Sapphire Foods looks to operate 2,000 restaurants: Group CEO Sanjay Purohit

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Sapphire Foods, is one of two franchisee operators of Yum! Brand’s KFC and Pizza Hut in India, listed in November last year during the great rush of initial public offerings that attracted a bunch of new investors to the primary markets. However, Group CEO Sanjay Purohit says nothing has changed for the company at the operating level.

He told Anuradha SenGupta in an interview that there is no question of Sapphire Foods merging with Devyani International, the other franchisee of KFC and Pizza Hut. The focus is on building operating scale, capability, and backend to run as many as 2,000 restaurants, perhaps with the addition of two more brands.

Purohit also spoke about how the company’s Sri Lankan outlets were performing and how inflation is affecting operations in India. Edited excerpts:

What did it mean to take Sapphire Foods public? And how has your life and your work changed as a result?

So Sapphire Foods came into existence six years ago. At that time, Yum! Brands believed that a two-franchisee model in India was the way to go, so they had an Indian promoter-led franchisee (Devyani). And then they said, let's get in another kind of franchisee, professional promoters led by professional management and governed by a professional board. And over the last six years, our performance has actually vindicated that the two-franchisee strategy in India is perhaps the best way for Yum! to go. We came into this business because we are very excited about the QSR space. We believe it's a multi-decade-long opportunity.

How much has your life changed after listing? Today, everything is up for scrutiny, every number, every decision, every bit of money spent. How does that affect your work? Is it inhibiting? Is it empowering?

So from an operating performance level, nothing has changed. If we run a great business, with great people, with great governance, that's the way to go. Finally, valuations are an outcome of all of these three things. So from an operating cadence perspective, there's nothing changed.

In any case, we were used to scrutiny of numbers. Today, just our investor base is much larger, that's it. I think what has changed is the pride that our employees feel in Sapphire Foods.

Six years ago, people were joining because of me. Today, they joined because of what Sapphire Foods means to them. They are owners in the organisation. So last year, before the IPO, we rolled out ESOPs to 1,000 people, including our restaurant general managers. So that pride, that ownership mindset, which has actually got translated in the mind and in reality through ESOPs, I think that is the big change that we see.

When you see analyst reports, there's a target price for Sapphire Foods. How does it feel when you look at these cues? How does this affect you?

Today, all the reports say buy Sapphire Foods, so that's the first thing. I don't look at the stock price at all – perhaps once a week. Our promoters are exactly the same. They say let's build a good business. I think the tenets and the fundamentals of a good business are this. Can you deliver consistently high-quality performance?

But can you afford to tune out all this buzz and chatter? In February, there was this run-up and the share price reached a lifetime high. This must be impinging on you in some way. And even if you are guided by your long-term vision, I want to understand how you cope with these external factors.

So it's easy to get flustered or be ecstatic when the share price goes up or goes down. I think it's important to remain calm here. When I speak to investors, they tell us this consistently. The people who have invested in us and continue to buy in us say, deliver great performance, deliver great governance, be transparent in your disclosures and this is what we are attempting.

It takes time to build trust. If I go back six years, it took time to build trust with private equity investors. Why should that be anything different for our investors? As long as we deliver great performance, and we are great with our disclosure, I'm quite confident that people will look at Sapphire Foods as an incredible opportunity to invest in.

Also read: Pizza Hut today offers better value than competitors: Sanjay Purohit, Group CEO, Sapphire Foods

You mentioned that Sapphire Foods is one of two franchise holders for Yum! Brands in India. When you look at the other company, which was also listed last year, there is a sense that at some point there will be a merger. When you hear things like that, how do you react?

So the simple fact is six years ago, Yum! could have consolidated its business with one franchise. They chose to go with a two-franchisee model. They chose to go with a different kind of franchisee, our franchise. And I think our performance has vindicated that.

Our improvement and financial metrics have actually been the best. FY20, our operating Ebitda was 5 percent. Today, it's 11.5 percent. Our net profit was negative 12 percent. Today, it's 3 percent. So this execution mindset and this accent on governance have really vindicated Yum!’s decision to say the two-franchisee model in India works and they've done this in many, many markets, all over Asia.

So are you ruling out a possible consolidation at some point?

Oh, completely. So I think we've got our story. We are building ourselves to be a restaurant operator platform play. So we are so excited about KFC and Pizza Hut and the opportunity but I'm not ruling out a third brand or a fourth brand. That is the kind of operating scale, capability, and backend that we are building. I think we are building that to be a 1,000 restaurant, 2,000 restaurant kind of an operation, two brands, three brands, perhaps four brands. So that's our story.

