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Institutional Equities Consumer Sector 12 October 2020 Restaurant s expected to recover by January; QSRs better placed Vishal Punmiya We spoke to Mr. Dheeraj Gupta, MD, Jumbo King Foods Pvt. Ltd., JKFPL (Jumbo King) and Research Analyst also conducted channel checks in Mumbai (Maharashtra) to get insights on the current environment for the overall restaurant industry. Following are the key highlights: [email protected] +91-22-6273 8064 Covid-19 and its impact on overall Indian restaurant industry: The industry will see a lot of restaurants shutting down, nearly ~30%, at least for the near term. Most of these would include players with weak brands, who focus on 2-3 different formats or different cuisines and who don’t have strong systems & processes in place. Within the organized space, the QSR segment will be the fastest to bounce back (is already recovering) and will revive to pre-Covid levels latest by January. JKFPL is also looking to reach pre-Covid per-store sales latest by Jan’ 2021. Fine dine restaurants would probably take the longest time, lagging maximum by a quarter. Mr. Gupta believes that the street vendors will open up the fastest as they are agile and it is also their only source of income, but would have to up their game by becoming more hygiene conscious. Any company with a sharp focus on the product(s) they sell, including international chains like Subway Update (sandwiches), McDonalds (burgers), Dominos (pizzas) etc., would revive at a faster pace. As opposed to this, restaurants, who typically try to provide everything under one roof, might take more time to revive. Businesses will be forced to become more focused, set up efficient supply chains, leaner teams and build scalable business models to make sustainable profits in the long term. The franchisee business model emerged as a game changer for JKFPL, which enabled it to sail through the tough period smoothly without much attrition or store closures. Sector Sector Rentals - making the most of the situation: As an after effect of the pandemic, property rentals have dropped significantly. Consequent to the price drop, JKFPL is getting rental quotes for prime properties at favorable rates. JKFPL would start expanding aggressively in next few years, in order to take advantage of the available discount on rentals by entering into 10-year agreements, thereby locking in favorable rates. Breakfast segment to grow over time: Mr. Gupta believes that the breakfast segment is likely to grow big over time. With both members of a family-of-two going out to work and domestic help becoming more expensive, out-of-home consumption will tend to increase. WLDL is likely to be a beneficiary as it has been smart enough to launch its breakfast offerings so early in the industry. While WLDL may not get much traction in the short term, over time it is bound to become big in this space with an early mover advantage. Even JKFPL is working to come up with some relevant launches in the breakfast space. Key highlights from our channel checks in Mumbai post 5th Oct’ 2020: A premium casual dine-in pizza chain has started allowing customers purely on a reservation basis. In order to ensure restricted contact, diners would have to order from e-menus appearing on their individual phones, rather than physical menus. They would not be serving alcohol anytime soon. A Middle Eastern fine dine chain, which was already operating through delivery/takeaways since mid- August, would open up two of its premises from 20th October and their remaining premises from 30th October. This is because they are ensuring hygiene by fumigating all their premises, which would take one week; and another week for the smell to disappear. Diners would be allowed only on reservation basis. For premises opening up on 20th October, 20% reservations (out of the allowed capacity) have already been made. An Italian premium casual dine-in chain, whose delivery/takeaway operations have started since August, mentioned that dine-in would start from November as it wants to evaluate its SOPs further. Local casual dine-in restaurants, who are satisfied with their delivery/takeaway sales, are willing to wait and watch as to how the situation pans out before opening their premises for dine-in. However, those casual dine-in players who have not witnessed significant traction in delivery/takeaway sales have opened their dine-in operations on immediate basis. None of the restaurants we spoke to were willing to use disposable cutlery as they believed that washing utensils properly (either through a dishwasher or by housekeeping staff) would sanitize them well enough. From our limited radius of ground checks, we could evidently see that street vendors across most areas have resumed their operations. Recently, food