Podcast Overview –
Today we take a delicious deep dive into the QSR sector with Rushabh Doshi, CFA & Darshan Doshi.
We take an overview of the trends in QSR sector. What are the growth prospects from an investor’s standpoint? What factors should you keep in mind while doing an investment analysis of the QSR sector?
Explore and learn some insightful thoughts on the QSR sector by Rushabh Doshi (Head of Equity Research at Proinvest Nirmiti) in this Swatantra podcast series where we talk about simplifying Investing.
Darshan Doshi (00:15)
Welcome to the second episode of Swatantra, just for those who are logging in for the first time, this is a partnership between Proinvest and Dasar where we are simplifying investments. Everybody wants to be rich, everybody wants to be wealthy, but you got to put in the hard work and you need analysis. You need to build confidence and conviction. And that is what we will help you to do through this podcast series. Now, with me today is Rushabh Doshi. He’s from Proinvest and maybe Rushabh would love to learn. What do you do at Proinvest?
Rushabh Doshi (00:47)
So I head the Equity research division at Proinvest Nirmiti. So through this podcast called Swatantra series, what we want to do is make investing and research as easy as possible and deliver the rich content without any jargons and make it as easy as possible for our viewers to understand.
Darshan Doshi (01:07)
Brilliant. So as I understand you’re, the person who does the analysis, the deep dive, the qualitative data, the quantitative data, and puts it all together to form what would be the recommendations to invest in stocks or any other investment vehicles. Now, today we have a fantastic topic. What we are going to do is we’re going to do sector analysis. We are going to do sector analysis in food retail or the QSR space. Now, I don’t know a lot about QSR, but it sounds delicious. My stomach gets going with this topic, but let’s break down, right, if you could help understand what is QSR and how does anyone get his or her head around QSR space?
Rushabh Doshi (01:55)
So QSR is just an industry specific term for quick service restaurants. So basically, these are all our fast food chains like McDonald’s, Domino’s and Pizza Hut. So before directly jumping into the sector, let’s just take an eagle view of what the Indian food industry is. So in 2020, the size was around 4.4 lakh crores. And in 2025, it’s expected to grow by more than 55% to 6.5 lakh crores. So anything which we eat outside is captured here. And this industry has a mix of organized and unorganized. So in 2010, the share of organized was only 24%, and in 2020 that has grown to around 40%. But in 2025, it is expected to be more than 54%. And that’s where a huge growth opportunity lies. And also inside the organized industry, QSR is going to be the largest pie there and it’s expected to grow even faster. So apart from QSR in the organized sector, there are segments like fine dining restaurants, casual dining restaurants, pubs and bars, and even cafes. So basically, the organized segment has stores, franchises which are three or more outlets, or the food which we consume in hotels, like three star hotels or five star hotels.
Darshan Doshi (03:22)
So if I understand correctly, if I launch a local cafe down the lane here in Baner Pune, then I’d fall under the unorganized sector. But if I had a chain of more than three, saying three different parts of Pune, then I would fall under organized sector. And then that can be either quick service, which is the McDonald’s of the world, or then the fine dining restaurants that we see. My second follow-up question to you Rushabh, in QSR is, can you give us a top level view of what is this food retail space, what is the QSR space, and what are the trends that are going on?
Rushabh Doshi (04:01)
So, basically, when we take a QSR, basically there are two parties involved. One is the brand owner, and the second one is the franchise. So your brand owners are typically McDonald’s or Yum Brands, which owns brands like Pizza Hut, KFC, and Taco Bell. And the second one are franchises which run the stores on the ground, something like a Jubilant Foods or Devyani International, which partner with these brand owners and operate everything on the floor in their respective territories, which they are allotted. So the basic transaction here, or the contractual terms, are these franchises, they pay a royalty fee to their brand owners, and they also have a certain set of rules where they have to open X number of stores each year in their respective territories, and they also have to pay a fee for each store they open. So this is something like a symbiotic relationship where both the entities, whenever they work, they have to ensure that both of them are successful in their respective feeds.
Darshan Doshi (05:09)
Thanks a lot for giving an overview of what is QSR. I understand it better, but help me simplify from an investor standpoint. I want to deploy capital. You’re an investor managing money. There might be people out there who are looking to invest in this sector. So what are the things that you like about this sector or gets you interested as an investor or as a researcher?
