One of the fastest growing players in India’s quick service restaurant (QSR) sector, Westlife Development Limited focuses on putting up and operating quick service restaurants in India through its wholly owned subsidiary Hardcastle Restaurants Pvt Ltd (HRPL). Westlife Development operates a chain of McDonald’s restaurants in west and south India through its subsidiary Hardcastle Restaurants Pvt Ltd. Westlife development through its subsidiary operates McDonald’s through 305 restaurants across 42 cities in the states of Telangana, Gujarat, Karnataka, Maharashtra, Tamil Nadu, Kerala, Chattisgarh, Andhra Pradesh, Goa and parts of Madhya Pradesh, and provides direct employment to over 9,537 employees. McDonald’s operates through various formats and brand extensions including standalone restaurants, drive-through’s, 24/7 restaurants, McDelivery, dessert Kiosks. Westlife development also has around 190 McCafe outlets. Westlife development has been recognized for their contribution to the industry with several awards such as – great place to work institute in 2017, best QSR leadership India 2017 by business vision awards. It have also been rated amongst the top 30 companies to work in India. Hardcastle Restaurants Pvt Ltd is a master franchisee of McDonald’s. Under the master franchisee arrangement with the McDonald’s Corporation, HRPL is responsible for providing capital for all business operations, including the real estate interest. McDonald’s corporation offers technical, operation and business support. HRPL owns or secure long-term leases for all its restaurant sites to ensure long-term occupancy rights and to control related costs. McCafe was launched in 2013 in India, is an in house coffee chain offering over 35 beverages. It also offers smoothies, iced splash beverages and share shakes. McDelivery, a global brand extension was successfully launched in India in the year 2005 with an aim to enable utmost consumer convenience. Further extending its offering, McDonald’s launched McDelivery services App in 2014 with the objective of providing consumers with loved food at their fingertips. Currently available across various platforms such as web ordering, mobile app and call centre, the app service is available across 145 + McDonald’s restaurants across west and south India. The breakfast category was launched in the year 2010. McBreakfast, the first ever branded breakfast category in India was introduced in the year 2017. McDonald’s is a pioneer and the only food retailer to offer dedicated branded breakfast menu in the country between 7am-11am. Dessert kiosks are McDonald’s booths avail delicious desserts. Dessert Kiosks operate separately from existing restaurant, but depend on them for supplies and operational support. When Westlife Development went into business, lettuce which is used in Burgers was not grown in India. Lettuce was grown only within a small 60 day window in a year. If company misses that window for some reason and company would be compelled to impost at prohibitive costs. Company worked extensively with aggregators who worked with hundreds of farmers. Company convinced farmers about the lettuce growing prospects. Company persuaded them to shift the harvest from the plains to hills and then again to the plains to adapt to changing temperatures. The result of this is that company didn’t just help farmers to produce lettuce in India, but it helped create an entire lettuce growing ecosystem. The French fires company make are different. Because they are not made from the usual potatoes. They are made from customized variety that can only be grown in exacting soil and weather conditions like long worm days and cold nights. Company started growing potatoes in Gujarat in 2004. It got its first indigenous potato that could go into its French fries only in 2007. It took another six years before every single French fry order at company’s McDonald’s store was backed by completely indigenous potatoes. Indian food service industry is the largest service sector in India after retail and insurance and is 20 times of the film industry, 4.7 times of hotels and 1.5 times of the pharmaceutical sector. The Indian restaurant industry employed around 7.3 million people in 2018-19. India’s food service market is pegged at US$ 61 billion in 2018-19, China at US$ 8,154 billion and Brazil at US$ 2,284 billion. This shows that Indian food service market has a lot of catching up to do. India has only around 480 McDonald’s restaurants compared with a country like China (with a near equivalent population) with more than 3,000 McDonald’s outlets or a market like USA at the upper end with about 4,000 McDonald’s restaurants. So India is sitting at the bottomed of a long J-curve from this point onwards. This shows huge opportunity for westlife Development to expand its McDonald’s outlets. The Indian chain restaurant market is expected to grow at a CAGR of 21% to reach Rs 62,000 crore by 2022 from Rs 23,500 crore in 2017. QSR’s have the maximum market share followed by casual dining restaurants. In the chain restaurant market, QSR’s and CDRs constitute 79% in 2018 and the same is expected to grow to 83% by 