courts in malls have also opened up and some are now open even till 11.30pm. Institutional Equities About Jumbo King Foods Pvt. Ltd., JKFPL (Jumbo King): Jumbo King started its journey as a Vada Pav brand. As the brand was evolving, the company realised that Vada Pav was a very Mumbai-centric (to a certain extent Pune- centric) product. The company’s target audience is between 18-25 years (extended to 35 years as well) for whom burger is a more aspirational product. Thus, in order to get a larger addressable market and also to address margin limitations, JKFPL started pivoting from a Vada Pav brand to a Burger brand 3-3.5 years ago. The change led to increase in sales, improvement in margins and the franchise turning more profitable over these years. It is one of first Indian brands, which started to focus on smaller category of products. The company believes that differentiation is the key to build long-term value for stakeholders. Two key differentiators include positioning Jumbo King as: 1) burgers born in India 2) a pure vegetarian brand . The company follows a franchise model where the front-end and back-end are completely outsourced and the company essentially does the knowledge management part. The back-end partner Vista is capable to produce 50x of Jumbo King’s current requirement. Aggregators (like Swiggy and Zomato) contribute ~15% to the company’s business but during the pandemic, even this channel declined by 40% for the company. Contribution of wraps is <1% to the overall sales. Exhibit 1: Jumbo King store at Andheri, Mumbai (a conventional stand-in and takeaway format) Source: Company, Nirmal Bang Institutional Equities Research Product offerings: There are 2 broad varieties - 1) the Vada Pav/Mumbai burger priced at ~Rs25 and 2) the premium/Indian burger whose pricing starts from Rs60 and Rs75 The mix between customers buying Vada Pav and the premium product was 80:20 two years ago. Last year, it reached 60:40 and this year the company has witnessed a mix of 40:60. The change towards premium offerings is driven by the fact that all innovations are happening around the premium segment. The company’s strategy is to move 80% customers to the premium offerings. It also has an option of a meal combo which is served along with fries and a beverage. 2 Consumer Sector Institutional Equities Exhibit 2: Key product offerings in Regular and Premium range Source: Company, Nirmal Bang Institutional Equities Research Top left – Regular JK Top centre – Big Crunch JK Top right – Corn Palak JK Bottom left – Crispy Veg JK Bottom centre – Nacho JK Bottom right – Tangy Mexican JK Store economics and aspirations: The company clocked Rs600mn in revenues this year and Mr. Gupta expects it to reach Rs1bn in a span of 2 years. Currently, per store revenue is Rs7mn a year, which is expected to reach Rs10mn in 2-3 years, driven by advertisement, improvement in discoverability on digital platforms and launch of loyalty programs on Jumbo King’s own digital platform. Other unit economics: . Jumbo King follows a franchise model where the franchisee has to invest Rs2.5-3mn. The franchisee can make ~Rs100,000/month, thereby recovering its investment in 2-3 years. The company charges a 10% royalty from its franchisees. Stores operate at a 45-50% gross margin. After rentals, margin comes to ~15-20%. 2-3 years ago, per head spend was Rs20. It increased to Rs45 during the last year. The company is planning to launch a loyalty program (schemes like Rs75 product being available at Rs60, free fries on Friday etc.) to establish a data base and incentivize customers to upgrade from unorganized vendors. On ownership basis, the company would require Rs4bn investments to get to the 1,000 stores mark. Under the franchisee model, it would require investment of Rs400mn, which would be towards infrastructure, talent and advertisement capital. PBT under the franchises model is 5-6%. Expansion strategy: Mumbai is the largest market for JKFPL, with 93 out of the total 114 stores located in this metro city. In all the 12 metro stations in Mumbai, it has 18 stores. Due to the current environment, it is anticipating 10% store closures, which is relatively small compared to the size of the problem that the pandemic has brought. There are 150 metro stations coming up in Mumbai. Over 1,000 metro constructions are being undertaken in various cities across India. So, even if the company specializes only in the Metro format, there are nearly 1,000 potential spots. For new store openings and expansion, JKFPL: . Enters newer geographies by setting up stores across channels in which it specializes, like metro stations. Experiments in established markets like Mumbai. The company has set up a store away from the station in Powai, which is different than its conventional location preference.