Rushabh Doshi (05:36)
So, as a philosophy, we like businesses which are highly scalable. So, just to give you an example, when we look for businesses, we bucket them into two segments. The first one, which we consider, is a small fish in a large pond. So the opportunity to grow is humongous. And the second businesses, which we typically don’t like, are the large fish in a small pond. These businesses are already big. Let’s say a business which has 80% to 90% market share. There’s not a lot of room left to grow. And if on top of that in the industry is only growing at 2 to 3%, it becomes very difficult to create shareholder value. So coming to QSR, the opportunity to scale is very large. So, Yum Brands has more than 50,000 stores globally. They have 10,000 stores in China alone. The second largest, which is McDonald’s, has around 380 stores globally. And certain facts about McDonald’s, which really surprised me is that they serve food to more people than the entire population of the UK every day, and they open a store on an average of 15 hours every time. And interestingly, they’re the top distributor of toys thanks to their Happy Meal concept, which kids seems to be loving. And apart from that, these QSR offer convenience at a low cost, which makes them a very good opportunity to grow and take market share from the unorganized industry. So the next three points, which I think has more to do with India, the first one is when your per capita income rises, let’s say when India’s per capita income would double in the next four to five years, when it moves from two thousand dollars to four thousand dollars. Our basic consumption in goods like, let’s say, detergent, toothpaste is not going to double overnight. But certain categories like QSR will see a huge boom because our aspirations are high, our population, median population age is very low. And secondly, because of urbanization and the nuclear family concept, this sector is also seeing a lot of tailwinds and QSR in India is still a very urban formula or phenomenon and it’s not so popular in tier two or three or three cities. And lastly, what I think would be a huge driving force, and this has seen happening in China and in US in the early 90s, is that as and when women enter the workforce, this segment sees a huge boom because it’s very difficult for a woman to come home after work and cook. So this becomes a phenomenon and it becomes a habit going ahead and people prefer to either dine out or order more frequently. And lastly, all these food aggregators are adding to this market Swiggy and Zomato majority of their sales are also through QSR only.
Darshan Doshi (08:48)
Brilliant. So if I can sum this up quickly, one is a very highly scalable business area to operate in. So as an investor, that’s good. The second is the average disposable income is expected to increase significantly because India’s GDP per capita is going from currently about one $850 to expect it to touch about 2600 in the next three to four years. And then the third part, you know, it’s interesting that you say as more women enter the workforce, I think just day before yesterday at the Jito Summit, Mr. Harish Mehta, he made a comment saying that women will be the majority of the workforce in the tech sector, which is growing rapidly. And so within the NASCOM, within the IT sector, we’re going to see a lot more women than men. And so that’s such a fantastic fact because it also adds into the disposable income. Right? For a family. Who doesn’t like french fries, who doesn’t like pizzas, and as the young population starts getting the money to spend it, they are going to spend it on this. Okay, so we’ve understood what is QSR. We’ve understood why as an investor, you like investing in QSR. Now let’s get into the structure and the commercials of a QSR. How does QSR operate? Maybe what you could do is you said you have the brand. And then you have the entity which drive in a symbiotic relationship. But who gets what, who makes what money, where are the margins? And we all know it’s a volume game, but that’s something that India thrives on because we have 1.3 billion people to feed. Yeah, right. So maybe you can help us understand that.
Rushabh Doshi (10:53)
So, the brand owner provides them with basically the brand trade marks. And also when they start initially in a respective country, they provide the menu and how, and they also organize the supply chain for the franchise. So all the groundwork has to be done by the franchise which is scaling up stores, customizing the menu and also organizing and hiring people and building the ground force for them. And there are many types of contracts which are there. So, Domino’s has tied up with Jubilant as an exclusive master franchise, where they have been given the entire country to run stores. Other companies, like Yum brand have two franchises and they have been allocated respective territorial areas where they can operate. Interestingly. Yum in 2015 had reorganized a strategy in India. Before that they had around eight to nine franchises. And then they realized that Jubilant was doing much better than them. And after that they took a decision to rationalize their franchises and organize it in a way which would be more sustainable going ahead. And Burger King has a different structure. The brand owner has done a JV with them and they are the exclusive franchises for India. So, there are many combinations which the brand owner does based on their requirements. And apart from that, the franchise have to pay a royalty fee to the brand on a monthly basis. So this is around 3 to 4% for Jubilant Foods, which is the lowest in the industry. And it’s around 6% for all the other brands. There’s also store opening fee which they have to pay, which is typically for ten years. And it can be renewed further for ten years. So, for most of the stores, it’s around 20 lakhs per store. And apart from that, they also have to spend 6% to 7% on marketing. And majority of this is for national marketing and 1% maybe for local area level marketing. So this is a structure which typically all these MNCs have with most of their global operations.
