Same store sales growth to come back in another 2-3 quarters: Sanjay Purohit, Sapphire Foods

“Post Diwali last year is when we have seen a drop in consumer demand and that has impacted our sales. In fact, I joke sometimes that if you look at QSR results, they will foretell in some ways the GDP of the country and when GDP drops from 7% to 4% as it did in the October-December quarter, so that there is a little bit of push on discretionary income,” says Sanjay Purohit, Sapphire Foods.

This is the second consecutive quarter for a decline that you have seen in the same-store sales growth for Pizza Hut. Why is that and when do you foresee a recovery?
It is the second year since we have publicly listed. So, before I talk about quarter, let me just spend a minute on the full-year results because that is important. We have had a stonking full year, really stellar full year. Our sales revenue grew to Rs 2260 crores; highest ever EBITDA margin of 11.7%, 265 crores; highest ever PAT of 6.2%. We opened the highest number of restaurants. So, by all accounts, the year itself was a good year. Now, let me come to quarter four. So, post Diwali last year is when we have seen a drop in consumer demand and that has impacted our sales. In fact, I joke sometimes that if you look at QSR results, they will foretell in some ways the GDP of the country and when GDP drops from 7% to 4% as it did in the October-December quarter, so that there is a little bit of push on discretionary income. So, Pizza Hut had a negative same-store sales growth, but the positive part was transactions were still positive and the opposite was possibly true on KFC.

We had same-store sales growth muted though, but negative transaction growth. So, I think it is reflective of what we are generally seeing in the consumer space where demand is a little bit slow.

But I think the important part is that we are gearing up to do or to take charge of the market and there is much exciting news on both the brands. On KFC, we launched our value, a completely different layer we call it, the chicken roll starting 99. In Pizza Hut, we revamped our menu, 10 new pizzas, we have launched a new advertising campaign, we are back on television after a long time. So, while I see the discretionary income slowdown perhaps two-three quarter episode, but eventually, we have got to come back.

When do you see the same store sales, SSS, it is a number markets are obsessed with. It is a market which historically has been used to judge the growth of the company. When do you see that becoming positive?
I would think that the general GDP slowdown perhaps is another 2 to 3 quarters for it to come back. And I will just try and explain why has this happened. Coming out of Covid, we first saw a pent up demand bumping up the revenue numbers for many consumer companies, including us. So we saw last year the first half was very strong and then it was also backed by high price increases that we took. So we took nearly double digit price increases on both KFC and Pizza Hut, whereas actually, our inflation was in the mid teens.

So generally we see that when there is such kind of inflation, there is an impact on demand.

But I would say perhaps the next 2 to 3 quarters might be a little muted and then we will start to see same store sales growth come back. But really, the picture to look at is both same store sales growth as well as systems growth. And let me explain. So if you look at KFC, KFC grew at 24% system growth, but 2% same store sales growth. And generally we have guided saying that over a three, four year period we would see same store sales growth 5 to 7% but we want to improve accessibility on the brand and therefore new store addition will add 17-18%. So really, it is a combination of both that is at play.

How will ONDC change life for the sector and for your company?
I think the way that we have got to look at ONDC is it is another channel for us to use to reach consumers and therefore anyway to become more accessible is something that we will adopt.

There was an extraordinary spike in inflation, extraordinary spike in energy cost. Now that things have stabilised, wheat prices multi-year low, energy prices have stabilised, everything has stabilised in the commodity market, but you took a price hike, you were forced to take a price hike. Now that prices have come down, are you likely to reduce pizza prices? Are you likely to reduce item prices?
Last year, we saw this bump up in all prices and that those price levels have remained constant. So what we have seen is inflation on top of what prices that we saw, that has cooled off. And I will explain again. So on KFC and Pizza Hut, we saw raw material and packing material, ingredient pricing to be close to 16 to 17% that was the kind of inflation that we saw. And we took price increases only in the region of 9% and therefore we saw gross margins also impacted in the short term.

Today we are seeing on two big raw materials, chicken as well as dairy, chicken is stable but still substantially over say 18 months ago.

Dairy keeps increasing, oil, flour etc. has started to stabilise. So I do not think there is a case for us to actually reduce prices. And if you look at our total basket, you are right commodity prices and raw material prices have reduced, but utility prices have not reduced. So we have seen the highest ever increase in electricity prices in Tamil Nadu. Our minimum wages have gone up by 40% in Gujarat as well as in Karnataka.

And with elections due and this is what perhaps we would see over the next year. So I think inflation will cool down but it is not going to revert back to the levels of 18 months ago.

I have a very basic question that how many things, how many supply chain do you think in India will coexist? The whole restaurant experience, then you have got food delivery model, then you’ve got a mix of what you do, which is food delivery as well as restaurant, as well as opening up restaurant and then you have got ONDC. Are not there too many multiple channels which suddenly are there?
I have grown up in FMCG all my life and I will use the lessons from FMCG here. Distribution is key and accessibility is absolutely key. And hence you will find that as channels of increasing accessibility, so as channels increase and accessibility increase, finally it is better for the consumer.

Then which channels survive really then is dependent on their business model and whether they are able to become profitable or not. But for the consumer, it is only good news.