At fast-food chains, profit goes on a diet

    At fast-food chains, profit goes on a diet

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    Sustained high food inflation and intense competition appear to be giving food chain players sleepless nights. Though volumes have not dipped yet, the companies are hard-pressed for margins.

    “There is severe cost pressure in raw materials and fuel charges, which is causing a lot of strain on the bottomline,” said of submarine sandwich maker . “The pressure has aggravated in the last 3-6 months.”

    Subway’s vendors for raw materials like breads, fresh vegetables, dairy products and sauces have upped prices 5-20%. But, with consumer wallets already squeezed due to all-time high food and fuel prices, “we have decided to absorb much of the increase in costs and pass on minimal hikes to consumers,” said Arora.

    It’s no different for other quick-service-restaurants and cafe chains. Input costs have increased 10-20% across food and beverage categories, led by cheese, dough, vegetables, sugar, milk, and coffee.

    “Nobody’s looking at bottomline. We are concerned about our market share in this extremely competitive market,” said an official at a leading cafe chain who did not wish to be named as he is not authorised to talk to the media.

    Another official at a leading quick-service restaurant chain agreed.

    “The fast-food chain business in India is exciting, but the flipside is, even as food prices spiral, no player wants to price himself out of the market. They want to maintain end prices to consumers as much as they can,” he said on the condition of anonymity.

    Over the past few years, food inflation has trended up steadily. According to analysts, this is partly due to rising global food prices and partly because of the monsoon and losses due to pilferage, lack of proper storage and distribution.

    While most fast-food chain players are experiencing strong double-digit sales growth, margins are suffering and maintaining price affordability is becoming a challenge. Most chains have not been able to take menu hikes of more than 5-10% in the last one year.

    “Going into the next few years, we believe that a key challenge for the food companies will be to keep their products affordable, especially for the mass markets, to enable conversion from non-users to users and from unorganised to organised,” Nomura Financial Advisory and Securities (India) analysts and Anup Sudhendranath said in their February report on the food and beverages sector.

    An email sent to chief executive remained unanswered.

    Another email sent to ’s India also did not draw any response.

    Both Jubilant and McDonald’s have effected a few price hikes in the last one year, each to the tune of 2-5%. Jubilant, which took a 5.5% price hike in April, has a 65% share of the Indian pizza market through its Domino’s chain and faces competition from players like , Papa John’s, Garcia’s Pizza and the latest entrant — .

    Food, fuel, and wages account for 25%, 9% and 20% of Jubilant’s sales, respectively, and are witnessing a higher inflationary trend, which could adversely impact its margins, say analysts.

    In a bid to dissuade consumers from restricting their budgets and to maintain footfalls, most food chains are devising entry-level price points, said Pankaj Gupta, practice head – consumer and retail, Tata Strategic Management Group.

    Among others, Yum! Brands’ chain introduced a snack at Rs25 a few months ago, taking on burger giant McDonald’s, which has been an early adopter of the Rs20 price menu. Subway, too, is carrying out a national promotion to push its healthy sandwiches, which are 97% fat-free, by selling them at Rs99 instead of Rs150.

    “Fast-food chains are reeling under pressure of high food prices, which like any other industry will be met through value-engineering and price increases from time to time,” said Gupta of Tata Strategic Management Group.

    Pizza restaurants and cafe chains make up the largest chunk of the organised food and beverage retail business. Brands such as US Pizza, Papa John’s, KFC, McDonald’s, Subway and are already present in India and are looking to grow further. There are other global brands such as Church’s Chicken and Round Table Pizza that, when they enter India, will further aggravate competition.

    But the fast-food chain story in India is different from those in mature markets, said Santosh Unni, chief executive officer, Costa Coffee India. “The food and beverage retail market in India is very nascent but things are so dynamically changing here. The fast-food chain industry is likely to see a lot of activity over the next decade,” he said.

    China, for example, has 3,200 KFC outlets and 1,300 McDonald’s outlets, both of which plan to increase outlets by 15-20 per cent over the next year. In India, the largest food retail players, Domino’s and McDonald’s, have only 378 and 200 outlets, respectively, indicating significant scope.

    The cafe chain business is more competitive than the fast-food chain business in India —- with existing and new players such as Cafe Coffee Day, , Costa Coffee, Starbucks and Dunkin Donuts fighting for the same market. Still, going by industry estimates, India can hold three times the number of cafe outlets.

    Currently, the cafe chain business is estimated to be worth Rs.600 crore with approximately 1,400 outlets across players. Broking firm Batlivala & Karani Securities estimates the total size of the food service industry in the country at close to Rs60,000 crore, with a compounded annual growth rate of 20 per cent since 2004.

    The industry is dominated by the unorganised sector with branded chains accounting for less than 10 per cent share, it said in a recent report.

    Small wonder the Indian food and beverage retail market is attracting numerous private equity and foreign institutional investors, and brands hungry to cash in on the increasing disposable incomes, said Gupta of Tata Strategic Management Group.

    Source : DNA