KFC, Pizza Hut operator adds fresh brands to menu to beat demand blues

Devyani International Ltd continues to battle weak consumption demand, especially in urban areas. This has hurt the quick-service restaurant operator’s same-store sales performance for many quarters now. The September quarter (Q2FY25) was no exception.

Same-store sales dropped 6-7% last quarter in key brands KFC and Pizza Hut. Same-store sales measure comparable sales over a period of time. While Devyani continues to expand KFC and Pizza Hut franchises in non-metro and tier-2 cities, it is finding it difficult to boost sales commensurately.

Sure, consolidated revenue was up 49% year-on-year to ₹1,222 crore in Q2, aided by the acquisition of the KFC franchise in Thailand. However, India revenue was up 7% year-on-year, despite a 20% year-on-year store growth, which was offset by weak same-store sales growth across brands, pointed out Motilal Oswal Financial Services.

While the Shraadh period, when people avoid non-vegetarian food, typically resulted in leaner fried chicken and pizza sales in Q2, cautious consumer spending amid high food inflation also meant about 12% and 10% on-year drop in average daily sales for KFC and Pizza Hut, respectively. Its coffee shop franchise Costa and home-grown brand Vango are also struggling with falling average daily sales, while their same- store sales are still growing on a lower base.

Higher marketing expenses for Pizza Hut and pricing experiments with KFC’s portfolio, particularly in smaller markets, weighed on profitability. Devyani’s reported consolidated Ebitda was down 310 basis points to 16.3% in Q2.

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Devyani expects Q3 to benefit from upbeat festive demand. Still, the consumption patterns need to improve dramatically to boost profitability.

To fuel future growth amid this, the company has signed master franchise agreements with three new QSR brands – Tealive, New York Fries and Sanook Kitchen. As these brands mark their debut in India, Devyani is confident that they will cater to current consumer preferences and appeal to the mass premium segment of customers. It plans to operate these brands in food courts and small-store formats which will have lower capex requirements.

But whether their new premiumization bid will bring more customers to the table is anybody’s guess at this point. While the immediate financial impact is small, the categories are promising and Devyani has the history of entering newer promising categories as it has done with Pizza Hut and KFC, according to Nuvama Research. So far this year, the company's shares have declined 10% on the National Stock Exchange.

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