India is growing at a breakneck pace with rapid growth and high demand for various products. One industry that is ever in demand is quick service restaurants (QSR), which serve burgers, pizza, fries and beverages.

Many QSR businesses are operating in India, but the franchises that catch the eye from an investor perspective are KFC and PizzaHut. The parent company of these brands is YUM India, which has given these franchises to two players in India — Devyani International Ltd (DIL) and Sapphire Foods India Ltd (SFIL). When there are two players in the same market with the same products, the same brand name and with similar product pricing, how can one differentiate them? To achieve this, DIL is diversifying its portfolio to get an edge over Sapphire Foods.

DIL and SFIL operate the two common brands in India and at a few international locations. SFIL also operates one more brand exclusively in India, Sri Lanka and the Maldives — Taco Bell, also a YUM India brand. Devyani operates three brands under its umbrella, apart from the Yum India franchise — Costa Coffee, Vaango and The Food Street. Coffee, one of the most consumed products in India, is what DIL is largely targeting among other brands to differentiate its portfolio and increase the incremental revenue.

It is evident from the above table that DIL operates more outlets of KFC and PizzaHut than SFIL. DIL has 874 stores (national and international) of common brands against SFIL’s 610 stores (excluding Taco Bell stores). Even though DIL has a greater number of stores and is bigger, it does not enjoy any pricing or product differentiation power. One area where the common brands have little advantage is its international business, which operates exclusively. DIL operates its KFC and PizzaHut business exclusively in Nigeria and Nepal, and SFIL enjoys its exclusive rights in Sri Lanka and Maldives. Still, for both the companies, most of the outlets and the revenue come from India.
The majority of the revenue that both the companies generate is from KFC and PizzaHut. SFIL franchisee of Taco Bell is present in Sri Lanka with just 6 outlets. It doesn’t contribute a significant revenue as the company doesn’t even provide a separate revenue line item in the P/L statement. On the other hand, DIL’s other brands (Costa Coffee, Vaango & The Food Street) have 134 outlets, apart from the YUM franchisee — which contributes very little now but is expected to see an increase in revenue as the company is planning on having more outlets. The company is expected to open 40-50 other brand stores every year, the majority of them being Costa Coffee stores. In FY20, before the economic disruptions began, Costa coffee accounted for 5.4% of the revenue.
DIL’s other brands currently account for almost 14% of its portfolio stores. The company has exclusive rights for these brands’ expansions, marketing and pricing. So this segment will generate higher incremental revenue than the common brands. People are indifferent to whose store they buy food from. This non-common brand diversification also helps DIL as there is no marked regional territory between the two players for opening outlets. Both the companies operate in several cities, including the top 10 in the country. Expanding the other brands of DIL will help the company strategically increase and cater to a higher number of customers without facing the risk of the competition it faces in case of the common brands.

DIL’s other brand, Vaango, which serves authentic South Indian food, and The Food Street, which is present at airports and malls, provide multi-cuisine food and have 65 outlets across India. It plans to add more outlets at malls and airports after due analysis.

Costa Coffee, which the company classifies as a core brand, has 69 outlets in India with an average daily sales (ADS) of Rs 36,000 for the Q1FY23 quarter. The ADS range may fluctuate a little over the period as new restaurants are added and also with the launch of new products. Still, a higher ADS indicates more products are being sold, increasing revenue for the company.

ADS for FY20 and FY21 were low due to the pandemic. As the economy gains momentum, revenue growth can be seen. The company has priced the products at the same level as Starbuck as it offers products of premium standards. DIL not only provides coffee-related drinks but other products like wraps, sandwiches and desserts. The demand for coffee and related drinks is increasing in India, as seen in the graph. DIL plans to add new stores to gain visibility and increase consumption. The number of stores the company adds will aid in increasing its revenue.

Currently, both companies’ expansion plans are to increase the core business (KFC & PizzaHut) as it contributes the most revenue and helps the entities improve their cash flow. This will help in capex and development of other brands.

Even though the contribution of Devyani’s other brands is minimal now, the company is focusing extensively on diversifying its business to avoid the risk of stagnation or marginality of income increase. These changes will help the company in the coming years.

(The authors, Gaurav Jain & Parimal Ade are Founders, InvestYadnya.in. Views are their own)

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell stocks or MF.

source : https://economictimes.indiatimes.com/markets/stocks/news/can-devyanis-move-to-diversify-help-it-get-an-edge-over-sapphire-foods/articleshow/93655235.cms