When you have two separate companies running the same brands in this country, how do you ensure the brand experience, in both taste and presentation, is the same? Because the customer doesn't know Sapphire Foods owns this outlet and Devyani owns another outlet. And also, what about the communication, the brand communication? How does that work?

Now Yum! would be responsible for both advertising, communication, and innovation. And all three of us come together in a coop to really decide what we want to do from an innovation perspective, what are the new products that we launched, and pricing. So, for each function, there is a tripartite coop meeting. So IT will have a council where it is all three coming together and so on and so forth. So, what you see in a store is standardised right across the country.

Tell us a little bit about Sri Lanka. How have your stores been affected there? Are they running full-time? We hear of power shortages. There's political uncertainty, social unrest, and an economic crisis.

What is happening from a macro sense is saddening. But we've got such a strong business and there are reasons for it. One is, actually, while there is inflation, there's also a lot of money in consumers’ hands.

So every family has someone or the other in the Gulf, who's remitting money. One year ago, they got 200 to a dollar. Today, they're getting 353 or so to a dollar. Actually, there is money available and people want to spend that money.

Read here: How Sapphire Foods is operating in Sri Lanka’s challenging environment

So your stores are open for shorter hours?

We've got the wherewithal to continue to operate. So one person is always at the fuel pump to get diesel to be able to run our stores. So unless there is a curfew, actually, we are running our stores. And then we've got delivery capability better than anyone else. So in your home, you don't have gas or electricity to cook, and therefore you have to come out and eat. And where would you eat, you'd eat at a Pizza Hut. So our execution advantages are really playing out in that market. We're seeing tremendous transaction growth and same-store sales growth.

But expansion might slow down, right?

So last year, we opened 25 stores on a base of 70, we came to 95 stores, we believe that we will double this in three, four years, nothing has changed from an expansion perspective.

I was speaking to the Sri Lankan team yesterday. And they are saying we are now hopeful of things stabilising over the next four, six months.

Here in India, we are seeing RBI action to control inflation. Growth is slowing down. Is any of that affecting consumption when it comes to your product portfolio because of some price hikes you've had to put in place?

Inflation is now across the board – on food, on food raw materials, packaging, materials, capital equipment, and this kind of inflation I've not seen at least for the last 10-15 years. So it is a concern. We've trying to raise prices, but less than general inflation. So perhaps in the short run, gross margins might be impacted, but we will recover through other belt-tightening initiatives and still deliver profitability as per earlier. If we keep our price increases below consumer inflation – and this has been my old consumer marketing theory – you will get more affordable, therefore, consumers will come to you.

At this moment, we are still seeing very strong transaction growth. And yes, we've taken price increases of about 9% on KFC, and 2.5% on Pizza Hut. But it's waiting and watch.

How do you prepare for this kind of uncertain world? The world is always uncertain, but never more than at this point of time?

I think the most important thing to do is to remain calm and collected in such volatile circumstances. So if my team sees me being jittery, I think that's not good. During the Covid pandemic also, the same thing happened. So then it's going back to the basics. Let's get our stores open. Let's take care of our team members. Let's take care of customers. Let's build the business slowly. And I think that focus on execution, that calmness, therefore, we conveyed to our investors… you have to just be as calm and collected, it's not easy. There are a hundred things going on in your mind, in your heart. But there is no other option.

When investors look at your quarterly results, at your interviews, at your investor meets and analyst calls, how do you want them to look at execution and the emphasis you have on execution at Sapphire Foods? And what kind of value should they ascribe to it?

So we are a restaurant operator. We have to get the execution right. And execution strategy is sexy. But if you ask me, execution is sexier. And really, there are three things to execution. First, is we say, what is our purpose? Why do I exist? Why do I get my salary? If customers come into our store, get great food, great experience, and great value, we will be good. So everything that we start off is through this.

The second part is people enable this great customer experience to be delivered. So everything from hiring to our values is clearly enunciated. This drives behavior. We build capability. So the people piece is a continuous piece – how do I drive ownership mindset and people? So that's the second part.

The third part is governance. I think our accent on governance – this comes through from our private equity promoters – highest levels of transparency, highest levels of disclosures if you get all three right. And then you get the backend operations.

So we invest a lot in our financial controls, we invest a lot in IT and tech. I think tech can solve a number of issues at the backend. Our food safety and hygiene standards, again, maniacally focused on that. Our supply chain. We own our supply chain. So customer experience people, the backend operations, transparency, and disclosures. I think this is the mantra to great execution. It is every day, every single day.