The sheen’s off Sapphire (2025)

The past year has been slow going for Quick Service Restaurants. Business at Sapphire Foods, which runs the KFC and Pizza Hut chains, too has been sluggish as reflected in weak same-store sales (SSS). For the KFC business, the SSS came in at a negative 6% in the June quarter, falling for the third consecutive quarter. For the Pizza Hut business, it was a minus 7%, a fall for the fifth straight quarter.

Even adjusting for a change in the Navratra period this year, the growth was virtually flat. Also, the ADS (average daily sales per store) for KFC fell 12% while for Pizza Hut it was down by about 8%. While the sequential trends were better—a good 17% increase for Pizza Hut—, a recovery is some time away.

As Naveen Trivedi, analyst at Motilal Oswal, observed, the quick-service restaurant (QSR) industry continues to experience weakness in unit economics. “Dine- in is under more pressure than delivery,” Trivedi said. This trend was noticeable at KFC with the management also operating delivery channels for more hours each day.

Sanjay Purohit, CEO and MD, acknowledged to analysts that sales trends have been somewhat subdued over the last 6-7 months owing to weak demand and competitive pressures. The company is treading cautiously on the pizza business with just one Pizza Hut store having been added in the six months to June. Some of the impact on spending power, according to Puneet Mansukhani, Partner- Digital Advisory and Retail sector head, KPMG India, can be traced to global economic conditions.

Demand may be muted but a changing ecosystem is also hurting sales at these eateries. With food aggregators having built such enormous reach consumers today have many more options in terms of ordering in. This allows them to order even from smaller restaurants which might not have been possible earlier. As Kunal Vora at BNP Paribas points out, restaurants active with Zomato have increased to 51 times the number of total branded QSR stores in FY24 vs 22 times in FY19.

Anand Ramanathan, Partner, Consumer Products and Retail Sector Leader, Deloitte India, observes that the rapid expansion of food delivery platforms has broadened the customer base, particularly benefitting smaller eateries. “A leading food delivery app has grown its restaurant partners 4x from 61,000 in 2019 to over 2.5 lakh in 2024. Customers have the convenience of variety,” he points out, adding that this has led to sales becoming fragmented and in turn dampening business at QSRs.

There is also, as KPMG’s Mansukhani, points out, the fact that people are becoming more conscious of what they eat. “Eating habits are changing and if there is a healthier option many will take it,” he says. He added that in India regional preferences are a factor and players need to cater for those tastes as also for an increasing number of vegetarians. The high share of the vegetarian menu helped Pizza Hut during the Navratra period.

Again, the rapid growth in the homegrown startups which are focused on cuisine expertise, premium packaging and competitive prices has driven up the competition. That is cutting into the margins and affecting the performance of large players. Ramanathan points out that, for example, a burger or pizza from an Indian start-up costs 30-40% less than one from established international chains, while offering a similar culinary experience. “The top players are often unable to give customers the kind of good deals that a single-store restaurant can”, Mansukhani observed.

He believes that while there is purchasing power, there are customers who cannot afford eating out too often. “It’s possible they may simply order in on some days because it’s less expensive,” he says. The situation, he feels, is such that many customers prefer to look at deals than just the brand and suggests pricing could be correlated to the per capita income of the region. “This practice is not uncommon in the US and UK and could help pull in more customers,” he said.

Ramanathan believes that focusing on value offerings and combos could drive demand. Sapphire is addressing some critical price points including those at `99 and `149 through specific meals and offerings. KFC launched new burger products and special lunch menus at `149, `199 and `249. The company is also toying with the idea of offering coffee and early experiments have begun. “We’re trying not to let the macro trends overwhelm us,” Purohit observed.

Sapphire is refurbishing many of its outlets to make them attractive to customers. Analysts point out, the company continues to spend good amounts on marketing and advertising, analysts point out, even if it is at the cost of margins. For instance, it has upped the marketing effort and launched product innovations backed by strong media campaigns. It will continue to open more KFC outlets and is on track to double the store count by December on the base of December, 2021.

Deloitte’s Ramanathan feels players would need to optimise their delivery strategy to leverage the growth of food delivery platforms while maintaining profitability. “This would entail finding the right balance between using third-party delivery services and developing their own in-house delivery capabilities,” he observed.