Darshan Doshi (13:22)
Any numbers that you have on profitability or the money that is made, it’s easy to understand from brands perspective because they get royalty, right? And so there’s a brand that has been built, but for the franchisees, how much money do they actually make?
Rushabh Doshi (13:41)
So actually, if you take Pizza as a segment, it’s a highly profitable segment. Gross margins are at 77 or 76% for both Jubilant and Pizza Hut. And the Burger category has a lower margin of around 66% to 67%. So, if you compare this with other FMCG players like I guess HUL and Nestle have a gross margins of 70 and 65% so these are very respectable gross margins and coming to the EBITDA margins, they make around 26% to 23%. Sapphire, which is the second franchisee of Yum Brands, still has to make a profit. But they are growing rapidly. And as an investor, what I think we should more focus on is at the rate at which these companies are growing. So when we look at the growth, we typically break it down into two segments. One is the same store sales growth or the SSG, which means that if they had 100 stores last year, how well did these stores do in the current year? And the second part of the growth is the growth, which is because of new stores which has been added. So usually SSG, that part of the growth is highly profitable because when your same store makes incremental sales just because of operating leverage, it’s very profitable for the company.
Darshan Doshi (15:06)
Brilliant. Thanks for breaking it down. It kind of gives me a very quick overview of the whole sector and how it operates. If I had to dig in, I would probably take two, three, maybe five days, maybe a couple of weeks to go through the company statements, google it, the annual reports. So that was a very quick fire overview.
Rushabh Doshi (15:29)
So just one thing which I wanted to add is that there’s this thing called negative working capital. Or you can also look at from a cash conversion point of view. So these franchises work on a negative working capital principle. This is because they don’t sell anything on credit, unlike all the other businesses. Like 90% of businesses in India have to sell on credit. But these businesses sell on cash. And their inventory days are also very low because basically they’re working in perishable items. And their payable days are very high because these guys have pricing power. They pay their vendors on an average in 160 to 170 days. So networking capital is around 150 days. And because of this, they tend to be cash rich. And once they open a store, cash acts as a cash generating machine, which helps them to fund their next store. So this is, I guess, a sign of a good business. Most of the popular FMCG businesses also have the same concept, and this is a strong sign of pricing power.
Darshan Doshi (16:41)
Yeah, it’s such a fascinating fact. As a person who has worked with over 150-200 startups across India and the US, one of the biggest killers of startups or any new businesses in the first five years is cash flow. And that’s why they call it Cash is King. And so if this sector, QSR sector, is so cash rich, you can just put so much of that money into growth. And that’s not even at the cost of debt or anything else. So lovely to hear that. All right, so I’m ready to put my money down. Okay. I want to invest in QSR. Exactly. But I want to now invest. And I’m sure there will be many people in our audience who must be saying, I understand this is a growing space, it’s an investment worthy space. But how do I research, how do I analyze, what do I look for? Right? And then you go on tools like Screener and then you can see the financials, the comparable and all of that. Right? But as the head of research, as someone who does good qualitative and quantitative research, how would you research this particular sector to identify what you want to invest in?
Rushabh Doshi (18:08)
So, for every sector there are certain aspects which we call the KPIs or the key parameters. So for this sector, these key parameters are not so easily available on sites like Screener. And so if you look at the balance sheet, you see a lot of debt. But as we mentioned, these are cash rich companies which produce a lot of cash. So just because of something which is called NDS one one six, all the rental or leases which they have, they have to show it as an asset and liability which increases their debt. But this isn’t actually a debt. And other key parameters which we look at is their store opening growth, the geographies in which they are present. So what we don’t like is most of these newly listed franchises, they are opening stores rapidly, but half of these are in malls. And we’ve seen in the pandemic what has happened like this could be a very risky model going ahead. I would prefer companies which open stores cautiously, but we don’t have to close down the same store after three to four years.
Darshan Doshi (19:17)
So location, location, location.
Rushabh Doshi (19:20)
And apart from that, there’s a concept called restaurant-level EBITDA, how profitable they are at the restaurant level, excluding all their corporate costs and SG and related to that and other key parameters are the ADS, which is the average daily sales which they make per restaurant. This is a very key aspect to track. And also their sales per square foot. What we are seeing is that most of these franchises or QSR companies have been able to consistently increase their average daily sales per square feet by introducing combos which are value perceived to be value for money or adding beverages which have an even higher gross margin. Also, McDonald’s has done a very interesting thing. They have introduced the breakfast menu which opens up a very huge opportunity. So pizza is something which you can consume for lunch or dinner, but adding that third segment increases your total adjustable market. They also have Mc Cafe, which is doing good. In India, it does around 18% to 19% of their sales. And they are famous for their ice cream portfolio also. So all these things help to increase the average ticket size.