2022. QSR’s will be driving the growth based on the operating model, where centralized commissaries and robust supply chain will help in attaining deeper penetration in Tier II and Tier III cities. The restaurant chain market is dominated by the international QSR brands operating in India such as Domino’s, McDonald’s, KFC, Pizza Hut, Burger King etc. The overall share of international brands in terms of outlets in the restaurant chain market is around 37%, contributing 45% share to the total revenue in chain market. For the international brands, the QSR segment is the maximum revenue contributor with around 70-75% share. Indian foodservice market is expected to reach USD 95.75 billion by 2024, registering a CAGR of 10.3%. The scope of Indian foodservice market includes segmentation of the food services like full-service restaurants, quick service restaurants, cafes/bars and 100% home delivery. The Indian restaurant and food service industry comprises two distinct segments: organized and unorganized. The organized segment accounts for about 30-35% of the industry, while the unorganized segment accounts for the remaining 65-70%. The organized segment is characterized by an organized supply chain with quality control and sourcing norms with multiple outlets having standardized designs. The unorganized segments lack technical standardization and a structures supply system or business practices. However in line with the evolving consumer preferences and increasing innovation by the organized formats, the industry has experienced a rapid shift towards the organized segment in the recent past. The shift is further fuelled by the foray for large global international brands into the organized food service sector. Quick service restaurants and casual and fine dining restaurants account for about 75-80% of the organized segment, followed by cafes & bakery and pubs, bars and lounge accounting for about 8-10% and institutional catering and kiosks with 13-15% share in the organized market. The country’s organized segment in the food service sector is expected to grow at a CAGR of 16% between 2017-2022, enhancing its market share from 34% in 2017 to 43% in 2022. Within the organized sector, the share of India’s quick service restaurants is expected to sustain growth to around 13% of the organized market. India is one of the fastest growing food services markets on account of varied reasons:
1) Rising income: India’s per capita income increased from Rs 1,14,958 in 2017-18 to an estimated Rs 1,26,406 in 2018-19, growing at a rate of 10.2%. The increase disposable incomes catalysed consumption.
2) Urbanization. India is the fastest urbanizing country, catalyzing the food sector. In 2018, 34% of India’s population was urbanized (3% increase since 2011 census) and this number is anticipated to reach 36% by 2021 (compared to 59.3% urban population in China, 2018).
3) Working population: India’s urban middle class workforce (over US$ 11,000 annual income) stands at 27 million or 2% of its population with a large growth headroom that could accelerate consumption. This growth is likely to catalyzed by an increase in the number of working women and youth, strengthening the food sector growth.
4) Demographic mix: India is a young country with a, median age of 27.9 years. Almost half its population is under the age of 25 and two-thirds less than age of 35. India is expected to possess the world’s largest workforce by 2027, with 67% of its population in the economically productive age range of 15-64, strengthening consumption.
5) Rural Market: The rural population of India, accounting for 68.86% of the national population, represents a large relatively under-penetrated market, offering the potential for sustained growth.
6) Growing middle class: Since 2000, India’s wealth has grown 9.2% per annum, faster than the global average of 6%, even after considering an annual population of 2.2%. This has strengthened indulgence spending on eating out, luxury products, consumer durables and other categories. 7) Growing Nuclearisation: Growing family nuclearisation is increasing the number of families and their respective spending on eating out. Nearly 74% urban households have five or less members compared to 65% in 2001. The increased disposable income and the reduction in the average household size are catalyzing discretionary spending on eating out. 8) Changing preferences: Exposure to global cuisines and increased international travel are catalyzing the market for global cuisine and contemporary design of restaurants, driving increased spending on eating out. There is also a growing preference for regional cuisine in India, marked by a wide variety of ethnic communities and traditions. 9) Technology: The Indian food service market is being increasingly driven by smart phone based technologies (mobile app) enhancing ordering conveniences and widening the market. This is increasingly relevant in congested urban market where commutes are getting longer or where working / lifestyles schedules are busier. The emergence of restaurant market places and cloud kitchens has led to reduction in delivery costs and increased penetration.
