gradual recovery in the coming quarters, backed by the upcoming festive season.