Darshan Doshi (20:41)
Okay. Screener can’t help me as much to evaluate companies in this sector. Okay? That’s why we’re talking about Swatantra, about simplifying investing. And we are putting our money, where our mouth is. And so in this case, go deep into the annual reports, take a look at the numbers, come out with your key parameters, research them, write it down, make your own notes. One thing that I have learned is do your own analysis. While you may even have a financial adviser or an investor, you have to stay on top of your own money and you have to manage your own money. Just the way you can’t outsource the growth of your children, you can’t outsource the growth of your money. You have to have some level of control and knowledge about it. And so basic understanding and spending maybe a couple of hours every week on things like QSR, which you think are attractive, and staying on top of the markets. Have the markets increased? Have they fallen down drastically? You don’t have to take action, but you need to have that base level of knowledge so that you can take a decision. Right. So, great. Thanks for decoding how to think about investing and what parameters to look at when we are researching this sector. Now, the other side of the coin is what are some of the mistakes that most investors or many investors may have made while investing in QSR or scams or blunders that may have happened in this sector?
Rushabh Doshi (22:26)
Correct. So there haven’t been many Scams because this is a very open industry. But what I think could be the biggest risk is that whenever there’s an agreement or a partnership between the brand owner and the franchisee, the agreement is one sided, it’s in the favor of the brand owner. So they can choose whoever they want to run a business, but if they feel that they’re not doing a great job, they can fire you immediately and replace you with another franchise. And this has happened. For instance, McDonald’s has two franchises. One handles the south and west operations, which is Westlife Development, it’s a listed entity. And the second one, so the north and east business didn’t do quite well, and McDonald’s choose to replace that franchise with another franchise. So the older one had to sell all their assets to the new one. And McDonald’s decides everything at what price they are going to sell it. So that could make things go haywire. And many people don’t consider this as a risk because this is something which hasn’t happened on the listed space, fortunately. And also, we’ve seen this in 2015, when Yum Brands chose to reorganize their portfolio in India, they had eight to nine franchises. Now they’ve narrowed it down to two for KFC and Pizza Hut. And the third one, they’ve chosen Birmingham Hospitality for the Taco Bell franchise, which is also doing very good.
Darshan Doshi (23:57)
Before we go to the next question with Rushab, a quick announcement. If you are a reader like me, you’ll find that we’ve transcribed the whole podcast you can go on Dasar.in and you’ll find the videos, all the other podcast series that we’ve got on investing, on health, on fitness, as well as productivity and leadership. We also have a few courses. So if some of you want to learn how to invest, learn how to network, you can jump on Dasar.in and find out these details too. Now, let’s get to the next part of QSR. A lot of the things that you’ve talked about Rushabh are around physical stores, right? But then there are many other brands which are proxies to the QSR sector. So maybe what are these proxies? What are the alternatives where there is growth being seen?
Rushabh Doshi (24:52)
So, in developed markets, you have options like you can buy the brand owner directly. In India, you can go for the franchisees, but you can also go and buy these food aggregators, which are also growing at a rapid pace. So Zomato or Swiggy, which is also planning to list. Apart from that, there are also players which are part of the supply chain in this industry. So something like Tasty Bites, they make patties for Burger King and KFC and also Mrs. Beckham Foods, they make the buns, which are used in burgers. And in USA, there are companies like Beyond Meat, which are into plant based meat, and they are disrupting the market there. So these are the typical proxy place.
Darshan Doshi (25:44)
It’s interesting that you mentioned Tasty Bites. We had the managing director and ex CEO, chairman of Tasty Bites, Mr. Ravi Nigam. We had done a podcast with him right here. You can check it out. As a part of the Dasar D2C brand series. And one of the best speakers, one of the most eloquent speakers and thinkers of our time by far, to be able to build, to take Tasty Bites to an IPO, to make it the first India food brand to go in and attack the Americas, dominate that market, dominate Australia, New Zealand, parts of Europe, Japan as well. So the growth has been phenomenal and it has been one of the fastest or the highest return giving stock in that sector, correct? So we’ve covered what would be the proxies to the QSR segment, where you could still, as an investor, make money by investing in these proxies. Now, the last part is a deep dive and analyzing one of these companies, right? And so let’s pick Jubilant Foods. I did a quick research and I found that since 2010, when Jubilant was listed, it has given over 100% returns each year. Just what that means is, if you would have put one lakh rupees in 2010, by 2020 you would have made just over ten and a half, eleven lakh rupees. Now, that’s a significant growth for an investor, which kind of grows in multiples right? Maybe any other examples of who might have given multiple returns in this sector? And then what is Jubilant and a breakdown of Jubilant.