10) Curation & Personalization: An increasing number of food delivery platforms are being curated around convenience, reliability and selection.
11) Hang out: The QSR format has evolved from merely servicing the food requirements of customers to providing a place to hang out with friends, colleagues and family. 12) Formats: The preference for entering in brick and mortar restaurants yielded to relatively asset light formats like McCafe and home delivery. 12) Price –Value proposition: India’s QSR sector demonstrated its capacity to provide a superior price-value proposition for all economic classes by under- performing general inflation and helping widen the market. 13) Festive season: A culture of round the year celebration and festivals strengthened the food service market. 14) Tourism boom: Tourism, domestic and international, has reported spike. In 2018, the number of Indian nationals departing from India was 23.94 mn and the number of domestic tourists was estimated at 1652.49 mn.- catalyzed by cheaper air travel, rising disposable incomes and affordable hotel accommodation. This has helped enhance exposure to international cuisines and widen the country’s food services sector. 15) Habit: Eating out tops the list priorities as soon as individuals begin earning in India, topping even items like smart phone and vehicle acquisition. The market size of Informal Eating Out (IEO) industry in India was US$ 131 billion while the size of the QSR segment was placed at US$ 21.6 billion, indicative of significant category scope. Approximately 50% of India’s population selects to eat out at least once every three months, while this figure in metro cities is eight times a month as compared to the US (14 times), Brazil (11 times), Thailand (10 times) and China (9 times), presenting room for multiyear growth. Indian’s having income between Rs 3 lakhs to Rs 10 lakhs per annum spends 10% of the total food expenditure in eating out. Indian’s having annual income greater than Rs 10 lakhs spends approximately twice as much as their middle class counterparts on eating out. The average urban Indian spends Rs 6,500 a year on eating out. Millennials spend 13% of their food expenditure on eating out. 60% of Indian Millennials eat out at least thrice a month. On average Chinese people eat out around 50 times in a month, Singaporean eats out around 50 times a month where as Indian eats out only 3-4 times a months. This clearly shows the opportunity for QSR’s to increase their business. Per capita spending on eating out in USA is US$3630, in Europe is US$1188, in Middle East & Africa is US$112 and in Asia-Pacific is US$237.21. Total number of QSR in USA is 3,57,766, in UK is 26,005 and in India is 3,357 . India has the world’s second largest population and is expected to emerge as the world’s largest by 2024. A larger working force could result in increased discretionary spending on eating out. Consumer spending in India is expected to touch US$ 3.6 trillion by 2021. India could emerge as fifth largest consumer market by 2030. This interplay is expected to sustain the food services industry momentum. The portion of the female workforce which accounted for 26% of country’s workforce during 1971 has scaled to around 37% during 2018-19. The percentage of working women involved in the organized industrial activity too has gone up from 27% in 1981 to 54% in 2018. This will lead to increasing in eating out since women would not get time to cook food. When millennials are in the mood for some fun, urban Indian millennials just head to a restaurant, or order in food. Indeed, dinning out is the activity that this group, aged between 18 and 34 years, spends the most on to entertain itself. Western fast food is a fast growing part of the QSR industry, representing about US$ 1 billion of the US$ 15.4 billion QSR industry. Average Indian house hold spends Rs 2,500 per month on eating out, and the city that spends the most is Bengaluru, splurging over Rs 3,568 a month. Westlife not only launched new stores but it turned them into profitability in the shortest time, enhancing cash flows for onward reinvestments. The introduction of ROP 2.0 helped moderate the break-even point of new and existing stores through a continuous cost examination discipline. The ROP 2.0 initiatives comprised the following initiatives: 1) restructure store opening process, operations and financial management. 2) strengthened real estate portfolio management. 3) localized seating and kitchen equipment procurement. 