About Company:

Jubilant Foodworks (JUBI) part of the Jubilant Bhartia group, is a food service company operating the brands of Domino’s Pizza, Dunkin Donut and Hong’s Kitchen. JUBI has acquired exclusive rights to develop and operate Dominos in India, Sri Lanka, Bangladesh and Nepal and Dunkin brands in India from the parent companies respectively.

India is the second-largest Pizza market in the world behind the US. Food service industry in the country is expected to grow at 9% CAGR over the next 3 years. Jubilant’s brands fall into Quick Service Restaurant (QSR) segment of the food service industry and this segment is expected to grow at an even better 17% CAGR over the next few years. In addition, the organized market for food service industry in India is only 35% and estimated to grow to 43% by FY23. All these factors put Jubilant in a sweet spot for growth in the coming years as it is already a well-established player with its presence across all major cities.

Jubilant works under a master franchise model and has 1325 outlets in 282 cities in India. Jubilant derives 78% of its revenue from pizzas so Domino’s is its most successful brand till date.

Domino's has 1254 outlets in India, Sri Lanka and Bangladesh and has about 77% market share in Pizza QSR category in India. Domino’s has been adding stores at the rate of 16% CAGR from FY11-FY19. This has been the highest growth compared to its QSR peers Subway (13%), KFC (12%), McDonalds (8%). In the recent quarters, the pace of store addition has increased even more with 44 stores being added in Q3FY20 alone. Close to 100 stores addition is projected each year for the next 3 years by the company. ~65% of its stores are in just 16 cities. So the room for growth in tier 3-5 cities is huge for Domino’s, although the sales in these stores would be inclined more towards value products. This aggressive expansion helped Domino’s post impressive growth over FY17-FY19 period.

Internet penetration and ease of ordering has resulted in more and more people opting to use apps for delivery. Domino’s mobile app has now more than 29million downloads across the country. Online ordering is growing at a fast pace and now forms 87% of delivery sales for Domino’s compared to 65% 2 years ago.

Besides its strong presence and quality food, Domino’s has continuously focused on enhancing customer experience. It has perhaps the highest customization levels compared to its peers with products across all price segments, base sizes and great variety. It regularly launches new products each year – 12 in FY19. Product innovation like late-night deliveries, train deliveries and one-click order also has helped the company build a strong brand image. It has continuously used innovation to improve its efficiency, which has helped it improve its margins.

Domino’s opened its first store in Bangladesh in 2019 and it was an instant hit as it received 7500+ orders in the very 1st week – breaking the record with huge margins.

But the situation in Sri Lanka is very different. Domino’s is a loss-making entity there since its inception in 2011. It recently closed a few stores in Sri Lanka to curb losses. Besides Domino’s, Jubilant’s other brand Dunkin’ Donuts has not been a hit. In India, Dunkin’ Donuts achieved breakeven after 7 years. It is present in 10 cities only and had to close a few stores recently taking the total count to 32. Clearly, donuts are not a preferred breakfast option in India.

With so many food varieties available in India, Italian remains 5th preferred option whereas North Indian remains the most preferred cuisine. 2nd most preferred cuisine in India is Chinese food. To tap into this market, Jubilant started its very own brand, Hong’s Kitchen. Hong’s Kitchen was recently started and has 2 stores in 2 cities. Hong’s Kitchen has all its products at a price range more affordable than its peers. Its daily run rate is almost 65% of Domino’s average daily run rate.

Risks:

Competition: It faces immense competition from regional players as well as national players in QSR space. Companies like Chaayos, Taco Bell, Tea Villa Café etc. have a higher share of store addition than Domino’s in QSR. Also with food delivery apps like Swiggy and Zomato, Domino’s 30-minute delivery moat has well been breached.

Raw Material Prices: Mozarella Cheese forms 35% of total Raw material expense for Domino’s. Any significant changes in prices can severely affect margins.

Cloud Kitchen: Cloud kitchen are a threat to Jubilant’s business as these have penetration in cities where Domino’s has maximum penetration. They also have lower costs and are able to compete on pricing.

Consumption Slowdown: Jubilant has seen fantastic Same Store Sales Growth (SSSG) in the past few years. But it has been slowing down significantly over the last few quarters. It went from 26% in Q1FY19 to just 6% in Q3FY20. Such slowdown in SSSG will significantly affect revenues.

Final Thoughts:

Jubilant Foodworks has been a beneficiary of India’s growing young population, rising incomes and increased urbanization. It has innovated and established a clear market leadership in the pizza segment in the country. But competition pressure is reflected in slowing SSSG (same store sales growth) and poor performance of Dunkin’ Donuts. It is still under-penetrated in several non-tier1 cities, but its exorbitant valuation is a risk during the severe slowdown woes in the country.

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