Rushabh Doshi (27:32)
Interestingly, McDonald’s has been a humongous wealth creator and it’s been very consistent. So they IPOed in US in the 1965 and $1,000 invested during the IPO today would be $38 million. So that’s around 38,000 times your money. And it’s been 55 or 65 years. But still, if we go 50 years ahead, I’m pretty sure that McDonald’s would be there as a dominant brand in the QSR space. Now coming to Jubilant Foods, it has been the most successful franchise in India. They are the biggest franchisees for Dominoes outside the USA. They have 1500 stores currently and they have a revenue of more than 4000 crores annually. And interestingly, they have the highest EBITDA margins in the industry. And this is because firstly, because of their scale, they have been given Pan India operation unlike all the other franchises where there are multiple franchises. So they have the exclusive rights for India and they also have Bangladesh, Sri Lanka and Nepal. And the royalty which they pay is also the lowest. So this helps them make higher margin. And Pizza as a category has the highest gross margin at 77%. So because of all this, they have the highest margins. And apart from that, they’ve also done a very well job in customizing the menu for Indians. So if you go back 20 years, Pizza Hut and Domino’s actually at that time, Pizza Hut was the preferred choice. But Domino’s came from behind and they could understand what Indians actually want. They customize the menu. They also focused on delivery. And apart from that, there are a huge amount of efficiency they gain because of reducing the store’s. So Pizza at that time at stores which are 2000 to 2500 sqft. But Domino’s at that time they realized that smaller stores are more efficient. And because of that they also focus more on delivery, which is a higher margin and higher operating efficient business. And apart from that, they also focus on their own app. So they have more than eight crore app users. They added 82 lakh app users in Q3 of FY 22. And by focusing on their own app, it builds a strong customer franchise. And this also helps you. Like if you go on to swiggy there are many options, but if you’re used to Domino’s and you can open the app and they deliver it very quickly. Interestingly, Domino’s also runs their own delivery on the roads. They don’t depend on Swiggy and Zomato. So you might also book your order on swigy and zomato. But at the end of the day, Domino make sure to deliver that Pizza to you. And this also helps them. So they pay around just 7% to food aggregators compared to all other franchises which were close to 20%. So all in all, they have been excellent executioners in this piece.
Darshan Doshi (30:56)
So, you know, it’s interesting that you say that. One is paneer Pizza was an unheard concept two years ago, but today is extremely common and delicious, absolutely delicious. And we have to appreciate that innovation in it. And the second part of it is the last-mile delivery. Before Swiggy or Zomato took off from 2015. You could still get Domino’s would be the ones who would actually deliver to you. I don’t remember anyone else being able to deliver food at your doorstep. That’s why it became so popular among the parties, especially in youngsters and cheap, relatively cheap. This has been a phenomenal podcast. We’ve covered the details of a complete sector, which is QSR before we wrap up on a scale of one to ten, where ten means you absolutely love this sector, as an investor, what do you rate this sector?
Rushabh Doshi (32:03)
So for me, it’s maybe a nine.
Darshan Doshi (32:07)
So you absolutely love this sector. Okay, so there you have it. Just as a disclaimer, all the names that we’ve suggested over here, they are not from an advisory standpoint. What we encourage you to do is to do your own analysis, equip and skill up. Okay, we have ways to do that. This podcast series is brought to you in a way by which your base level of knowledge increases. But hopefully you’re not just learning, you’re doing. If you still want to equip yourself, we are going to bring more stuff to you. So subscribe. Share this with your friends. Go on our website, take a look at our transcripts, take a look at our courses, and if you have any questions for us, if you would like to cover us a particular sector, a particular company, just reply to this podcast. Just send us an email and we’ll be sure to cover it in our next podcast as well. So I hope you’ve enjoyed it. This has been an absolutely phenomenal podcast. Thanks a lot, Rushabh, and we’ll see you soon. Bye.
Thank you.