4) Re-vamped the delivery app to further ease the ordering and delivery process. 5) Created format complements that made it possible to increase services from the same store space, increasing revenues without a corresponding increase in cost, thereby widening margins. 6) Strengthened the supply chain to negotiate volume –based discounts 7) Replacing CFL lights with LED lights which results in decrease of electric bills. The result of all this is that the rationalized the cost of opening a store and moderated the store break- even point to around 20 months. Besides, new restaurant launched in 2018 began to contribute to cash flows during this year under the review that was available for accelerating store rollout and reinforcing business sustainability. Westlife Development has created a Vision 2022 achieving certain goals. Despite weak near term consumer sentiment, under vision 2022 the management remains confident of achieving 7-9% SSSG (same store sales growth) for FY20 due to western fast food continuing to grow at robust 14-15% in value terms (including store expansion led growth) . The focus is on taking the cash on cash returns (restaurant Operating margin / capital employed) to 25% (currently at 20%). Management remains confident of achieving its vision 2022 targets of Rs 60-65 million average unit value, 400+ stores and 13-15% margin band led by various initiatives like menu innovation, brand extensions, scaling of value platform, EOTF (remaining stores and to bring the entire network under EOTF by 2023, currently only 45 stores are under EOTF) and new product launch (likely in April 2020) . The company is targeting a topline of Rs 2,500 crore by 2022 when it will have 400 plus stores on an investment of around Rs 500 crore. It has targetes to have McCafe in almost every McDonald’s restaurant it operates by 2022. On consolidated levels the company’s revenue in FY2018-19 recorded the growth of 23.5% to Rs 14,016 million compared to Rs 11,348.7 million in FY 2017-18. The increase in revenue was driven by the opening of new restaurants and an increase in same store revenues. The company added 33 new restaurants, taking the total restaurant count to 304. In 2018-19 same store sales growth was 17% compared to 15.8% in the previous year. During the review period, food, paper and distribution costs increased to Rs 5,055.2 million, compared to Rs 4,249 million in 2017-18. The increase in cost was primarily driven by increased restaurant footfalls and sales. The company delivered improved gross margins by 138 bps to 63.9% driven by supply chain efficiencies through sourcing optimization, logistics efficiency, improved store utilization, wastage reduction, yield improvement, superior product mix and prudent menu pricing. The company reported a restaurant operating margin of Rs 2,047.5 million compared to Rs 1,486.7 million in the previous year. RoM was 14.6% compared to 13.1% in FY2017-18. Operating EBITDA by the company was Rs 1,273.9 million in FY2018-19 as compared to Rs 846.8 million in FY2017-18. Operating EBITDA margin was 9.09% in FY2018-19 compared to 7.5% in FY2017-18. In FY2018-19, the company invested Rs 1,302.40 million in restaurant development and capital expenditure. As of March 31, 2019 the company had cash and cash equivalents of Rs 2,117 million. Profit stood at Rs 403.02 million. Cash profit stood at Rs 1,258.1 million against Rs 889 million in 2017-18. For quarter ended 30, 2019 PAT jumps by 217.5% to Rs 129.1 million. Total revenue grows by 13.3% to Rs 3965.3 million. Both restaurant operating margins and operating EBITDA expand by more than 200bps. Reports an SSSG 7% in the 17th consecutive quarter of positive SSSG. McDonald’s India has laid down stringent condition for its north and east franchise, which has led to stalemate in talks between the US company and Prospective Indian Partners. McDonald’s said the new partner will be barred from listing on the stock exchanges and all shares of the company operating McDonald’s outlets in the north and the east must be pledge to the parent company of McDonald’s. Company financially sounds good and even the sector is showing growth in future but due to extreme difficult franchise policies by the McDonalds in the east and north have create a hurdle for WESTLIFE DEVELOPMENT LTD to expand its foot prints in North and East. So at present I prefer hold call on it at CMP of Rs 370.85. Once the clear statement on policies regarding franchise comes out by McDonald’s and if it is in favor of WESTLIFE DEVELOPMENTS LTD than at that time one should buy its shares.