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Home  /  Specials  /  30 Fastest  / Pizza gone cold | MAY 25 , 2013

Vishal Koul

30 Fastest

Pizza gone cold
Jubilant Foodworks’ growth led by store expansion was fast. Now, the momentum is showing signs of flagging

Himanshu Kakkar

If you have benefited from consumerism, you can’t say I want only the good part of it" —Ajay Kaul, CEO, Jubilant Foodworks

Three white dots in two red squares — when Tom and James Monaghan set up Domino’s Pizza in Ypsilanti, Michigan, in 1960, the brothers planned to add a dot to the logo for every new store. The Indian operations of the pizza chain must be especially grateful they dropped the idea a few years later — if not, Jubilant Foodworks would be updating the logo every three days, for that is the speed at which India’s largest and fastest-growing food service chain is growing. “We have added 110 stores in FY13. Domino’s India is the fastest growing in the Domino’s world as well,” grins Ajay Kaul, CEO, Jubilant Foodworks, the master franchisee for Domino’s Pizza and Dunkin’ Donuts in India. 

By December 2012, the chain had 552 stores across 118 cities, while archrival Pizza Hut has 331 stores (181 restaurants and 130 home service units). Both companies entered India at the same time — 1996 — and in their home market, Pizza Hut is the undisputed leader. In the ₹1,500-crore organised Indian pizza market, though, it is Domino’s that has the largest slice (55% in 2012, according to Euromonitor), while Pizza Hut has 30%. 

But same store sales (SSS) growth — a key indicator in the retail and food services business — across Domino’s outlets have been falling and rival Pizza Hut, too, is focusing more intently than before on the home delivery market that has so far been Domino’s preserve. So, just how sustainable is Domino’s growth? 

The right recipe

First, though, a look at how Domino’s helped convert Indians from parantha to pizza. Kaul considers the eight years before 2007 (when it started rapid expansion) the foundation-building years. “For eight years, we created a supply chain, set up commissaries all over the country, tied up with trucking companies that would work only for us, explored Indian customers’ needs, figured out the right pricing and built market prowess,” he says. It worked. Domino’s now has six commissaries and 180 suppliers, which help it deliver about 500 pizzas from each of its 500-plus stores every day. 

It wasn’t easy, though. Even in the 1990s, pizza was still alien to most Indians and those who did take to the taste, and saw the pie as a snack, not a meal replacement. Consequently, Domino’s was growing slowly — by 2007, after over a decade in India, it had 158 stores. But already, the company was seeing the benefits of a game-changing consumer insight. “In the Indian context where there is difficult traffic on one side and all the other goodies on the other side — such as double income families, increasing household incomes, paucity of time and more working women — ordering from home will become a proposition that will keep coming into lives of people,” says Kaul.

One way to cash in on this would have been to offer a discount if the delivery was late. “We chose to go all the way. We wanted noise,” Kaul recalls. Hence the deal in 2004: 30 minutes delivery or your pizza free. Outside the US, India was the only market to launch such an offer. As consumers caught on to the convenience of ordering in pizza, Domino’s grew its share of pizza home delivery — it now accounts for 70% of that market. 

Desi Flavour

Customising pizzas to suit Indian palate has complemented Domino's outlets expansion

Meanwhile, the chain had also been working to ensure pizza didn’t end up being an urban-only phenomenon. It launched its first non-metro outlet in Chandigarh in 1997. Kaul says that armed with research that showed going to an air-conditioned restaurant was the only entertainment for many families in places like Bareilly and Jabalpur, the company tweaked its global model for small-town India. It went for larger stores with higher seating capacity and better frontage. More than half of all stores now are in non-metro areas. “Domino’s owes its fast growth to tier 1 and tier 2 cities. The money lies there and that is where it has extraordinary penetration compared with its competitors,” says Subroto Mukherjee, founder, Carnevale Hospitality International, a consultancy firm. 

Domino’s also realised soon after launch that Indians don’t want an entirely Western or Indian offering. So, keeping the format American, it offered an Indianised menu, catering to local tastes and preferences. Desi toppings such as keema do pyaaza, peppy paneer and chicken chettinad tickled the tastebuds of consumers across India while some innovations have even been sent to Domino’s chains in other countries. “India is a cheesy country. We introduced the cheese burst pizza in India and that has been exported to other countries,” says Kaul. 

Pricing has also been a key component in ensuring success, as the company has been hiking prices by about 6% every year. In 2008, the company launched the ‘pizza mania’ promotion, where it offered pizzas for as little as ₹35, making them cheaper than other popular snacks such as masala dosa and chhole bhature. Recently, it’s started pushing that offer again, this time at a slightly higher price of ₹44. “Although this category may not be the highest revenue earner, the number of such pizzas sold is very high,” says Kaul.

Fresh slices

Last year, Kaul and his team at Jubilant took two decisions that are likely to have far-reaching consequences. The first is related to brand positioning, where Domino’s moved from promising ‘khushiyon ki home delivery’ to announcing ‘yeh hai rishton ka time’ — a classic move up the advertising value chain. “After providing functional benefits such as tasty pizza, convenience and affordability, any brand wants an emotional attachment with its customers. Likewise, our ads now say, ‘you will not remember whether it was a veg or non-veg pizza, but you will remember a non-veg joke from a relative or friend’. Our pizzas are catalysts for bonding,” points out Kaul. 

What is left unsaid is the other reason for leaving behind the home delivery angle. Yum! Brands, which owns Pizza Hut, is working overtime to build its delivery business (it hived off delivery as a separate business in 2010) even as Domino’s is focusing more on in-store eating. Which means the lines between the two pizza chains are getting blurred and competition, therefore, will only get fiercer.  A recent report by Credit Suisse warns that “rising competition in both pizzas and other quick service restaurants (QSR) formats will put pressure on pricing”. An earlier report by JP Morgan points out that “while Jubilant does enjoy an early start in pizza delivery, its closest competitor Yum Brands aims to narrow the gap with a target of 350-plus Pizza Hut stores with the delivery format by 2015 and 700-plus by 2020”. Kaul says he welcomes competition. “This will help the QSR industry grow. Together we can all convert more people from conventional food to pizza.” 

Knocking on new doors

Domino's has been expanding to more non-metro cities

The other decision is quite unrelated to pizza. In May 2012, Jubilant Foodworks opened the first Dunkin’ Donuts store in India. Now, there are nine Dunkin’ Donuts & More outlets in Delhi and one in Chandigarh. “Research told us there is a gaping hole between the QSR format and cafés in India. And Dunkin’ International allowed us to play around in this area in India in terms of positioning,” says Kaul. The all-day cafés have expanded Dunkin’ Donuts’ traditional international menu of coffee and donuts to offer sandwiches, milkshakes as well; donuts with Indian flavours such as mango have also made it to the menu. 

Jubilant is going slow with the Dunkin’ expansion — just 10 stores in nearly a year with plans of growing to 100 only in five years. Still, doubts are being raised on whether it’s bitten off more than it can chew with Dunkin’. There’s already one recognisable rival, the Singapore-based Mad Over Donuts. But donuts are still a very new concept to most Indians, so acceptance may not be easy or quick. “Unlike pizza, a donut faces competition from every other thing, including rasgulla, pastry etc.

Moreover coffee is a ferocious market in India, with Café Coffee Day, Barista and now even Starbucks,” points out Carnevale’s Mukherjee. Most analysts seem to agree. “We see limited scope for Dunkin’ Donuts to break even anytime in the coming two or three years,” write analysts Arnab Mitra and Akshay Saxena in the Credit Suisse report. “Jubilant broke even only after it had over 100 Domino’s stores, and Domino’s is an inherently far more profitable business given the higher share of delivery business, larger ticket sizes and higher operating leverage.” Concurs Pritesh Chedda, senior research analyst at Emkay Global, who says, “Dunkin’ Donuts may put some strain on the company’s profits. It is a worry.” 

Blowing hot, blowing cold

Indeed, there’s quite a lot of worrying news from Jubilant, its tag of being among the fastest growing companies notwithstanding. While SSS growth has been declining since FY12, the last three quarters especially have seen a drastic fall — to 16.1% in Q3FY13 compared with 30.1% in the same period the previous year (see: Weak appetite). Kaul points to the low consumer sentiment in the past six months as the cause for the falling SSS growth. “Post-Diwali, consumers have been holding their purse for discretionary buying,” he points out. But he’s not too worried. “If you have benefited from consumerism, you can’t say I want only the good part of it, not inflation or downturn. As the GDP growth revives, there will be more money in people’s hands and there will be a turnaround,” Kaul predicts. Perhaps the confidence stems from having been there, done that earlier: SSS growth plummeted during 2008-09 but climbed back rapidly the next year. 

Weak appetite

Dame store sales growth has been losing steam of late

Analysts aren’t quite as sanguine. A report by IIFL expects SSS growth to moderate to 10% in FY14. Adds Emkay’s Chedda, “Their margins will be under pressure till the time their SSS growth declines. Low SSS growth today is a function of cut in discretionary buying by consumers and pizza is a discretionary buy. We will see low SSS growth for at least the next three to four quarters.” 

That isn’t dampening Jubilant’s expansion plans, though. Even in Q3FY13, which had the lowest SSS growth in 13 quarters, the company added 37 stores — its highest-ever in a quarter. Also, apart from the 100 Dunkin’ outlets in the next five years, the company aims to open over 110 Domino’s outlets every year in about 80-100 more cities and remember, Jubilant doesn’t have franchisees; all outlets are company owned and operated.

Is that a good move, given that Ebitda margins, too, are declining, thanks to a combination of declining SSS growth, jump in rent and advertising expenses? Nobody’s against the idea. “There is a lot of market yet to be tapped in India,” points out Chedda. Kaul, too, sees only advantages in this strategy. “The downturn is the best time to do brand building. Besides, aspiration-led demand is still high — some of our new stores in places such as Guntur, Ambala and Rourkela have surprised us.” More importantly, the expansion has not being fuelled by leverage. As a result, the company has zero debt on its books. 

The stock market, though, seems far from impressed, even as it had enthusiastically applauded Jubilant’s  scrip when it was listed on the bourses in 2010 at ₹145. Kaul pulls out his iPhone from his pocket to check the current price. “It’s ₹1,185 today. It has fallen by ₹40 from yesterday. But, see, we are almost eight times our listing price. It shows markets have bought our growth story,” he smiles.

While that may be true, what Kaul hasn’t talked about is how the stock has been declining from its peak of ₹1,397 in September 2012 and even fell to ₹1,044 in February after the Q3 results were announced. Nor does he mention how he kept selling his stake as the stock hit new highs and how the promoters pared their stake from 62% in FY10 to 55% now. Like a pizza gone cold, the Domino’s story, too, needs much chewing before it’s digestible. Kaul, though, seems confident, “There are still so many cities left where Domino’s is yet to make its mark.”

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